UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
☐
x
☐
☐
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, 2017
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 0-30070
AUDIOCODES LTD.
(Exact name of Registrant as specified in its charter and translation of Registrant’s name into English)
ISRAEL
(Jurisdiction of incorporation or organization)
1 Hayarden Street, Airport City Lod 7019900, Israel
(Address of principal executive offices)
Shabtai Adlersberg, CEO and President, Tel: 972-3-976-4105, Fax: 972-3-9764040, 1 Hayarden Street, Airport City, Lod 7019900 Israel
(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
Ordinary Shares, nominal value NIS 0.01 per share
Name of each exchange on which registered
Nasdaq Global Select Market
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
As of December 31, 2017, the Registrant had outstanding 29,443,000 Ordinary Shares, nominal value NIS 0.01 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
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:
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 ☒
Yes ☐ No ☒
Yes ☒ No ☐
Indicate by check mark whether registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted 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 and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer ☐
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.
☐
† 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.
Item 17 ☐ Item 18 ☐
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):
Yes ☐ No ☒
TABLE OF CONTENTS
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3.
KEY INFORMATION
ITEM 4.
INFORMATION ON THE COMPANY
ITEM 4A.
UNRESOLVED STAFF COMMENTS
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
ITEM 8.
FINANCIAL INFORMATION
ITEM 9.
THE OFFER AND LISTING
ITEM 10.
ADDITIONAL INFORMATION
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
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.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFIED ACCOUNTANT
ITEM 16G.
CORPORATE GOVERNANCE
ITEM 16H. MINE SAFETY DISCLOSURE
ITEM 17.
FINANCIAL STATEMENTS
ITEM 18.
FINANCIAL STATEMENTS
ITEM 19.
EXHIBITS
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PRELIMINARY NOTE
This Annual Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, or the Securities Act,
and Section 21E of the Securities Exchange Act, or the Exchange Act. These forward-looking statements can generally be identified as such because the
context of the statement will include words such as may, “will,” “intends,” “plans,” “believes,” “anticipates,” “expects,” “estimates,” “predicts,” “potential,”
“continue,” or “opportunity,” the negative of these words or words of similar import. Similarly, statements that describe our business outlook or future
economic performance, anticipated revenues, expenses or other financial items, introductions and advancements in development of products, and plans and
objectives related thereto, and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters, are
also forward-looking statements. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ
materially from those stated in such statements. Factors that could cause or contribute to such differences include, but are not limited to, those set forth under
Item 3.D, “Key Information - Risk Factors” of this Annual Report.
Our actual results of operations and execution of our business strategy could differ materially from those expressed in, or implied by, the forward-
looking statements. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance and you should not
use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-
looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. In evaluating our forward-
looking statements, you should specifically consider the risks and uncertainties set forth under Item 3.D, “Key Information - Risk Factors” of this Annual
Report.
Unless the context otherwise requires, “AudioCodes,” “us,” “we” and “our” refer to AudioCodes Ltd. and its subsidiaries.
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
The selected financial data, set forth in the table below, have been derived from our audited historical financial statements for each of the years from
2013 through 2017. The selected consolidated statement of operations data for the years ended December 31, 2015, 2016 and 2017, and the selected
consolidated balance sheet data as of December 31, 2016 and 2017, have been derived from our audited consolidated financial statements set forth elsewhere
in this Annual Report. The selected consolidated statement of operations data for the years ended December 31, 2013 and 2014, and the selected consolidated
balance sheet data as of December 31, 2013, 2014 and 2015 have been derived from our previously published audited consolidated financial statements,
which are not included in this Annual Report. The selected financial data should be read in conjunction with our consolidated financial statements, and are
qualified entirely by reference to these consolidated financial statements.
- 1 -
Statement of Operations Data:
Revenues:
Products
Services
Total revenues
Cost of revenues:
Products
Services
Total cost of revenues
Gross profit
Operating expense:
Research and development, net
Selling and marketing
General and administrative
Total operating expenses
Operating income
Financial expenses (income), net
Income before taxes on income
Income tax expense (benefit), net
Equity in losses of affiliated company
Net income
Basic earnings (loss) per share
Diluted earnings (loss) per share
Weighted average number of ordinary shares used in computing
basic earnings (loss) per share
Weighted average number of ordinary shares used in computing
diluted earnings (loss) per share
2013
Year Ended December 31,
2014
2016
2015
(In thousands, except per share data)
2017
$
111,750 $
25,482
137,232
118,561 $
33,018
151,579
101,990 $
37,769
139,759
102,279 $
43,292
145,571
107,482
49,257
156,739
51,996
6,568
58,564
54,349
8,243
62,592
47,227
9,744
56,971
46,935
10,295
57,230
47,445
11,449
58,894
78,668
88,987
82,788
88,341
97,845
28,194
39,279
8,456
75,929
2,739
(96)
2,835
(1,404)
21
4,218 $
32,275
45,534
7,677
85,486
3,501
196
3,305
3,391
-
(86) $
27,996
43,360
8,726
80,082
2,706
(442)
3,148
2,782
-
366 $
29,139
45,084
6,364
80,587
7,754
160
7,594
(8,644)
-
16,238 $
0.11 $
(0.00) $
0.01 $
0.46 $
0.11 $
(0.00) $
0.01 $
0.45 $
30,348
48,954
8,893
88,195
9,650
(10)
9,640
(5,610)
-
4,030
0.13
0.13
38,241
42,286
40,178
35,174
31,104
39,097
42,286
40,565
35,779
32,168
$
$
$
Balance Sheet Data:
Cash and cash equivalents
Short-term and restricted bank deposits, marketable securities and
accrued interest
Working capital
Long-term and restricted bank deposits and long-term marketable
securities
Total assets
Bank loans
Total equity
Capital stock (*)
2013
2014
December 31,
2015
2016
2017
$
30,763 $
14,797 $
18,908 $
24,344 $
24,235
24,807
64,859
8,173
34,218
8,141
30,376
10,179
34,951
9,826
32,015
6,697
174,304
14,477
104,809
201,362
62,750
200,384
9,791
133,721
235,885
53,328
189,820
11,370
117,453
238,638
34,947
186,976
11,944
108,659
243,183
24,682
170,938
8,756
92,381
248,269
(*) Capital stock represents share capital plus additional paid-in capital.
- 2 -
Currency and Exchange Rates
The following table sets forth the exchange rates for one United States dollar (“US$” or “$”) expressed in terms of one New Israeli Shekel (“NIS”)
in effect at the end of the following years (based on the exchange rate on the last day of each year).
2013
2014
December 31,
2015
2016
2017
3.471
3.889
3.902
3.845
3.467
The high and low exchange rates for each month during the previous six months are as follows (NIS per U.S. $1.00):
Month
September 2017
October 2017
November 2017
December 2017
January 2018
February 2018
High
Low
3.584
3.542
3.544
3.550
3.460
3.535
3.504
3.491
3.499
3.467
3.388
3.427
The high, low, average (calculated by using the average of the exchange rates on the last day of each month during the period) and closing exchange
rates for each of the Company’s five previous fiscal years are as follows:
High
Low
Average
Period End
2013
3.791
3.471
3.609
3.471
Year Ended December 31,
2015
2014
2016
3.994
3.402
3.577
3.889
4.053
3.761
3.884
3.902
3.983
3.746
3.841
3.845
2017
3.860
3.467
3.576
3.467
Unless otherwise indicated, in this Annual Report all currency references are to United States dollar (“dollar”).
The exchange rate on March 23, 2018, as reported by the Bank of Israel, for the conversion of dollars into New Israeli Shekel was U.S. $1.00 equals
NIS 3.4910.
B.
CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D.
RISK FACTORS
We are subject to various risks and uncertainties relating to or arising out of the nature of our business and general business, economic, financing,
legal and other factors or conditions that may affect us. We believe that the occurrence of any one or some combination of the following factors could have a
material adverse effect on our business, financial condition, cash flows and results of operations.
- 3 -
Risks Related to Our Business and Industry
We have reported losses in the past. We may report additional losses in the future.
We reported net income in 2013, 2015, 2016 and 2017. We reported a net loss in 2014. The majority of our expenses are directly and indirectly
related to the number of people we employ. Most of our wages are denominated in New Israeli Shekels. Fluctuations in exchange rates may cause our
expenses to increase in U.S. Dollars. We may increase our expenses based on projections of revenue growth. If at any given time we do not meet our
expectations for growth in revenues, our expenses incurred in anticipation of projected revenues may cause us to incur a loss. We may not be able to
anticipate the correct amount of expenses in relation to our revenue and adjust our variable costs accordingly. As a result, we may report additional losses in
the future.
Our gross margin could be negatively impacted by amortization expenses in connection with acquisitions, increased manufacturing costs and other
factors. This could adversely affect our results of operations.
Our gross margin has fluctuated in the past. Our gross margin has been negatively affected in the past and could continue to be negatively affected by
amortization expenses in connection with acquisitions, expenses related to equity based compensation, increases in manufacturing costs, a shift in our sales
mix towards our less profitable products, increased customer demand for longer product warranties, fixed expenses that are applied to a lower revenue base
and increased cost pressures as a result of increased competition. Acquisitions of new businesses could also negatively affect our gross margin. A decrease in
our gross margin could cause an adverse effect on our results of operations.
We have invested significant resources in developing products compatible with Microsoft Skype for Business and related solutions of other partners
of ours. If Microsoft or our other partners, such as Genesys, Avaya or BroadSoft, abandon their solutions compatible with our products, decide to
acquire one of our competitors such as Ribbon Communications (formerly Sonus Networks), Polycom or Yealink or decide to promote products of
our competitors instead of our products, or may be unwilling to continue to recognize AudioCodes as a partner or fail to achieve the expected
growth of solutions compatible with our products, our results of operations will be adversely affected.
We have invested significant resources in complying with Microsoft’s requirements for the purpose of becoming a Microsoft recognized partner for
their unified communication solutions for the enterprise market, which are known as Microsoft Skype for Business and Teams (formerly known as Microsoft
Lync). We have adapted some of our gateway products, IP phones, session border controllers, survivable branch applications; value added applications and
professional services to operate in the Microsoft Skype for Business/Teams environment. We believe that recognition as a Microsoft partner enhances our
access to and visibility in markets relevant to our products. We are dependent on the users of Microsoft Skype for Business to select our compatible products
and purchase them. If Microsoft were to abandon (or significantly change) Skype for Business, decide to promote the products of our competitors instead of
our products, is unwilling to continue to recognize AudioCodes as a Skype for Business partner or fails to achieve the expected growth of Skype for Business,
our results of operations will be adversely affected.
Similarly, we have invested in the development of products and capabilities and achieving certifications for the solutions of other partners of ours,
such as Genesys and Avaya contact centers or BroadSoft’s BroadWorks and BroadCloud (acquired by Cisco). If those partners decide to promote products of
our competitors instead of our products, are unwilling to continue to recognize AudioCodes as a partner or fail to achieve the expected growth of solutions
compatible with our products, our results of operations may be adversely affected.
Funding of our new R&D Center may not be continued and we may not be able to develop commercially profitable products at the Center.
In June 2016, the National Authority for Technology and Innovation (formerly known as the Office of the Chief Scientist) of the Israeli Ministry of
Economy and Industry, or NATI approved a three-year program (2016-2018) for approximately NIS107 million (equal to approximately $27.8 million based
on the exchange rate in effect as of December 31, 2016). These grants are subject to conditions relating to grants by NATI. Funding for the whole term of the
program is subject to the continued review and approval of the progress of the project by NATI. If any required approval is withheld or delayed. our results of
operations will be negatively affected and we may be unable to complete research and development projects that could lead to new product launches and
sales.
Uncertain economic conditions may adversely affect our business.
In the past, uncertain global and local economic conditions have had a significant impact on the technology industry and our major customers and
potential customers. Conditions may continue to be uncertain or may be subject to deterioration, which could lead to a reduction in consumer and customer
spending overall and result in an adverse impact on sales of our products. A disruption in the ability of our significant customers to access liquidity could
cause serious disruptions or an overall deterioration of their businesses, which could lead to a significant reduction in their orders of our products and the
inability or failure on their part to meet their payment obligations to us, any of which could have a material adverse effect on our results of operations and
liquidity. A significant adverse change in a customer’s financial and/or credit position could also require us to assume greater credit risk relating to that
customer’s receivables or could limit our ability to collect receivables related to previous purchases by that customer. As a result, our allowance for doubtful
accounts and write-offs of accounts receivable could increase.
- 4 -
We may need additional financing to operate or grow our business. We may not be able to raise additional financing for our capital needs on
favorable terms, or at all, which could limit our ability to grow and to continue our longer term expansion plans.
We may need additional financing to operate our business, continue our longer term expansion plans. To the extent that we cannot fund our activities
and acquisitions through our existing cash resources and any cash we generate from operations, we may need to raise equity or debt funds through additional
public or private financings. We cannot be certain that we will be able to obtain additional financing on commercially reasonable terms, or at all. This could
inhibit our growth, increase our financing costs or cause us severe financial difficulties.
We could be forced to repay our bank debt if we are unable to satisfy the covenants in our loan agreements.
In December 2015, we received bank loans of $3 million and 3 million Euro, respectively. These amounts are repayable in 20 equal quarterly
installments from March 2016 through December 2020. In December 2016, we borrowed an additional $6 million which is repayable in 20 equal quarterly
installments which began in March 2017 and continue through December 2021. If we are unable to make payments when required by these loan agreements
or if we do not comply with covenants in our loan agreements with respect to maintaining shareholders’ equity, cash balances, and liabilities to banks at
specified levels or achieving certain levels of operating income, we could be required to repay all or a portion of these bank loans prior to their maturity date.
We may need to expand our business through acquisitions that could result in diversion of resources and extra expenses. This could disrupt our
business and affect our results of operations.
Part of our strategy is to pursue acquisitions of, or investments in, businesses and technologies or to establish joint ventures to expand our business.
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. The markets for the products produced by the companies we acquire may take longer than we anticipated to develop and to result in increased
sales and profits for us. We may not realize the intended benefits of any acquisition, investment or joint venture and we may incur losses from any acquisition,
investment or joint venture.
Acquisitions could result in:
·
·
·
·
·
·
·
·
·
·
substantial cash expenditures;
potentially dilutive issuances of equity securities;
the incurrence of debt and contingent liabilities;
a decrease in our profit margins;
amortization of intangibles and potential impairment of goodwill and intangible assets;
reduction of management attention to other parts of the business;
failure to invest in different areas or alternative investments;
failure to generate expected financial results or reach business goals; and
increased expenditures on human resources and related costs.
decrease growth of our professional services;
If acquisitions disrupt our sales or marketing efforts or operations, our business may suffer.
- 5 -
If new products we introduce or expect to introduce in the future fail to generate the level of demand we anticipated, we will realize a lower than
expected return from our investment in research and development with respect to those products, and our results of operations may suffer.
Our success is dependent, in part, on the willingness of our customers to transition or migrate to new products, such as our expanded offering of
session border controller products, our multi service business routers (MSBRs), our IP Phones, our software solutions and value added application products,
our services or expected future products. We are involved in a continuous process of evaluating changing market demands and customer requirements in order
to develop and introduce new products, features and applications to meet changing demands and requirements. We need to be able to interpret market trends
and the advancement of technology in order to successfully develop and introduce new products, features and applications. If potential customers defer
transition or migration to new products, our return on our investment in research and development with respect to products recently introduced or expected to
be introduced in the near future will be lower than we originally anticipated and our results of operations may suffer.
Because of the rapid technological development in the communications equipment market and the intense competition we face, our products can
become outmoded or obsolete in a relatively short period of time, which requires us to provide frequent updates and/or replacements to existing
products. If we do not successfully manage the transition process to the next generation of our products, our operating results may be harmed.
Furthermore, the Communication Platform as a Service (CPaaS) is developing fast and it may have a negatively affect our Unified Communications
as a Service (UCaaS) market which is one of our main revenue sources.
The communications equipment market is characterized by rapid technological innovation and intense competition. Accordingly, our success
depends in part on our ability to develop next generation products in a timely and cost-effective manner. The development of new products is expensive,
complex and time consuming. If we do not rapidly develop our next generation products ahead of our competitors, we may lose both existing and potential
customers to our competitors. Further, if a competitor develops a new, less expensive product using a different technological approach to delivering
informational services over existing networks, our products would no longer be competitive. Conversely, even if we are successful in rapidly developing new
products ahead of our competitors, if we do not cost-effectively manage our inventory levels of existing products when making the transition to the new
products, our financial results could be negatively affected by high levels of obsolete inventory. If any of the foregoing were to occur, then our operating
results would be harmed.
Our industry is rapidly evolving and we may not be able to keep pace with technological changes, which could adversely affect our business.
The transmission of multimedia over data networks is rapidly evolving. Short product life cycles place a premium on our ability to manage the
transition from current products to new products. Our future success in generating revenues will depend on our ability to enhance our existing products and to
develop and introduce new products and product features. These products and features must keep pace with technological developments and address the
increasingly sophisticated needs of our customers. The development of new technologies and products is increasingly complex and uncertain. This increases
the difficulty in coordinating the planning and production process and can result in delay in the introduction of new technologies and products.
The increased adoption of IP networks may adversely affect the demand for media gateway products.
Media gateway products are primarily intended to transmit voice from traditional telephony networks to IP networks and vice versa. Along with the
growth and adoption of IP networks, there has been an increase in the amount of information that is sent directly from one IP network to another IP network.
This direct network communication potentially obviates the need to use a media gateway. A reduction in the demand for media gateways may adversely affect
the demand for our media gateway products and, in turn, adversely affect our results of operations.
The ongoing transition to the use of cloud-based software could adversely affect us.
The use of cloud-based software as a service or SaaS is a software licensing and delivery model in which software is licensed on a subscription basis
and is centrally hosted in the cloud. Recently, our partners have started adopting this model. For example, Microsoft offers a cloud based alternative to Skype
for Business and is encouraging business customers to use that model instead of the on premises alternative. Many of our products are intended for on
premises use. Currently, our revenue is generated primarily from on premises deployments. The transition to cloud-based delivery impacts the architecture
and role of our products in the overall solution. We may not succeed in transitioning in time or at all to the new technologies, products, solutions and services
adopted by our partners and their customers. We may not succeed in aligning our solutions with our partners’ solutions and be unable to bring sufficient value
to them or their end customers. Our inability to adapt to the ongoing transition to the use of cloud-based software could have an adverse effect on us.
Furthermore, SaaS pay-per-use licensing models may have an adverse effect on our short-term revenue recognition.
- 6 -
New industry standards, the modification of our products to meet additional existing standards or the addition of features to our products may delay
the introduction of our products or increase our costs.
The industry standards that apply to our products are continually evolving. In addition, since our products are integrated into networks consisting of
elements manufactured by various companies, they must comply with a number of industry standards and practices established by various international bodies
and industry forums. Should new standards gain broad acceptance, we will be required to adopt those standards in our products. We may also decide to
modify our products to meet additional existing standards or add features to our products. Standards may be adopted by various industry interest groups or
may be proprietary and nonetheless accepted broadly in the industry. It may take us a significant amount of time to develop and design products incorporating
these new standards.
Our OEM customers or potential customers or partners may develop or prefer to develop their own technical solutions, or purchase third party
technology, and as a result, would not buy our products.
Our products are sold also as components or building blocks to large OEMs and NEPs. These customers incorporate our products into their product
offerings, usually in conjunction with value-added services of their own or of third parties. OEM or NEP customers or potential customers may prefer to
develop their own technology or purchase third party technology. They could also manufacture their own components or building blocks that are similar to
the ones we offer. Large customers have already committed significant resources in developing integrated product offerings. Customers may decide that this
gives them better profitability and/or greater control over supplies, specifications and performance. Customers may therefore not buy components or products
from an external manufacturer such as us. This could have an adverse impact on our ability to sell our products and our revenues.
We have a limited order backlog. If revenue levels for any quarter fall below our expectations, our results of operations will be adversely affected.
We have a limited order backlog, which makes revenues in any quarter substantially dependent on orders received and delivered in that quarter. A
delay in the recognition of revenue, even from one customer, may have a significant negative impact on our results of operations for a given period. We base
our decisions regarding our operating expenses on anticipated revenue trends, and our expense levels are relatively fixed, or require some time for adjustment.
Because only a small portion of our expenses varies with our revenues, if revenue levels fall below our expectations, our results of operations will be
adversely affected.
Generally, we sell to original equipment manufacturers, or OEMs, network equipment providers or system integrator customers, as well as to
distributors. As a result, we have less information with respect to the actual requirements of end-users and their utilization of equipment. We also
have less influence over the choice of equipment by these end-users.
We typically sell to system integrators, distributors as well as to OEM customers, network equipment providers. Our customers usually purchase
equipment from several suppliers and may be trying to fulfill one of their customers’ specific technical specifications. We rely heavily on our customers for
sales of our products and to inform us about market trends and the needs of their customers. We cannot be certain that this information is accurate. If the
information we receive is not accurate, we may be manufacturing products for which no customer demand exists or fail to manufacture products that end-
users want. Because we are selling products to OEMs, system integrators and distributors rather than directly to end-users, we have less control over the
ultimate selection of products by end-users.
The markets we serve are highly competitive and many of our competitors have competitive advantages over us, which may make it difficult for us
to maintain profitability.
Competition in our industry is intense and we expect competition to increase in the future. Our competitors currently sell products that provide
similar benefits to those of the products that we sell. There have been a significant number of mergers and acquisitions and strategic alliances, frequently
involving major telecommunications equipment manufacturers acquiring smaller companies, and we expect that this will result in an increasing concentration
of market share among these companies, many of whom are our customers.
Our principal competitors in the area of analog media gateways (2 to 24 ports) for access and enterprise are Grandstream, Natex, Iskratel, Zyxel,
Adtran, Media5, Cisco, Sangoma, Innovaphone AG, Patton, Dialogic and Edgewater.
In the area of low and mid density digital gateways we face competition from companies such as Ribbon Communications (formerly Sonus
Networks), Huawei, Cisco, Dialogic, NewRock, Edgewater, Patton, Ferrari and Sangoma.
Our competitors in the area of MSBRs are companies such as Cisco, Juniper, Adtran, One-Access, Patton, Huawei, HP/3COM and Alcatel-Lucent.
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Specifically in the area of enterprise class session border controller technology we compete with Oracle, Cisco, Avaya, Ribbon Communications
(formerly Sonus Networks), MetaSwich, Ingate and Edgewater.
Our competitors in the Microsoft Skype for Business certified gateways, session border controller, Survivable Branch Appliance and IP Phone
markets include Ribbon Communications (formerly Sonus Networks), Dialogic, Cisco, Oracle, Polycom, Snom, Sangoma, Yealink, Patton and Edgewater.
Our competitors in the area of contact center vendors are Ribbon Communications (formerly Sonus Networks), Oracle, Polycom and Yealink.
Our principal competitors in the sale of signal processing chips are DSP Group, Broadcom, Octasic and Mindspeed. Other indirect competition is a
result of the integration of VoIP functionality into processors (running VoIP signal processing on generic ARM/MIPS cores), thus decreasing the need for
dedicated signal processing chips in the VoIP product. Examples of such manufacturers are Cavium and Texas Instruments. Our principal competitors in the
communications board market are Dialogic, Sangoma and PIKA Technologies.
Our principal competitors in the area of IP Phones are comprised of “best-of-breed” IP phone vendors and end-to-end IP telephony vendors. “Best of
breed” IP phone vendors sell standards-based SIP phones that can be integrated into any standards-based IP-PBX or hosted IP telephony system. These
competitors include Polycom, HP, Grandstream, Yealink, VTEC (acquired SNOM). End-to-end IP telephony vendors sell IP phones that only work in their
proprietary systems. These competitors include Cisco, Avaya, Alcatel-Lucent, Siemens, Mitel and NEC.
Some of our competitors are also customers of our products and technologies.
Many of our competitors have the ability to offer complete network solutions and vendor-sponsored financing programs to prospective customers.
Some of our competitors with broad product portfolios may also be able to offer lower prices on products that compete with ours because of their ability to
recoup a loss of margin through sales of other products or services. Additionally, voice, audio and other communications alternatives that compete with our
products are being continually introduced.
In the future, we may also develop and introduce other products with new or additional telecommunications capabilities or services. As a result, we
may compete directly with VoIP companies and other telecommunications and solution infrastructure providers, some of which may be our customers.
Additional competitors may include companies that currently provide communication software products and services. The ability of some of our competitors
to bundle other enhanced services or complete solutions with VoIP products could give these competitors an advantage over us.
Offering to sell directly to carriers or service providers may expose us to requirements for service which we may not be able to meet.
We also sell our products directly to telecommunications carriers, service providers or other end-users. We have traditionally relied on third party
distributors and OEMs to test and/or sell our products and to inform us about the requirements of end-users. Telecommunications carriers and other service
providers have great bargaining power in negotiating contracts. Generally, contracts with end-users tend to be more complex and impose more obligations on
us than contracts with third party distributors. We may be unable to meet the requirements of these contracts. If we are unable to meet the conditions of a
contract with an end-user customer, we may be required to pay liquidated damages or become subject to liabilities that could result in a material adverse
effect on our results of operations.
Selling directly to end-users and VARs may adversely affect our relationship with our current third party distributors upon whom we will continue to
rely for a significant portion of our sales. Loss of third party distributors and OEMs, or a decreased commitment by them to sell our products as a result of
direct sales by us, could adversely affect our sales and results of operations.
We rely on third-party subcontractors to assemble and original design manufacturers to design and manufacture some of our products, and
therefore do not directly control manufacturing costs, product delivery schedules or manufacturing quality.
Our products are assembled and tested by third-party subcontractors. As a result of our reliance on third-party subcontractors, we cannot directly
control product delivery schedules. We have in the past experienced delays in delivery schedules. Any problems that occur and persist in connection with the
delivery, quality or cost of the assembly and testing of our products could have a material adverse effect on our business, financial condition and results of
operations. This reliance could also lead to product shortages or quality assurance problems, which, in turn, could lead to an increase in the costs of
manufacturing or assembling our products.
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In addition, we have engaged several original design manufacturers, or ODMs, based in Asia to design and manufacture some of our products and
may engage additional ODMs in the future. Any problems that occur and persist in connection with the delivery, quality, cost of the assembly or testing of our
products, as well as the termination of our commercial relationship with an ODM or the discontinuance of the manufacturing of the respective products could
have a material adverse effect on our business, financial condition and results of operations.
If a small number of third-party suppliers do not provide us with key components on a timely basis, we may not be able to deliver our products to
our customers, and substantial reengineering costs may be incurred.
Texas Instruments Incorporated supplies all of the chips for our signal processor product line. Our signal processor line is used both as a product line
in its own right and as a key component in our other product lines. Motorola and Cavium Networks manufacture all of the communications and network
processors currently used in our embedded communications boards and network products.
We have not entered into any long-term supply agreements or alternate source agreements with our suppliers and, while we maintain an inventory of
critical components, our inventory of chips would likely not be sufficient in the event that we had to engage an alternate supplier for these components.
An unexpected termination of the supply of the chips provided by Texas Instruments or the communications processors supplied by Motorola or
Cavium Networks or disruption in their timely delivery would require us to make a large investment in capital and personnel to shift to using chips or signal
processors manufactured by other companies and may cause a delay in introducing replacement products. Customers may not accept an alternative product
design. Supporting old products or redesigning products may make it more difficult for us to support our products.
We depend on other sole source suppliers to produce components for us without the benefit of long-term supply agreements or alternative source
agreements.
Some of our sole source suppliers custom produce components for us based upon our specifications and designs while other of our sole source
suppliers are the only manufacturers of certain components required by our products. We have not entered into any long-term supply agreements or
alternative source agreements with our suppliers and while we maintain an inventory of components from single source providers, our inventory would likely
not be sufficient in the event that we had to engage an alternate supplier of these single source components. In the event of any interruption in the supply of
components from any of our sole source suppliers, we may have to expend significant time, effort and other resources in order to locate a suitable alternative
manufacturer and secure replacement components. If no replacement components are available, we may be forced to redesign certain of our products. Any
such new design may not be accepted by our customers. A prolonged disruption in supply may force us to redesign and retest our products. Any interruption
in supply from any of these sources or an unexpected technical failure or termination of the manufacture of components could disrupt production, thereby
adversely affecting our ability to deliver products and to support products previously sold to our customers.
In addition, if demand for telecommunications equipment increases, we may face a shortage of components from our suppliers. This could result in
longer lead times, increases in the price of components and a reduction in our margins, all of which could adversely affect the results of our operations.
Our customers may require us to produce products or systems to hold in inventory in order to meet their “just in time,” or short lead time, delivery
requirements. If we are unable to sell this inventory on a timely basis, we could incur charges for excess and obsolete inventory which would
adversely affect our results of operations.
Our customers expect us to maintain an inventory of products available for purchase off the shelf subsequent to the initial sales cycle for these
products. This may require us to incur the costs of manufacturing inventory without having a purchase order for the products. The VoIP industry is subject to
rapid technological change and volatile customer demands, which result in a short product commercial life before a product becomes obsolete. If we are
unable to sell products that are produced to hold in inventory, we will need to write-off all or a part of the inventory value of these products. Write-offs could
adversely affect our operating results and financial condition. We wrote off inventory in an aggregate amount of $724,000 in 2015, $2.2 million in 2016 and
$1.9 million in 2017. We have incurred write-offs as a result of slow moving items, excess inventories, discontinued products and products with net realizable
value lower than cost.
The right of our customers to return products and their right to exchange products may affect our ability to recognize revenues which could
adversely affect the results of our operations.
Some of our customers expect us to permit them to return some or all of the products they purchase from us. If we contractually agree to allow a
customer to return products, the customer may be entitled to a refund for the returned products or to receive a credit for the purchase of replacement products.
If we agree to this type of contractual obligation, it could affect our ability to recognize revenues. In addition, if we are not able to resell any products that are
returned, we would have to write off this inventory. This could adversely affect our results of operations.
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Our products generally have long sales cycles and implementation periods, which increase our costs in obtaining orders and reduce the predictability
of our revenues.
Our products are technologically complex and are typically intended for use in applications that may be critical to the business of our customers.
Prospective customers generally must make a significant commitment of resources to test and evaluate our products and to integrate them into larger systems.
Many of our customers are large organizations with complex and lengthy evaluation, decisionmaking and negotiation processes. As a result, our sales process
is often subject to delays associated with lengthy approval processes that typically accompany the design and testing of new communications equipment. The
sales cycles of our products to new customers are approximately four to twelve months after a design win, depending on the type of customer and complexity
of the product. This time period may be further extended because of internal testing, field trials and requests for the addition or customization of features or
acceptance testing. This delays the time until we realize revenue and results in significant investment of resources in attempting to make sales.
Long sales cycles also subject us to risks not usually encountered in a short sales span, including customers’ budgetary constraints, internal
acceptance reviews and cancellation. In addition, orders expected in one quarter could shift to another because of the timing of customers’ procurement
decisions. The time required to implement our products can vary significantly with the needs of our customers and generally exceeds several months; larger
implementations can take multiple calendar quarters. This complicates our planning processes and reduces the predictability of our revenues.
Our proprietary technology is difficult to protect, and our products may infringe on the intellectual property rights of third parties. Our business
may suffer if we are unable to protect our intellectual property or if we are sued for infringing the intellectual property rights of third parties.
Our success and ability to compete depend in part upon protecting our proprietary technology. We rely on a combination of patent, trade secret,
copyright and trademark laws, nondisclosure and other contractual agreements and technical measures to protect our proprietary rights. These agreements and
measures may not be sufficient to protect our technology from third-party infringement, or to protect us from the claims of others.
Enforcement of intellectual property rights may be expensive and may divert attention of management and of research and development personnel
away from our business. Intellectual property litigation could also call into question the ownership or scope of rights owned by us. We believe that at least one
of our patents may cover technology related to the ITU G.723.1 standard. Because of our involvement in the standard setting process, we may be required to
license certain of our patents on a reasonable and non-discriminatory basis to a current or future competitor, to the extent required to carry out the G.723.1
standard. Additionally, our products may be manufactured, sold, or used in countries that provide less protection to intellectual property than that provided
under U.S. or Israeli laws or where we do not hold relevant intellectual property rights.
We believe that the frequency of third-party intellectual property claims is increasing, as patent holders, including entities that are not in our industry
and that purchase patents as an investment or to monetize such rights by obtaining royalties, use infringement assertions as a competitive tactic and a source
of additional revenue. Any intellectual property claims against us, even if without merit, could cost us a significant amount of money to defend and divert
management’s attention away from our business. We may not be able to secure a license for technology that is used in our products and we may face
injunctive proceedings that prevent distribution and sale of our products even prior to any dispute being concluded. These proceedings may also have a
deterrent effect on purchases by customers, who may be unsure about our ability to continue to supply their requirements. We may be forced to repurchase
our products and compensate customers that have purchased such infringing products. We may be forced to redesign the product so that it becomes non-
infringing, which may have an adverse impact on the results of our operations.
In addition, claims alleging that the development, use, or sale of our products infringes third parties’ intellectual property rights may be directed
either at us or at our direct or indirect customers. We may be required to indemnify such customers against claims made against them. We may be required to
indemnify them even if we believe that the claim of infringement is without merit.
Multiple patent holders in our industry may result in increased licensing costs.
There are a number of companies besides us that hold patents for various aspects of the technology incorporated in our industry’s standards and our
products. We expect that patent enforcement will be given high priority by companies seeking to gain competitive advantages or additional revenues. We have
been sued a number of times in recent years for alleged patent infringement. If holders of patents take the position that we are required to obtain a license
from them, we cannot be certain that we would be able to negotiate a license agreement at an acceptable price or at all. Our results of operations could be
adversely affected by the payment of any additional licensing costs or if we are prevented from manufacturing or selling a product.
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Changes in governmental regulations in the United States or other countries could slow the growth of the VoIP telephony market and reduce the
demand for our customers’ products, which, in turn, could reduce the demand for our products.
VoIP and other services are not currently subject to all of the same regulations that apply to traditional telephony. Nevertheless, it is possible that
foreign or U.S. federal or state legislatures may seek to impose increased fees and administrative burdens on VoIP, data, and video providers. The FCC
requires VoIP service providers to meet various emergency service requirements relating to delivery of 911 calls, known as E911, and to accommodate law
enforcement interception or wiretapping requirements, such as the Communications Assistance for Law Enforcement Act, or CALEA. In addition, the FCC
may seek to impose other traditional telephony requirements such as disability access requirements, consumer protection requirements, number assignment
and portability requirements, and other obligations, including additional obligations regarding E911 and CALEA. The cost of complying with FCC
regulations could increase the cost of providing Internet phone service which could result in slower growth and decreased profitability for this industry, which
would adversely affect our business.
The enactment of any additional regulation or taxation of communications over the Internet in the United States or elsewhere in the world could have
a material adverse effect on our customers’ (and their customers’) businesses and could therefore adversely affect sales of our products. We do not know what
effect, if any, possible legislation or regulatory actions in the United States or elsewhere in the world may have on private telecommunication networks, the
provision of VoIP services and purchases of our products.
Use of encryption technology in our products is regulated by governmental authorities and may require special development, export or import
licenses. Delays in the issuance of required licenses, or the inability to secure these licenses, could adversely affect our revenues and results of
operations.
Growth in the demand for security features may increase the use of encryption technology in our products. The use of encryption technology is
generally regulated by governmental authorities and may require specific development, export or import licenses. Encryption standards may be based on
proprietary technologies. We may be unable to incorporate encryption standards into our products in a manner that will insure interoperability. We also may
be unable to secure licenses for proprietary technology on reasonable terms. If we cannot meet encryption standards, or secure required licenses for
proprietary encryption technology, our revenues and results of operations could be adversely affected.
We are subject to regulations that require us to use components based on environmentally friendly materials. We may be subject to various
regulations relating to management and disposal of waste with respect to electronic equipment. Compliance with these regulations has increased our
costs. Failure to comply with these regulations could materially adversely affect our results of operations.
We are subject to an increasing number of directives and regulations requiring the use of environmentally-friendly materials. For example, pursuant
to a European Community directive, equipment suppliers are required to stop using specified materials that are not environmentally friendly. Some of our
customers may also require products that meet higher standards than those required by the directive, such as complete removal of additional harmful
substances from our products. We are dependent on our suppliers for components and sub-system modules, such as semiconductors and purchased assemblies
and goods, to comply with these requirements. This may harm our ability to sell our products in regions or to customers that may adopt such directives.
Compliance with these directives, has required us to undertake significant expenses with respect to meeting the basic requirements and the updates of those
regulations and of implementing new similar regulations and directives. In addition, we may be required to pay higher prices for components that comply
with those directives. We may not be able to pass these higher component costs on to our customers. Compliance with these directives have increased and
could continue to increase our product design and manufacturing costs. New designs may also require qualification testing with both customers and
government certification boards.
Some of our operations use substances regulated under various federal, state, local and international laws governing the environment, including laws
governing the management and disposal of waste with respect to electronic equipment. We could incur substantial costs, including fines and civil or criminal
sanctions, if we were to violate or become liable under environmental laws or if our products become non-compliant with environmental laws. We also face
increasing complexity in our product design and procurement operations as we adjust to new and future requirements relating to the materials that compose
our products. The EU has enacted the Waste Electrical and Electronic Equipment Directive, which makes producers of electrical goods financially responsible
for specified collection, recycling, treatment and disposal of past and future covered products. Similar legislation has been or may be enacted in other
jurisdictions, including the United States, Canada, Mexico, China and Japan.
Our inability or failure to comply with these regulations could have a material adverse effect on our results of operations. In addition, manufacturers
of components that do not meet the new requirements may decide to stop manufacturing those components prior to the required compliance date. These
actions by manufacturers of components could result in a shortage of components that could adversely affect our business and results of operations.
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We have a significant presence in international markets and plan to continue to expand our international operations, which exposes us to a number
of risks that could affect our future growth.
We have a worldwide sales, marketing and support infrastructure that is comprised of independent distributors and value added resellers, and our
own personnel resulting in a sales, marketing and support presence in many countries, including markets in North America, Western and Eastern Europe, the
Asia Pacific region and Latin America. We expect to continue to increase our sales headcount, our applications development headcount, our field support
headcount, our marketing headcount and our engineering headcount and, in some cases, establish new relationships with distributors, particularly in markets
where we currently do not have a sales or customer support presence. As we continue to expand our international sales and operations, we are subject to a
number of risks, including the following:
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greater difficulty in enforcing contracts and accounts receivable collection, as well as longer collection periods;
increased expenses incurred in establishing and maintaining office space and equipment for our international operations;
fluctuations in exchange rates between the dollar and foreign currencies in markets where we do business;
greater difficulty in recruiting local experienced personnel, and the costs and expenses associated with such activities;
general economic and political conditions in these foreign markets (for example changes in oil prices and the global economy have affected
growth and ultimately the demand for our products in China);
economic uncertainty around the world;
· management communication and integration problems resulting from cultural and geographic dispersion;
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risks associated with trade restrictions and foreign legal requirements (such as privacy and cyber security) , including the importation,
certification, and localization of our solutions required in foreign countries, such as high import taxes in Brazil and other Latin American
markets where we sell our products;
greater risk of unexpected changes in regulatory practices, tariffs, and tax laws and treaties;
the uncertainty of protection for intellectual property rights in some countries;
greater risk of a failure of employees to comply with both U.S. and foreign laws, including antitrust regulations, the U.S. Foreign Corrupt
Practices Act (FCPA), and any trade regulations ensuring fair trade practices; and
heightened risk of unfair or corrupt business practices in certain regions and of improper or fraudulent sales arrangements that may impact
financial results and result in restatements of, or irregularities in, financial statements.
Any of these risks could adversely affect our international operations, reduce our revenues from outside the United States or increase our operating
costs, adversely affecting our business, results of operations and financial condition and growth prospects. There can be no assurance that all of our
employees and channel partners will comply with the formal policies we have and will implement, or applicable laws and regulations. Violations of laws or
key control policies by our employees and channel partners could result in delays in revenue recognition, financial reporting misstatements, fines, penalties or
the prohibition of the importation or exportation of our software and services and could have a material adverse effect on our business and results of
operations.
A data security or privacy breach could adversely affect our business.
The protection of customer, employee and company data is critical to us. Customers have a high expectation that we will adequately protect their
personal or other information from cyberattack or other security breaches. A significant breach of customer, employee, or company data could damage our
reputation and result in lost sales, fines, or lawsuits. Our business involves the receipt and storage of personal and other information about customers and
employees. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Despite our security
measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breaches due to employee error, malfeasance or other
disruptions. Any such breach or attack could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen.
Because the methods used to obtain unauthorized access change frequently and may not be immediately detected, we may be unable to anticipate
these methods or promptly implement preventative measures. Any such access, disclosure or other loss of information could result in legal claims or
proceedings, liability under laws that protect the privacy of personal information, disrupt our operations and the services we provide to customers and damage
our reputation, which could adversely affect our business, revenues and competitive position. In addition to taking the necessary precautions ourselves, we
require that third-party service providers implement reasonable security measures to protect our customers’ identity and privacy. We do not, however, control
these third-party service providers and cannot guarantee that no electronic or physical computer break-ins and security breaches will occur in the future.
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Our use and handling of personally identifiable data is regulated at the international, federal and state levels. The regulatory environment
surrounding information security and privacy is increasingly demanding. Privacy and information security laws and regulations change from time to time, and
compliance with them may result in cost increases due to necessary systems changes and the development of new processes. If we fail to comply with these
laws and regulations, we could be subjected to legal risk. Increasing costs associated with information security, such as increased investment in technology,
the cost of compliance and costs resulting from consumer fraud could cause our business and results of operations to suffer materially.
A significant portion of our revenues is generated outside of the Americas and Israel. We intend to continue to expand our operations internationally
and, as a result, our results of operations could suffer if we are unable to manage our international operations effectively.
Revenues generated outside of the Americas and Israel represented approximately 44% of our revenues in 2015, 45% of our revenues in 2016 and
47% of our revenues in 2017. Part of our strategy is to expand our penetration in existing foreign markets and to enter new foreign markets. Our ability to
penetrate some international markets may be limited due to different technical standards, protocols or product requirements in different markets. Expansion of
our international business will require significant management attention and financial resources. Our international sales and operations are subject to
numerous risks inherent in international business activities, including:
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economic and political instability in foreign countries;
compliance with foreign laws and regulations;
different technical standards or product requirements;
staffing and managing foreign operations;
foreign currency fluctuations;
export control issues;
governmental controls;
import or currency control restrictions;
local taxation;
increased risk of collection; and
burdens that may be imposed by tariffs and other trade barriers.
If we are unable to address these risks, our foreign operations may be unprofitable or the value of our investment in our foreign operations may
decrease.
The prices of our products may become less competitive due to foreign exchange fluctuations.
Although we have operations throughout the world, the majority of our revenues and our operating costs in 2017 were denominated in, or linked to,
the dollar. Accordingly, we consider the dollar to be our functional currency. However, a significant portion of our operating costs in 2017 were incurred in
New Israeli Shekels (NIS). During 2017, the NIS appreciated against the dollar, which resulted in an increase in the dollar cost of our operations in Israel. As
a result of this differential, from time to time we may experience increases in the costs of our operations outside the United States, as expressed in dollars. If
there is a significant increase in our expenses, we may be required to increase the prices of our products and may be less competitive. Currently, our
international sales are denominated primarily in dollars. Therefore, any devaluation in the local currencies of our customers relative to the dollar could cause
customers to decrease or cancel orders or default on payment.
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Our sales to European customers denominated in Euros are increasing. Sales denominated in Euros could make our revenues subject to fluctuation in
the Euro/U.S. dollar exchange rate. If the dollar appreciates against the Euro, we may be required to increase the prices of our products that are denominated
in Euros. In 2017, the Euro appreciated against the dollar, which resulted in a decrease in the prices of our products that are denominated in Euros.
Our independent sales representatives may fail to market our products effectively.
A significant portion of our marketing and sales involves the aid of independent sales representatives that are not under our direct control. We cannot
be certain that our current independent sales representatives will continue to distribute our products or that, even if they continue to distribute our products,
they will do so successfully. These representatives are not subject to any minimum purchase requirements and can discontinue marketing our products at any
time. In addition, these representatives often market products of our competitors. Accordingly, we must compete for the attention and sales efforts of our
independent sales representatives.
Our products could contain defects, which would reduce sales of those products or result in claims against us.
We develop complex and evolving products. Despite testing by us and our customers, undetected errors or defects may be found in existing or new
products. The introduction of products with reliability, quality or compatibility problems could result in reduced revenues, additional costs, increased product
returns and difficulty or delays in collecting accounts receivable. The risk is higher with products still in the development stage, where full testing or
certification is not yet completed. This could result in, among other things, a delay in recognition or loss of revenues, loss of market share or failure to achieve
market acceptance. We could also be subject to material claims by customers that are not covered by our insurance.
Obtaining certification of our products by national regulators may be time-consuming and expensive. We may be unable to sell our products in
markets in which we are unable to obtain certification.
Our customers may expect us to obtain certificates of compliance with safety and technical standards set by national regulators, especially standards
set by U.S. or European regulators. There is no uniform set of standards, and each national regulator may impose and change its own standards. National
regulators may also prohibit us from importing products that do not conform to their standards. If we make any change in the design of a product, we are
usually required to obtain recertification of the product. The process of certification may be time-consuming and expensive and may affect the length of the
sales cycle for a product. If we are unable to obtain certification of a product in a market, we may be unable to sell the product in that market.
We depend on a limited number of key personnel who would be difficult to replace.
Because our products are complex and our market is evolving, the success of our business depends in large part upon the continuing contributions of
our management and key personnel. Specifically, we rely heavily on the services of Shabtai Adlersberg, our Chief Executive Officer and President, and Lior
Aldema, our Chief Business Officer. If our Chief Executive Officer or our Chief Business Officer are unable or unwilling to continue with us, our results of
operations could be materially and adversely affected. We do not carry key person insurance for our key personnel.
The success of our business also depends upon our continuing ability to attract and retain other highly-qualified management, technical, sales and
marketing personnel. We need highly-qualified technical personnel who are capable of developing technologies and products and providing the technical
support required by our customers. We experience competitive pressure with respect to retaining and hiring employees in the high technology sector in Israel.
If we fail to hire and retain skilled employees, our business may be adversely affected.
If we do not manage our operations effectively, our results of operations could be adversely affected.
We have expanded our operations in the past and may continue to expand them in the future. This expansion has required, and may continue to
require, the application of managerial, operational and financial resources. We cannot be sure that we will continue to expand, or that we will be able to
expand our operations successfully. In particular, our business requires us to focus on multiple markets, including the VoIP, wireline, cable, enterprise unified
communications and wireless markets. In addition, we work simultaneously with a number of large OEMs and network equipment providers each of which
may have different requirements for the products that we sell to them. We may not have sufficient personnel, or may be unable to devote this personnel when
needed, to address the requirements of these markets and customers. If we are unable to manage our operations effectively, our revenues may not increase, our
cost of operations may rise and our results of operations may be adversely affected.
As we grow we may need new or enhanced systems, procedures or controls. The transition to such systems, procedures or controls, as well as any
delay in transitioning to new or enhanced systems, procedures or controls, may seriously harm our ability to accurately forecast sales demand, manage our
product inventory and record and report financial and management information on a timely and accurate basis.
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The growth in our product portfolio means that we have to service and support more products. This may result in an increase in our expenses and
an adverse effect on our results of operations.
The size of our product portfolio has increased and continues to increase. As a result, we are required to provide product support to our customers.
Customers have requested that we provide a contractual commitment to support a product for a specified period of time. This period of time may exceed the
working life of the product or extend past the period of time that we may intend to manufacture or support a product. We are dependent on our suppliers for
the components (hardware and software) needed to provide support and may be unable to secure the components necessary to satisfy our service
commitments. We do not have long-term contracts with our suppliers, and they may not be obligated to provide us with products or services for any specified
period of time. We may need to purchase an inventory of replacement components and parts in advance in order to try to provide for their availability when
needed. This could result in an increased risk of write-offs with respect to our replacement component inventory to the extent that we cannot accurately
predict our future requirements under our customer service contracts. If any of our component suppliers cease production, cease operations or refuse or fail to
make timely delivery of orders, we may not be able to meet our contractual commitments for product support. We may be required to supply enhanced
components or parts as substitutes if the original versions are no longer available. Product support may be costly and any extra service revenues may not
cover the hardware and software costs associated with providing long-term support.
Terrorist attacks, or the threat of such attacks, may negatively impact the global economy which may materially adversely affect our business,
financial condition and results of operation and may cause our share price to decline.
Financial, political, economic and other uncertainties following terrorist attacks throughout the world may negatively impact the global economy. As
a result, many of our customers and potential customers have become much more cautious in setting their capital expenditure budgets, thereby restricting their
telecommunications procurement. Uncertainties related to the threat of terrorism have had a negative effect on global economy, causing businesses to
continue slowing spending on telecommunications products and services and further lengthen already long sales cycles. Any escalation of these threats or
similar future events may disrupt our operations or those of our customers, distributors and suppliers, which could adversely affect our business, financial
condition and results of operations.
Macroeconomic changes and trade wars may impact our business.
Changes in regional and global politics are leading to changes in the globalization and harmonization trends that prevailed in recent decades. Threats
of trade barriers, customs and duties and other political considerations are causing instability in the accepted world order and the stability of financial markets.
This may impact both our ability to manufacture and sell our products and services which would affect our results of our operations and may also affect the
price of our ordinary shares.
As part of our go to market strategy, we have become certified solution partners of technological giants such as Microsoft and BroadSoft. These
companies change their go to market strategy and product mix and technology requirements often and do so on reasonably short notice. We may be
unable or unwilling to change our products in time and as may be required in order to remain a certified partner.
In recent years we have invested heavily in our product offerings that meet the requirements of the Microsoft Skype for Business eco-system. The
nature of this Microsoft solution is undergoing major change and, as part of this change, we are also witnessing a shift from on-premises solutions to cloud-
based or hybrid on-premises and cloud-based solutions. This directly impacts the suitability of our products to end users and impacts end user demand for
products in a changing technical environment. Recently, Cisco acquired BroadSoft. This acquisition is likely to impact BroadSoft’s future direction and, as a
result, our investment in being compatible with the BroadSoft BroadWorks solution. Changes by our third party partners, over which we have little control
and influence, can negatively impact the results of our operations on reasonably short notice. We may be unable to recover or adapt to such changes.
We are subject to taxation in several countries.
Because we operate in several countries, we are subject to taxation in multiple jurisdictions. We are required to report to and are subject to local tax
authorities in the countries in which we operate. In addition, our income that is derived from sales to customers in one country might also be subject to
taxation in other countries. We cannot be sure of the amount of tax we may become obligated to pay in the countries in which we operate. The tax authorities
in the countries in which we operate may not agree with our tax position. Our tax benefits from carry forward losses and other tax planning benefits such as
Israeli approved enterprise programs, may prove to be insufficient due to Israeli tax limitations, or may prove to be insufficient to offset tax liabilities from
foreign tax authorities. Foreign tax authorities may also use our gross profit or our revenues in each territory as the basis for determining our income tax, and
our operating expenses might not be considered for related tax calculations, which could adversely affect our results of operations.
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Risks Related to Operations in Israel
Conditions in Israel affect our operations and may limit our ability to produce and sell our products and instability in the Middle East may
adversely affect us.
We are incorporated under the laws of the State of Israel, and our principal executive offices and principal research and development facilities are
located in the State of Israel. Political, economic and military conditions in Israel directly affect our operations. There has been an increase in unrest and
terrorist activity in Israel, which has continued with varying levels of severity for many years through the current period of time. This has led to ongoing
hostilities between Israel, the Palestinian Authority, other groups in the West Bank and Gaza Strip, and the northern border of Lebanon, such as the hostilities
along Israel’s border with the Gaza Strip and the missiles fired from the Gaza Strip into Israel in 2012 and 2013, as well as during the hostilities in the
summer of 2014. The future effect of this conflict on the Israeli economy and our operations is unclear. The Israeli-Palestinian conflict may also lead to
political instability between Israel and its neighboring countries. Ongoing violence between Israel and the Palestinians, as well as tension between Israel and
the neighboring countries, may have a material adverse effect on our business, financial conditions and results of operations.
Political events in various countries in the Middle East, such as Syria, Iraq, Iran and Egypt, have weakened the stability of those countries, and have
allowed extreme terrorists organizations, such as ISIS, to operate in certain territories in the Middle East. This instability may lead to deterioration of the geo-
political conditions in the Middle East. In addition, this instability has affected the global economy and marketplace through fluctuations in oil and gas prices.
Our headquarters and research and development facilities are located in the State of Israel. Any events that affect the State of Israel may impact us in
unpredictable ways. For example, recent activities of the global movement for a campaign of Boycott, Divestment and Sanctions (BDS) against Israel may
adversely affect our sales in certain countries. We have contingent plans for alternative manufacturing and supply sources, but these plans may be insufficient.
Should our operations be impacted in a significant way, this may adversely affect the results of our operations.
We cannot predict the effect on us of an increase in these hostilities or any future armed conflict, political instability or violence in the region.
Additionally, some of our officers and employees in Israel are obligated to perform annual military reserve duty and are subject to being called for additional
active duty under emergency circumstances. Some of our employees live within conflict area territories and may be forced to stay at home instead of
reporting to work. We cannot predict the full impact of these conditions on us in the future, particularly if emergency circumstances or an escalation in the
political situation occur. If many of our employees are called for active duty, or forced to stay at home, our operations in Israel and our business may be
adversely affected.
A number of countries and organizations continue to restrict or ban business with Israel or Israeli companies or companies doing business with Israel
or Israeli companies, which may limit our ability to make sales in those countries. In addition, there have been increased efforts by activists to cause
companies and consumers to boycott Israeli goods based on Israeli government policies. Such actions, particularly if they become more widespread, may
adversely impact our ability to sell our products.
We are adversely affected by the changes is the value of the U.S. dollar against the New Israeli Shekel and could be adversely affected by the rate of
inflation in Israel.
We generate most of our revenues in U.S. dollars and, in 2017, a significant portion of our expenses, primarily salaries, related personnel expenses
and the leases of our buildings in Israel, were incurred in NIS. We anticipate that a significant portion of our expenses will continue to be denominated in
NIS.
Our NIS related costs, as expressed in U.S. dollars, are influenced by the exchange rate between the U.S. dollar and the NIS. During 2015, the NIS
depreciated against the U.S. dollar, which resulted in a decrease in the U.S. dollar cost of our operations in Israel, and during 2016 and 2017, the NIS
appreciated against the U.S. dollar, which resulted an increase in the U.S. dollars cost of our operations in Israel. To the extent the U.S. dollar weakens against
the NIS, we could experience an increase in the cost of our operations, which are measured in U.S. dollars in our financial statements, which could adversely
affect our results of operations. In addition, in periods in which the U.S. dollar appreciates against the NIS, we bear the risk that the rate of inflation in Israel
will exceed the rate of such devaluation of the NIS in relation to the U.S. dollar or that the timing of such devaluations were to lag considerably behind
inflation, which will increase our costs as expressed in U.S. dollars.
A decrease in value of the U.S. dollar in relation to the NIS could have the effect of increasing the cost in U.S. dollars of these expenses. Our U.S.
dollar-measured results of operations were adversely affected in 2016 and 2017 when the NIS appreciated against the U.S. dollar. This could happen again if
the U.S. dollar were to decrease in value against the NIS.
In order to manage the risks imposed by foreign currency exchange rate fluctuations, from time to time, we enter into currency forward and put and
call options contracts to hedge some of our foreign currency exposure. We can provide no assurance that our hedging arrangements will be effective. In
addition, if we wish to maintain the U.S. dollar-denominated value of our products in non-U.S. markets, devaluation in the local currencies of our customers
relative to the U.S. dollar may cause our customers to cancel or decrease orders or default on payment.
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Because exchange rates between the NIS and the U.S. dollar fluctuate continuously, exchange rate fluctuations have an impact on our profitability
and period-to-period comparisons of our results of operations. In 2017, the value of the U.S. dollar decreased in relation to the NIS by 9.8% and the inflation
rate in Israel was 0.4%. In 2016, the value of the U.S. dollar decreased in relation to the NIS by 1.5% and the deflation rate in Israel was 0.2%. In 2015, the
value of the U.S. dollar increased in relation to the NIS by 0.3% and the deflation rate in Israel was 1.0%. Our results of operations may be adversely affected
in case of a decrease in the value of the U.S. dollar to the NIS.
The Israeli government programs in which we currently participate, and the tax benefits we currently receive require us to meet several conditions
and may be terminated or reduced in the future, which would increase our costs.
Currently there are four programs under the Israeli Law for the Encouragement of Capital Investments, 1959, or the Investment Law, that entitle us
to certain tax benefits. Our facilities in Israel have been granted Approved Enterprise status under the Israeli Law for the Encouragement of Capital
Investments, 1959, or the Investment Law under four programs of Approved Enterprise. We have two programs that qualify as Beneficiary Enterprises
pursuant to an amendment to the Investment Law that came into effect in April 2005. Among other things, the Investment Law, as amended in 2005, provides
tax benefits to both local and foreign investors and simplifies the approval process. Such amendments do not apply to investment programs approved prior to
December 31, 2004. Therefore, our Approved Enterprise program is not subject to the provisions of the amendment, but our four Beneficiary Enterprise
programs are subject to the amendment.
In order to be eligible for tax benefits under the Investment Law, our Approved Enterprise and Beneficiary Enterprises must comply with various
conditions set forth in the Investment Law and the criteria set forth in the applicable certificate of approval for the Approved Enterprise, as well as periodic
reporting obligations. If we fail to meet these requirements, we would be subject to corporate tax in Israel at the regular statutory rate. Additionally, some of
these programs and the related tax benefits are available to us for a limited number of years, and these benefits expire from time to time. We could also be
required to refund tax benefits, with interest and adjustments for inflation based on the Israeli consumer price index. See Note 13 to our Consolidated
Financial Statements for additional information with respect to tax benefits under the Investment Law.
If the Government of Israel discontinues or modifies these programs and potential tax benefits, our business, financial condition and results of
operations could be materially and adversely affected.
The government grants we have received for research and development expenditures limit our ability to manufacture products and transfer
technologies outside of Israel and require us to satisfy specified conditions. If we fail to satisfy these conditions, we may be required to refund grants
previously received together with interest and penalties. In addition, the government grants may be discontinued or reduced in the future.
In connection with research and development grants we received from NATI, we must pay royalties to NATI on the revenue derived from the sale of
products, technologies and services developed with the grants from NATI. The terms of NATI grants and the law pursuant to which grants are made restrict
our ability to manufacture products or transfer technologies outside of Israel if NATI grants funded the development of the products or technology, without
special approvals from NATI. Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of Israel of
technology or know-how developed with NATI funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay
NATI. These restrictions may limit our ability to enter into agreements for such transactions without NATI approval. We cannot be certain that any approval
of NATI will be obtained on terms that are acceptable to us, or at all.
In order to meet specified conditions in connection with the grants and programs of NATI, we have made representations to the Government of Israel
concerning our Israeli operations. If we fail to meet the conditions related to the grants, including the maintenance of a material presence in Israel, or if there
is any material deviation from the representations made by us to the Israeli government, we could be required to refund the grants previously received
(together with an adjustment based on the Israeli consumer price index and an interest factor) and would likely be ineligible to receive NATI grants in the
future and, in certain cases, may be subject to criminal charges. In addition, manufacturing products outside the State of Israel (as we currently do) increases
the rates of royalties to be paid to NATI. Any inability to receive these grants would result in an increase in our research and development expenses.
In 2017, we recognized a royalty-bearing grant of $8.3 million from the Government of Israel, through NATI, for the financing of a portion of our
research and development expenditures in Israel. The NATI budget has been subject to reductions, which may affect the availability of funds for these
prospective grants and other grants in the future. As a result, we cannot be certain that we will continue to receive grants at the same rate, or at all. In addition,
the terms of any future NATI grants may be less favorable than our past grant. As of December 31, 2017, we have a contingent obligation to pay royalties in
the amount of approximately $58.2 million.
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It may be difficult to enforce a U.S. judgment against us, our officers and directors, assert U.S. securities law claims in Israel or serve process on
substantially all of our officers and directors.
We are incorporated in Israel. Most of our executive officers and directors are nonresidents of the United States, and a majority of our assets and the
assets of these persons are located outside the United States. Therefore, it may be difficult to enforce a judgment obtained in the United States against us or
any such persons or to effect service of process upon these persons in the United States. Israeli courts may refuse to hear a claim based on a violation of U.S.
securities laws because Israel is not the most appropriate forum to bring such a claim. In addition, 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 these matters. Additionally, there is doubt as to the enforceability of civil liabilities under the Securities Act and the Exchange Act in
original actions instituted in Israel.
Israeli law and provisions in our articles of association may delay, prevent or make difficult a merger with or an acquisition of us, which could
prevent a change of control and therefore depress the price of our shares.
Provisions of Israeli law may delay, prevent or make undesirable a merger or an acquisition of all or a significant portion of our shares or assets.
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 have the effect of delaying
or preventing a change in control and may make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders.
These provisions may limit the price that investors may be willing to pay in the future for our ordinary shares. In addition, our articles of association contain
certain provisions that may make it more difficult to acquire us, such as a staggered board, the ability of our board of directors to issue preferred stock and
limitations on business combinations with interested shareholders. Furthermore, Israel tax considerations may make potential transactions undesirable to us or
to some of our shareholders.
The rights and responsibilities of our shareholders are governed by Israeli law which may differ in some respects from the rights and responsibilities
of shareholders of U.S. corporations.
Since we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by our articles of association and Israeli
law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in United States corporations. In particular, a
shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the
company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at a general meeting of
shareholders on certain matters, such as an amendment to a company’s articles of association, an increase of a company’s authorized share capital, a merger of
a company and approval of related party transactions that require shareholder approval. In addition, a controlling shareholder or a shareholder who knows that
it possesses the power to determine the outcome of a shareholders’ vote or to appoint or prevent the appointment of an office holder in a company or has
another power with respect to a company, has a duty to act in fairness towards the company. However, Israeli law does not define the substance of this duty of
fairness. Some of the parameters and implications of the provisions that govern shareholder behavior have not been clearly determined. These provisions may
be interpreted to impose additional obligations and liabilities on our shareholders that are not typically imposed on shareholders of United States corporations.
Risks Relating to the Ownership of our Ordinary Shares
The price of our ordinary shares may fluctuate significantly.
The market price for our ordinary shares, as well as the prices of shares of other technology companies, has been volatile. Between January 1, 2013
and March 23, 2018, the trading price of our shares on Nasdaq has fluctuated from a low of $2.69 to a high of $9.12. The following factors may cause
significant fluctuations in the market price of our ordinary shares:
·
·
·
·
fluctuations in our quarterly revenues and earnings or those of our competitors;
shortfalls in our operating results compared to levels forecast by securities analysts or by us;
announcements concerning us, our competitors or telephone companies;
announcements of technological innovations;
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·
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the introduction of new products;
changes in product price policies involving us or our competitors;
· market conditions in the industry;
·
·
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integration of acquired businesses, technologies or joint ventures with our products and operations;
the conditions of the securities markets, particularly in the technology and Israeli sectors; and
political, economic and other developments in the State of Israel and worldwide.
In addition, stock prices of many technology companies fluctuate significantly for reasons that may be unrelated or disproportionate to operating
results. The factors discussed above may depress or cause volatility of our share price, regardless of our actual operating results.
Our quarterly results of operations have fluctuated in the past and we expect these fluctuations to continue. Fluctuations in our results of operations
may disappoint investors and result in a decline in our share price.
We have experienced and expect to continue to experience significant fluctuations in our quarterly results of operations. In some periods, our
operating results may be below public expectations or below revenue levels and operating results reached in prior quarters or in the corresponding quarters of
the previous year. If this occurs, the market price of our ordinary shares could decline.
The following factors have affected our quarterly results of operations in the past and are likely to affect our quarterly results of operations in the
future:
·
·
·
·
·
·
·
·
·
·
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size, timing and pricing of orders, including order deferrals and delayed shipments;
launching of new product generations;
length of approval processes or market testing;
technological changes in the telecommunications industry;
competitive pricing pressures;
the timing and approval of government research and development grants;
accuracy of telecommunication company, distributor and original equipment manufacturer forecasts of their customers’ demands;
changes in our operating expenses;
disruption in our sources of supply;
temporary or permanent reduction in purchases by our significant customers; and
general economic conditions.
Therefore, the results of any past periods may not be relied upon as an indication of our future performance.
Our actual financial results might vary from our publicly disclosed financial forecasts.
From time to time, we publicly disclose financial forecasts and other performance metrics. Our forecasts reflect numerous assumptions concerning
our expected performance, as well as other factors which are beyond our control and which might not turn out to be correct. As a result, variations from our
forecasts could be material. Our financial results are subject to numerous risks and uncertainties, including those identified throughout this “Risk Factors”
section and elsewhere in this Annual Report. If our actual financial results are worse than our financial forecasts, the price of our ordinary shares may decline.
A large portion of our sales is made during the last month of each quarter. As a result, any delay in our receipt of orders could affect our results for a quarter
and the accuracy of our forecasts.
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It is our policy that we will generally not provide quarterly forecasts of the results of our operations. This policy could affect the willingness of
analysts to provide research with respect to our ordinary shares, which could affect the trading market for our ordinary shares.
It is our policy that we will generally not provide quarterly forecasts of the results of our operations. This could result in the reduction of research
analysts who cover our ordinary shares. Any reduction in research coverage could affect the willingness of investors, particularly institutional investors, to
invest in our shares which could affect the trading market for our ordinary shares and the price at which our ordinary shares are traded.
As a foreign private issuer whose shares are listed on Nasdaq, we follow certain home country corporate governance practices instead of certain
Nasdaq requirements.
As a foreign private issuer whose shares are listed on Nasdaq, we are permitted to follow certain home country corporate governance practices
instead of certain requirements contained in the Nasdaq listing rules. We do not comply with the Nasdaq requirement that we obtain shareholder approval for
certain dilutive events, such as for the establishment or amendment of certain equity based compensation plans. Instead, we follow Israeli law and practice
which permits the establishment or amendment of certain equity based compensation plans to be approved by our board of directors without the need for a
shareholder vote, unless such arrangements are for the compensation of directors or the chief executive officer, in which case they also require compensation
committee and shareholder approval.
As a foreign private issuer listed on the Nasdaq, we may also elect in the future to follow home country practice with regard to, among other things,
director nominations, composition of the board of directors and quorum at shareholders’ meetings, as well as not obtain shareholder approval for certain
dilutive events.
Accordingly, our shareholders may not be afforded the same protection as provided under Nasdaq’s corporate governance rules.
Our ordinary shares are listed for trading in more than one market and this may result in price variations.
Our ordinary shares are listed for trading on Nasdaq and on the Tel Aviv Stock Exchange (“TASE”). Trading in our ordinary shares on these markets
is made in different currencies (U.S. dollars on Nasdaq and New Israeli Shekels on TASE), and at different times (resulting from different time zones,
different trading days and different public holidays in the United States and Israel). Actual trading volume on the TASE is generally lower than trading
volume on Nasdaq, and as such could be subject to higher volatility. The trading prices of our ordinary shares on these two markets often differ resulting from
the factors described above, as well as differences in exchange rates. Any decrease in the trading price of our ordinary shares on one of these markets could
cause a decrease in the trading price of our ordinary shares on the other market.
We do not anticipate declaring any cash dividends on our ordinary shares.
We have never declared or paid cash dividends on our ordinary shares and do not plan to pay any cash dividends in the near future.
U.S. shareholders face certain income tax risks in connection with their acquisition, ownership and disposition of our ordinary shares. In any tax
year, we could be deemed a passive foreign investment company, which could result in adverse U.S. federal income tax consequences for U.S.
shareholders.
Based on the composition of our gross income, the composition and value of our gross assets and the amounts of our liabilities for each taxable year
from 2004 through 2017, we do not believe that we were a passive foreign investment company, or PFIC, for U.S. federal income tax purposes during any of
such tax years. It is likely, however, that we were a PFIC in each of 2001, 2002 and 2003. There can be no assurance that we will not become a PFIC in the
current tax year or any future tax year in which, for example, the value of our assets, as measured by the public market valuation of our ordinary shares,
declines in relation to the value of our passive assets (generally, cash, cash equivalents and marketable securities). If we are a PFIC for any tax year, U.S.
shareholders who own our ordinary shares during such year may be subject to increased U.S. federal income tax liabilities and reporting requirements for
such year and succeeding years, even if we cease to be a PFIC in such succeeding years. A U.S. holder of our ordinary shares will be required to file an
information return containing certain information required by the U.S. Internal Revenue Service for each year in which we are treated as a PFIC with respect
to such holder.
We urge U.S. holders of our ordinary shares to carefully review Item 10.E. – “Taxation - U.S. Federal Income Tax Considerations” in this Annual
Report and to consult their own tax advisors with respect to the U.S. federal income tax risks related to owning and disposing of our ordinary shares and the
consequences of PFIC status.
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We are subject to ongoing costs and risks associated with complying with extensive corporate governance and disclosure requirements.
As a foreign private issuer subject to U.S. federal securities laws, we spend a significant amount of management time and resources to comply with
laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010, United States Securities and Exchange Commission (“SEC”) regulations and Nasdaq rules. While we
have developed and instituted corporate compliance programs and continue to update our programs in response to newly implemented or changing regulatory
requirements, we cannot provide assurance that we are or will be in compliance with all potentially applicable corporate regulations. If we fail to comply with
any of these regulations, we could be subject to a range of regulatory actions, fines or other sanctions or litigation. In connection with our compliance with the
internal control provisions of Section 404 and the other applicable provisions of the Sarbanes-Oxley Act, our management and other personnel devote a
substantial amount of time, and may need to hire additional accounting and financial staff, to assure that we comply with these requirements. The additional
management attention and costs relating to compliance with the Sarbanes-Oxley Act, the Dodd-Frank Act and other corporate governance requirements could
materially and adversely affect our financial results.
The internal control over financial reporting required by Section 404 of the Sarbanes-Oxley Act may not prevent or detect misstatements because of
certain of its limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. As a result, even effective internal
controls may not provide reasonable assurances with respect to the preparation and presentation of financial statements. We cannot provide assurance that, in
the future, our management will not find a material weakness in connection with its annual review of our internal control over financial reporting pursuant to
Section 404 of the Sarbanes-Oxley Act. We also cannot provide assurance that we could correct any such weakness to allow our management to assess the
effectiveness of our internal control over financial reporting as of the end of our fiscal year in time to enable our independent registered public accounting
firm to state that such assessment will have been fairly stated in our Annual Report on Form 20-F or state that we have maintained effective internal control
over financial reporting as of the end of our fiscal year. Discovery and disclosure of a material weakness in our internal control over financial reporting could
have a material impact on our financial statements and could cause our stock price to decline.
The conflict minerals disclosure rules in the United States are complex and compliance with the rules could be difficult.
We are subject to SEC disclosure obligations relating to our use of so-called “conflict minerals”-columbite-tantalite, cassiterite (tin), wolframite
(tungsten) and gold. These minerals are present in a significant number of our products; as a result, we are required to file a conflicts minerals report with the
SEC on an annual basis by May of each year.
The preparation of our report is dependent upon the implementation and operation of our systems and processes and information supplied by our
suppliers of products that contain, or potentially contain, conflict minerals. We have incurred and will continue to incur costs associated with complying with
the supply chain due diligence procedures required by the SEC. To the extent that the information that we receive from our suppliers is inaccurate or
inadequate or our processes in obtaining that information do not fulfill the SEC’s requirements, we could face both reputational and SEC enforcement risks.
In addition, our efforts to comply with the disclosure rules and to otherwise implement conflict-free sourcing policies could result in changes to our supply
chain that could disrupt existing supply sources or cause more uncertainty with respect to our supply chain.
ITEM 4.
INFORMATION ON THE COMPANY
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
AudioCodes Ltd. was incorporated in 1992 under the laws of the State of Israel. Our principal executive offices are located at 1 Hayarden Street,
Airport City, Lod, 7019900 Israel. Our telephone number is +972-3-976-4099. Our agent in the United States is AudioCodes Inc., 27 World’s Fair Drive,
Somerset, New Jersey 08873.
MAJOR DEVELOPMENTS SINCE JANUARY 1, 2017
R&D Center
In April 2014, the Office of the Chief Scientist (now known as NATI) approved a three-year program (2014-2016) for approximately NIS100 million
(equal to approximately $25.7 million based on the exchange rate in effect as of December 31, 2014) to enable us to establish an advanced innovative
research and development center for cloud computing technologies and Unified Communications. In May 2014, the research and development center was
established. In June 2016, another three-year program (2016-2018) for approximately NIS107 million (equal to approximately $27.8 million based on the
exchange rate in effect as of December 31, 2016) was approved. As of December 31, 2017, we employed approximately 100 engineers at the research and
development center. We expect that a significant portion of the cost of this project will continue to be reimbursed to us through grants from NATI, the
successor to the Office of the Chief Scientist, pursuant to this program. The grants are subject to conditions relating to grants by NATI. Funding for the whole
term of the program is subject to the continued review and approval of the progress of the project by NATI.
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Virtualized Session Border Controller
There continues to be increased penetration of Cloud and Network Function Virtualization (NFV) in the service provider space. Service providers
seek to harmonize their infrastructure with common off the shelf servers, instead of using proprietary hardware. In 2017, AudioCodes continued to invest in
cloud and NFV technologies by adding more capabilities to its software session border controller (SBC) product line. This includes increasing scale in
multiple dimensions and high availability schemes for private and public clouds, as well as utilizing standard acceleration technologies for efficient utilization
of virtualized infrastructure.
IP Phones
During 2017, we continued to evolve our IP Phones offering for Microsoft Skype for Business, contacts centers and hosted business services by
developing additional capabilities and offering tighter manageability and control of the phones from the One Voice Operations Center. Additionally, we
introduced the 405 IP Phone for price-sensitive customers and to help our penetration into Asia Pacific and Latin American markets, as well as the 450 IP
Phone which is a high-end executive phone. In addition, we introduced the Huddle Room Solution (HRS), which delivers a meeting room solution for
businesses.
Multi-Service-Business-Routers
During 2017, we continued to evolve our MSBR product line with more hardware configurations as required by service provider customers and
enhanced management and operation capabilities, such as WEB GUI, used to enable end user restricted configuration without involving the service provider.
VoIP Management and Routing
Our One Voice operations center (“OVOC”) offers management applications for large-scale cloud or premise-based unified communications
deployments. It monitors, manages and operates AudioCodes’ session border controllers (SBC), media gateways, Microsoft survivable branch appliances
(SBA), multi-service business routers (MSBR) and IP phones. During 2017 we invested in the following modules and functionalities of OVOC:
New OVOC: In 2017 we integrated AudioCodes’ Element Management System (EMS) with AudioCodes’ Session Experience Manager (SEM) into
a single application - the New OVOC. The new OVOC provides device management and Voice quality management on a single pane of glass. The new
OVOC provides a unique user interface and user experience, the system operator can see the device quality status with its operational status on the same
window. In addition we enhanced the new OVOC with capabilities such as support for multi-tenancy and call signaling ladder for assisting root cause
analysis.
AudioCodes Routing Manager (ARM) enables system administrators of large and multi-site enterprise VoIP networks to manage their call routing
and policy enforcement configuration in a unified logical view. ARM is a centralized solution aimed at simplifying the task of managing increasingly
complex VoIP networks, thereby saving time and reducing operational costs. ARM enables routing policies to be enforced based on a multi-variate decision
mechanism and supports centralized dial plans and call routing within multi-vendor environments. ARM enables operational efficiency delivered with
intuitive GUI for network views, and single-click network topology creation. ARM is a highly scalable solution providing control over many network
elements.
In 2017, we enriched the routing capabilities of our ARM through various network conditions and user policies such as quality based routing,
location based routing and call prioritization for emergency calls, time based routing and enhanced load balancing. We also added offline VoIP network
planner module and simpler user operation by means of single sign on to the managed devices,
CloudBond 365, Cloud Connector Edition (CCE) appliances, and User Management Pack 365 (UMP 365)
AudioCodes CloudBond™ 365 is a modular, adaptable solution for the data center, customer premises or the branch. A versatile all-in-one Skype for
Business appliance designed for hybrid environments, it combines Skype for Business server, the Cloud-PBX and the service provider’s voice services. While
Microsoft’s Cloud PBX offering is still evolving into a full PBX replacement, CloudBond 365 bridges the gap, creating the critical bond between UC and the
developing cloud business.
AudioCodes CloudBond 365 CCE appliances, allows Microsoft Skype for Business cloud PBX customers to connect to their local existing voice
services (Like E1/T1, ISDN, and SIP Trunks). AudioCodes Mediant CCE appliances package Microsoft code along with AudioCodes SBC and gateway
technology, along with a management application for simplified installation and operations.
AudioCodes User Management Pack 365 (UMP 365) is a software management application that allows IT managers and service providers to easily
operate Skype for Business deployments. UMP 365 does not require knowledge and expertise in Microsoft’s PowerShell tools, and instead, allows helpdesk
level engineers to operate the daily tasks using an intuitive graphical user interface.
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Acquisition of Active Communications Europe
On December 31, 2015, we acquired Active Communications Europe, a leading provider of communications solutions that increase the effectiveness
of departments, individuals and organizations. Active Communications Europe is a Microsoft Silver Partner specializing in unified communications. This
acquisition has improved our ability to serve the growing market for Microsoft Skype for Business Online, Office 365 and Cloud PBX.
We acquired Active Communications Europe for a purchase price of $3 million, payable $2 million in cash at closing and $500,000 on each of the
first and second anniversaries of the closing date. The deferred payments may be paid in cash or our ordinary shares, at our option. The first and the second
deferred payments were paid in cash in February 2017 and in March 2018, respectively. We are also obligated under an earn-out arrangement pursuant to
which we have agreed to pay up to an additional $2 million based on attaining certain sales targets over the next three years. In exceptional circumstances, the
amount of the earn-out may increase. A first payment of the earn-out in the amount of $151,000 was paid in March 2018. Following the transaction, Active
Communications Europe became a wholly owned subsidiary of AudioCodes.
PRINCIPAL CAPITAL EXPENDITURES
We have made and expect to continue to make capital expenditures in connection with expansion of our operation and production capacity. The table
below sets forth our principal capital expenditures incurred for the periods indicated (amounts in thousands):
Computers and peripheral equipment
$
848 $
1,322 $
1,025
2015
Year Ended December 31,
2016
2017
Office furniture and equipment
Leasehold improvements
Total
B.
BUSINESS OVERVIEW
Introduction
732
446
114
41
392
158
$
2,026 $
1,477 $
1,575
AudioCodes designs, develops and sells advanced Voice over-IP (VoIP) and converged VoIP and data networking solutions, products and
applications that facilitate secured, resilient and high quality Unified Communications (UC) and Contact Center (CC) services whether deployed on-premise
or delivered from the cloud. Providing IP Phones, Customer Premise Equipment (CPE), and cloud-based platforms and applications, our solutions and
products are geared to meet the growing needs of enterprises and service providers realigning their operations towards the transition to All-IP networks and
hosted business services.
AudioCodes is a VoIP technology market leader focused on converged VoIP and data communications offering technology, products and solutions
for Enterprise Unified Communications, contact centers, service provider business services, mobile VoIP and Cloud virtualized Data Centers. Our products
are deployed globally in enterprise, service provider cloud networks. AudioCodes’ products include IP phones, session border controllers (SBC), media
gateways, Multi-Service Business Routers (MSBRs), residential gateways, media servers, mobile communications solutions, value added applications, life
cycle management solutions and professional services. AudioCodes high definition (HD) VoIP technologies and products provide enhanced intelligibility and
a better end user experience in emerging voice communications services.
AudioCodes’ vision is to be the innovative leading supplier of converged VoIP and data solutions for enterprises, Value Added Resellers (VARs),
System Integrators (SIs), service providers and Over the Top (OTT) communication providers worldwide. AudioCodes VoIP technology contains voice
quality enhancements and best-of-breed VoIP network elements, and has a proven track record in product and network interoperability with the industry’s
leading companies.
With 25 years in the telecommunications market, AudioCodes’ offers a broad range of solutions for both enterprise and service provider
deployments. These solutions are built around our field-proven VoIP product range. With full support for industry standard protocols such as SIP, and proven
interoperability with all industry leading soft switches, PBXs, IP-PBXs and unified communications platforms, AudioCodes delivers innovative solutions for
virtually any voice communications environment, offering reduced total cost of ownership (TCO), enhanced features, and superior voice quality.
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Historical Overview
AudioCodes was established in 1993 to develop its low-bit-rate speech compression technology. Our first achievement was developing the speech
compression algorithm that was selected by the International Telecommunication Union (ITU) as a basis for the ITU-T G.723.1 standard.
Over the years, we continued to expand our focus. Our development and expansion focused on different technologies and solutions as VoIP
progressed:
·
·
·
·
1993-1997 – Algorithm Development
1995-2007 – Chips, Blades
2002-2016 – Networking Products
2011-2017 – Solutions and Services
Through acquisitions and partnerships, we were able to grow our business and expand our focus, while taking advantage of our core competence –
voice processing and knowhow – which gave us the ability to mix and match technologies and become a solutions provider.
We expanded to compact PCI boards, achieving a transition to a higher capacity that helped develop the gateway market. In 2001, AudioCodes
released its first media gateway independent platform, based on our blade and chip technology. The first product was an analog media gateway that was
followed by a family of media gateways combining analog and digital interfaces. We then began to develop and sell high density media gateways and media
servers.
We entered the field of call recording in 2004 when we acquired Ai-Logix. Ai-Logix was a leading provider of advanced voice recording technology
and integration cards for the call recording and voice/data logging industries. AudioCodes used VoIP communications boards as we leveraged Ai-Logix’s
technology, strategic partnerships and customer base. We currently sell our call recording solutions mainly in the connection with Microsoft solutions.
In 2006, we teamed with BroadSoft to help service providers deliver hosted VoIP service. . By 2009, we had launched a strategic initiative with
BroadSoft to simplify deployments of IP voice networks and, in 2014, BroadSoft and AudioCodes announced that they were collaborating on “One Voice for
Hosted Services”. The One Voice initiative included BroadSoft’s unified communication services and AudioCodes’ IP phones, routers, SBCs and gateways
serving as a one stop shop for service providers that are offering enterprises next generation VoIP services.
AudioCodes continued to expand its product portfolio with session border controllers, multi-service business gateways/routers and IP Phones to be
able to offer a wider range of products for leading UC and CC software vendors.
In January 2013, AudioCodes launched “AudioCodes One Voice for Microsoft Skype for Business”, a unified product and service program intended
to simplify and accelerate voice-enablement of Microsoft Skype for Business (now Skype for Business) implementations with a complete portfolio of IP
phones, media gateways, enterprise session border controllers (E-SBCs), survivable branch appliances (SBAs), session experience manager (SEM) network
management tools, support and professional services. The program supports migration to Microsoft Skype for Business and co-existence with current
telephony systems in multi-site and multi-national deployment.
On December 31, 2015, AudioCodes acquired Active Communications Europe to further strengthen our ability to provide advanced software
solutions for the emerging Microsoft Skype for Business online application. In 2016, AudioCodes leveraged the Active Communications Europe acquisition
and promoted several products around Microsoft Skype for Business, including CloudBond 365 and User Management Pack 365 (UMP 365).
AudioCodes began working in the call center telecommunications sector in 2003 with VoiceGenie, which was acquired by Alcatel-Lucent-owned
Genesys in 2006. In 2011, we were designated a vendor in the Genesys SIP Select program specifically for our Mediant 1000 and Mediant 2000 gateway
products, that provide the interface between the PSTN and Genesys SIP Server. In 2016, AudioCodes and Genesys expanded their program pursuant to which
Genesys and its partners offer a complete integrated end-to-end solution that includes the Genesys Customer Experience Platform along with AudioCodes’ IP
phones, session border controllers, media gateways and centralized management and monitoring applications to allow customers to benefit from a quick and
easy migration to an all-IP contact center.
AudioCodes now has tens of millions of SBC, media gateway and media server channels deployed in over 100 countries across the globe. Our high
availability platforms (Mediant media gateways, Mediant session border controllers and IPmedia media servers) cover the spectrum of low, mid and high-
density applications for service providers and large enterprises.
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INDUSTRY BACKGROUND AND MARKET TRENDS
The networking and telecommunications industries continue to experience rapid change. Below are some of the major market trends affecting the
industry, as well as the evolving focus of AudioCodes solutions and products.
Unified Communications
With the move to VoIP and the network integration between voice and data based on Ethernet and IP, enterprises can adopt a unified communications
and collaboration solution. Unified communications solutions integrate all means of communications into a single platform, providing on line (e.g., voice,
data presence, instant messaging, white boarding and desktop sharing) and off line (voice mail, email and fax) integration into a single communication system
shared across a variety of end user devices. Unified communications can be accessed through devices such as PCs, tablets, desktop phones or mobile
smartphones. Unified communications can be either on-premises or cloud based. Alternatively, enterprises can adopt a hybrid approach where they keep the
real time media path portion of their unified communications on-premises and the applications hosted in the cloud.
Unified Communications as a Service (UCaaS)
Unified communications as a service (UCaaS) is a delivery model in which a variety of communication and collaboration applications and services
are hosted by a third-party provider in public or private cloud data center and delivered over the Wide Area Network (WAN). In this category, the growth of
hosted business services is widely affecting the communications world. Enterprises are adopting hosted and cloud services. Hosted unified communications
and contact centers that are driven by Microsoft, BroadSoft (acquired by Cisco), Genesys and others are gaining traction within the enterprise community and
are growing fast as an alternative to on-premises solutions. Microsoft’s Skype for Business unified communications offering is the market leader in this area.
SIP Trunking
SIP trunking is a VoIP service based on SIP by which service providers deliver IP telephone connectivity services to customers equipped with SIP-
based private branch exchange (IP-PBX) and unified communications facilities. More and more service providers are adopting SIP trunking as the technology
of choice for connecting on-premise IP based business voice systems. SIP trunking technology is not new. For several years, Over the Top (OTT) service
providers, sometimes called alternative service providers or Internet Telephony Service Providers (ITSP), have offered competitive voice services based on
SIP trunking technology while the traditional telco companies continue to offer legacy PSTN services. Market data shows a clear migration of telcos moving
towards SIP trunking services as well.
All IP Transformation
Many telcos are moving towards a complete replacement of their legacy TDM networks with all-IP networks. Among the factors that drive telcos to
replace legacy networks are end of life of the traditional TDM switches, real estate that is occupied by these switches and energy savings, together with the
need to compete with the growing alternative service providers. Two typical strategies employed for the business sector by service providers in the move
towards app-IP networks are placing CPEs (VoIP Media Gateways, Session Border Controllers or Multi-Service-Business-Routers) to connect the customers’
legacy or IP equipment or systems to their IP network, or alternatively aggregate large number of TDM links (PRI primarily) at centralized Point of Presences
utilizing large capacity VoIP Media Gateways.
Virtualization, Cloud and Network Function Virtualization (NFV)
NFV is a transition of network infrastructure services to run on virtualized computing infrastructure using cloud technology, management,
automation and orchestration solutions to provide network functionality with dynamic scaling of load as well as self-healing of virtual network functions
(VNFs). The significance of software only virtualized products for the telecommunications market is increasing as operators and enterprises are seeking to
move away from dedicated hardware platforms to common generic computing platforms that are enabling data centers. NFV aims to leverage standard IT
virtualization technology to consolidate potentially all network functions (including SBCs) onto industry standard high volume servers, switches and storage,
which could be located in datacenters, network nodes and on end user premises (vCPE – virtual customer premise equipment and vE-CPE, also known as
uCPE – virtual enterprise customer premise equipment). NFV infrastructure, management and orchestration promises to introduce agility and enable quick
introduction of new services to service providers’ networks, similar to those characterizing internet and cloud services. There are a number of challenges that
NFV needs to address, including real time performance, scale, resilience, management and automation. These and other technical challenges are being
addressed in a network operator-led industry specification group under the auspices of ETSI, an industry standards setting body, as well as by leading public
cloud vendors such as Amazon, Microsoft and Google.
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WebRTC
WebRTC is a free, open project that provides web browsers and mobile applications with real-time communications (RTC) capabilities via simple
application programing interface, or APIs. The WebRTC components have been optimized to best serve this purpose. WebRTC enables rich, high quality RTC
applications to be developed for the standard web browser, mobile platforms, and content delivery systems, and allows them all to communicate via a
common set of protocols. The WebRTC initiative is a project supported by Google, Microsoft, Mozilla and Opera, among others. WebRTC support is
available by default mainstream web browsers like Chrome, Edge, Opera and Firefox, and also as a library for developing mobile applications. WebRTC is
making a major impact in real time communications as it is natively supported by web browsers and therefore does not require a user to download a specific
application. Similar to other open source projects, WebRTC makes a complex technology (such as voice compression and packetization, mitigation of
network impairments, security and encryption of real time sessions and peer to peer connectivity of devices regardless of their location) accessible to the big
and growing community of web developers, allowing them to quickly and easily develop real time communications services without requiring specific
knowhow in voice and video communications. To enable connecting SIP based communication services (e.g., enterprise unified communications or contact
centers) with WebRTC, a WebRTC gateway is required to mediate between the incompatible media and signaling of the different systems, as well as enable
centralized functions such as compliance recording. WebRTC gateway functionality may be standalone or incorporated into an SBC, in which case it benefits
from SBC capabilities such as VoIP security and interoperability.
Software-Defined Networking (SDN) and Software-Defined Wide Area Network (SD-WAN)
SDN is an emerging technology and architecture for designing, building and operating networks that brings a degree of agility and flexibility to
networking, similar to what abstraction, virtualization and orchestration have brought to server and storage infrastructures. SDN architecture decouples the
network control and forwarding functions enabling the network control to become directly programmable and the underlying infrastructure to be abstracted
for applications and network services. Similar to NFV, SDN technology is expected to reduce OPEX and CAPEX associated with building and maintaining
networks and also enable innovation.
SD-WAN is a specific application of SDN technology applied to WAN connections, which are used to connect enterprise networks – including
branch offices and data centers – over large geographic distances. A WAN might be used, for example, to connect branch offices to a central
corporate network, or to connect data centers separated by distance. In the past, these WAN connections often used technology that required special
proprietary hardware. The SD-WAN movement seeks to move more of the network control into the “cloud,” using a software approach.
Mobility
Wireline service providers are facing increased pressure to add new revenue generating services, and can now use their customers’ mobile devices,
such as smartphones and tablets, to deliver next generation mobile services by using VoIP over Wi-Fi or cellular data. Service providers can offer mobility
services to reduce customers’ cellular roaming costs and divert roaming user’s revenue from the mobile providers to themselves. In parallel, enterprises are
increasingly relying on a mobile workforce and are requiring communications services and solutions that enable employee mobility and productivity.
BUSINESS STRATEGY
AudioCodes’ business strategy is focused on increasing its position as a leading vendor of advanced voice networking and media processing
solutions for the digital workplace. The following are key elements of our strategy:
Maintain and extend technological leadership. We intend to capitalize on our expertise in voice compression technology and voice signaling
protocols and proficiency in designing voice communications systems. We continually upgrade our product lines with additional functionalities, interfaces
and densities. We have invested heavily and are committed to continued investment in developing technologies that are key to providing high performance
voice, data and fax transmission over packet networks and to be at the forefront of technological evolution in our industry.
Strengthen and expand strategic relationships with key partners and customers. We sell our products to service providers worldwide, leading
enterprise channels, regional and global system integrators, global equipment manufacturers and value-added resellers (VAR), in the telecommunications and
networking industries and establish and maintain long-term working relationships with them. We work closely with our customers to engineer products and
solutions that meet their particular needs. The on-going development and integration cycles frequently result in close working relationships with our
customers and partners. By focusing on leading solution vendors, system integrators and channels with large volume potential, we believe that we reach a
substantial segment of our potential customer base while controlling the cost and complexity of our marketing efforts.
Expand and enhance the development of highly-integrated products. We plan to continue designing, developing and introducing new product lines
and product features that address the increasingly sophisticated needs of our customers. We believe that our knowledge of core technologies and system
design expertise enable us to offer better solutions that are more complete and contain more features than competitive alternatives. We believe that the best
opportunities for our growth and profitability will come from offering a broad range of highly-integrated network product lines and product features, the
integration of data services into our VoIP products, and the expansion into the unified communications and contact center markets.
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Build upon existing technologies to penetrate new markets. The technology we developed originally for the OEM market has served us in building
products that now sell into the service provider and enterprise markets. The same products and technology can also be used to create application-specific
products and solutions, which helps us penetrate and serve various types of customers. Key segments that we focus on are unified communications, contact
centers, SIP trunking and hosted services markets that have been adopting VoIP solutions.
Work close to market and customers. Our partners and customers are distributed around the world, and part of our ability to serve them is by being
close by. For this reason, we are investing in building local operations in key countries and regions, including sales, marketing and support resources to
closely serve our partners and customers.
Develop a network of strategic partners. We sell our products through, or in cooperation with, customers that can offer or certify our products as part
of a full-service solution to their customers. We expect to further develop our strategic partner relationships with solution providers, system integrators and
other service providers in order to increase our customer base. Our strategic partners include companies such as Microsoft, BroadSoft, Genesys, and
Interactive Intelligence.
Acquire complementary businesses and technologies. We may pursue the acquisition of complementary businesses and technologies or the
establishment of joint ventures to broaden our product offerings, enhance the features and functionality of our systems, increase our penetration in targeted
markets and expand our marketing and distribution capabilities.
Engage enterprise customers in direct sales effort. We are pursuing a strategy of engaging large enterprise customers on a global level, as part of the
AudioCodes product fit within leading enterprise solutions, mainly with Microsoft and Genesys. Our ability to engage these enterprises directly enhances our
ability to influence procurement decisions. This, in turn, is designed to increase demand, which is expected to allow our business partners to fulfill this
demand based on their relationship with AudioCodes.
Develop and expand professional services offering. AudioCodes has a rich portfolio of product-led services. We offer to our customers expert
professional services to assist them with design, implementation and support of our products. We are planning to expand our services offering in line with the
new products and solutions.
AUDIOCODES SOLUTIONS, PRODUCTS AND SERVICES
Overview
Our products facilitate the transmission of voice, data and fax over packet networks. We are a leading vendor of advanced voice networking and
media processing solutions for the digital workplace. We have incorporated our algorithms, technologies and systems design expertise in both our networking
and technology product lines.
We categorize our revenues from products and services into two main lines: networking and technology. Networking products consist of
connectivity platforms (Gateways, SBC and MSBR), IP Phones and management server suite. We further split the networking products to Gateways, UC-SIP
and Applications. The Gateways are comprised of the TDM Voice over IP Media Gateways (analog and digital). UC-SIP consists of SBC, MSBR, IP Phones,
Microsoft specific appliances (CloudBond 365 and Mediant CCE appliance) as well as call routing, element and voice quality management suite, all together
management server suite. Applications include mobile VoIP solutions and other value added application products. Sales of networking products accounted for
approximately 62% of our revenues in 2015, 61% of our revenues in 2016 and 60% of our revenues in 2017. Network services accounted for approximately
27% of our revenues in 2015, 29% of our revenues in 2016 and 31% of our revenues in 2017.
Technology products are enabling in nature and consist of our chips and boards business products. These are sold primarily to original equipment
manufacturers, or OEMs, through distribution channels. Our chips and boards serve as building blocks that our customers incorporate in their products. In
contrast, our networking products are used by our customers as part of a broader technological solution and are a box level product that interacts directly with
other third party products. Sales of technology products accounted for approximately 11% of our revenues in 2015, 9% of our revenues in 2016 and 8% of our
revenues in 2017. Technology services accounted for less than 1% of our revenues in 2015, 2016 and 2017.
To support today’s complex multi-service networks, AudioCodes has developed a comprehensive professional services program intended to provide
responsive, preventive, and consultative support of AudioCodes networking products. AudioCodes professional services support networking devices,
applications and infrastructures, allowing large organizations and service providers to realize the potential of a high-performance multi-service network. The
foundation for AudioCodes professional services is a network life-cycle model based on the four basic phases of planning, design, implementation and
operations. The result is a specially designed portfolio of complementary and synergistic service components.
Services accounted for approximately 27% of our revenues in 2015, 30% of our revenues in 2016 and 31% of our revenues in 2017.
- 27 -
AudioCodes Solutions
Solutions for Microsoft Skype for Business
AudioCodes One Voice for Skype for Business and Microsoft Teams includes AudioCodes’ Microsoft-qualified end-to-end voice elements, wide-
ranging services and extensive expertise to enhance Microsoft Skype for Business voice implementations. These products and services are suitable for all
Microsoft-approved unified communications architectures, including on-premise, cloud-based and hybrid.
Coexistence, Migration and SIP Trunking allow for smooth and controlled migration of existing telephony system or telephony. AudioCodes delivers
a comprehensive solution for migration, integration and SIP trunking connectivity. Compatible with virtually any PBX, AudioCodes’ simplified dialing plan
AD integration protects investment in legacy equipment.
Security and Fraud Prevention solutions prevent attacks causing voice disruptions, theft of services or other threats exposing a customer’s voice
infrastructure. AudioCodes secures the integration of unified communications and external voice services with attack detection and topology hiding.
Devices and Productivity improves employee efficiency while integrating UC into the work environment. AudioCodes delivers desk phone products
that are intuitive to work with and deliver excellent quality.
Compliance and recording meets regulatory and compliance requirements. AudioCodes helps businesses address compliance and regulation with
E911 location services support and compliance recording.
Resiliency and recovery enables recovery from failures and survival of voice network interruptions. AudioCodes has a broad portfolio of resiliency
products and solutions. AudioCodes products are designed for functionality and cost effectiveness.
All-in-One Voice Solution is based on CloudBond™ 365 and enables a wide range of solutions for cloud-hybrid deployments, remote branch offices,
PBX replacement and UC pilots.
Skype for Business Management Solutions deliver operational excellence with full life-cycle management. AudioCodes One Voice Operations
Center is a management suite providing full coverage of the entire set of actions required to manage a voice network in a Skype for Business unified
communications environment.
Enterprise UC and PBX Connectivity
AudioCodes’ products are essential elements of an enterprise telephony network, adding VoIP capabilities to existing TDM equipment, or
complementing IP-PBX or unified communications deployments with media gateway, IP phone, and enterprise session border controller (E-SBC) solutions.
AudioCodes’ suite of products provides the scalability, flexibility and reliability needed to aid the successful deployment of best-of-breed, SIP-based
enterprise communications systems. The solution delivers SIP and TDM Trunking, analog device connectivity, and enterprise branch survivability.
Managed IP Phone
Comprehensive IP phone management is the key to an excellent user experience. Voice remains the most fundamental method of employee
collaboration and the ability to control the user experience is critical for improved productivity.
AudioCodes Managed IP Phones solution defines the IP phone as an IT-managed entity and delivers unique and complete life-cycle management of
end-user desktop devices. The solution provides administrators with powerful and easy-to-use tools to simplify tasks such as configuration, troubleshooting
and monitoring to increase efficiency and ensure user satisfaction.
With the ability to deploy devices, monitor voice quality, identify problems and fix them rapidly and efficiently, AudioCodes’ solution is designed to
deliver employee satisfaction, increased productivity and lower IT expenses.
Solutions for Contact Centers
VoIP and Unified Communications have altered and evolved the business environment in which modern contact centers operate. The new IP Contact
Center offers lower costs, greater flexibility, higher customer satisfaction, improved productivity and increased revenue.
- 28 -
AudioCodes VoIP network solutions for Contact Centers are designed to help enterprises and service providers in their transition towards an all-IP
voice infrastructure by providing the network elements required to enable and support the smooth operation of the contact center application suite while
mitigating the risks of migrating into an IP environment.
Virtualization, Cloud and NFV
Enterprises and service providers adopt virtualized solutions either in privately own data centers or in public clouds, following the Network Function
Virtualization (NFV) architecture and concepts. This enables scale and quick introduction of new innovative communication services without the overhead
typically associated with hardware-based solution deployments. Realizing this opportunity requires flexible Virtual Network Function (VNF) Session Border
Controllers (SBCs) capable of running both as access and peering SBCs, as well as VNFs on enterprise virtualized data centers or Virtual Enterprise CPE
devices (vE-CPE, also known as uCPE).
AudioCodes offers a comprehensive and flexible set of solutions spanning from vE-CPE devices that can host third party VNFs as well as a scalable
virtual SBC. AudioCodes’ virtual SBC runs on any vE-CPE device, as well as in the Enterprise, Service or Cloud provider’s virtualized infrastructure,
functioning as an access or peering SBC. By offering a single scalable product, covering all capacity needs with one unified control and management
interface, Enterprises, Service and Cloud providers can leverage its deployment and maintenance simplicity to introduce new communications services
rapidly and cost-effectively.
SIP Trunking Solutions
AudioCodes’ SIP Trunking solutions are used by service providers deploying SIP Trunking services. These solutions allow service providers to
benefit from quick, easy and reliable deployments as well as address their customers’ needs to continue using their existing PBX and IP-PBX systems while
migrating from TDM to SIP Trunking services. This migration can be done with minimum business disruption while providing high quality communication
services. Additionally, the modular design of AudioCodes SIP Trunking devices enables service providers to leverage SIP Trunking services to allow for
quick and easy remote migration to hosted UC services in the future.
PSTN Migration
AudioCodes’ PSTN migration solutions are targeted at fixed-line service providers who are transforming their TDM fixed-line networks to all-IP.
The solutions consist of a set of scalable CPE devices, central office gateways, and management and monitoring application suites, working seamlessly
together and designed to enable fixed-line providers a quick, reliable and cost-effective path from TDM to All-IP services.
AudioCodes enables fixed-line service providers the ability to benefit from a wide-range of PSTN migration solutions that cover on-premises CPE,
street cabinet and central office PSTN to IP migration option, business customers from SOHOs up to large enterprises, PRI, ISDN and analog interface and
configuration, and VoIP gateway, Session Border Controller (SBC), routing and NFV applications.
UCaaS
Designed to enable reliable and quality delivery of cloud-based services, AudioCodes’ UCaaS solutions are comprised of a comprehensive portfolio
of hardware and software products. AudioCodes solutions are used by service providers who are deploying Cloud and Hosted UC services. Based on their
survivability, resiliency, high voice quality assurance, and advanced remote management features, AudioCodes’ UCaaS solutions enable service providers to
deliver to their business customers reliable and quality cloud services, as well as provide them with the confidence they need to place their key
communications functions in the cloud.
MobilityPLUS
AudioCodes MobilityPLUS enables operators to offer mobile voice, video and messaging, over cellular data and Wi-Fi networks.
AudioCodes MobilityPLUS offers a large-scale platform, comprised of comprehensive backend servers, cellular to Wi-Fi handover and a variety of
white label mobile applications. AudioCodes MobilityPLUS supports Apple® iOS™ and Google Android™ for smartphones, tablets, soft clients supporting
Microsoft Windows™ for PCs and laptops and WebRTC client for web browsers.
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VocaNom
AudioCodes VocaNom is a cloud-driven voice communication application for businesses and organizations allowing voice-based dialing and
routing. VocaNom is improving internal communication between employees and staff as well as external calls to suppliers (outbound) or from customers
(inbound). VocaNOM provides a solution for the problem of managing multiple business contacts and dialing on the go. The solution allows dialing by voice
as the organizational phone directory is fully synced into the cloud alongside the speech recognition algorithms designed by AudioCodes.
SmartTAP Call Recording
AudioCodes SmartTAP Call Recording is an enterprise-wide compliance and liability recorder supporting Skype for Business. Though most
recorders in the market focus on Contact Center features, SmartTAP is deployed across the enterprise to capture calls, either on-demand or, in some cases, full
time, when calls about compliance and liability occur more frequently. With an integral Skype for Business recording toolbar, enterprise users can record with
SmartTAP anywhere and anytime they are on Skype for Business calls. SmartTAP can initially be deployed on a small scale and be scaled up to support many
thousands of users using the product’s linear scalability feature.
AudioCodes Products
Core Technologies
Narrowband and Wideband (HDVoIP) Voice Compression Algorithms
Voice compression techniques are essential for the transmission of voice over packet networks. Voice compression exploits redundancies within a
voice signal to reduce the bit rate required to digitally represent the voice signal, from 64 kilobits per second, or kbps, down to low bit rates ranging from 5.3
kbps to 8 kbps, while still maintaining acceptable voice quality. A bit is a unit of data. Different voice compression algorithms, or coders, make certain
tradeoffs between voice quality, bit rate, delay and complexity to satisfy various network requirements. Use of voice activity detection techniques and silence
removal techniques further reduce the transmission rate by detecting the silence periods embedded in the voice flow and discarding the information packets
which do not contribute to voice intelligibility.
We are one of the innovators in developing low bit rate voice compression technologies. Our patented MP-MLQTM coder was adopted in 1995 by
the ITU as the basis for the G.723.1 voice coding standard for audio/visual applications over circuit-switched telephone networks. By adhering to this
standard, system manufacturers guarantee the interoperability of their equipment with the equipment of other vendors.
We also provide wideband compression techniques that provide high definition VoIP quality, which expands the sampled frequency range from the
traditional narrowband frequency range of 3.3Khz to over 7Khz, providing better voice quality and intelligibility, and a better user expertise. This technology
is expanding and is expected to become a de-facto standard for future VoIP communications.
Advanced Digital Signal Processing Algorithms
To provide a complete voice over packet communications solution, we have developed a library of digital signal processing functions designed to
complement voice compression coders with additional functionality, including: echo cancellation; voice activity detection; facsimile and data modem
processing; and telephony signaling processing. Our extensive experience and expertise in designing advanced digital signal processing solutions allows us to
implement algorithms using minimal processing memory and power resources.
Our algorithms include:
Echo cancellation. Low bit rate voice compression techniques introduce considerable delay, necessitating the use of echo cancellation algorithms.
The key performance criterion of an echo canceller is its ability to deal with large echo reflections, long echo delays, fast changing echo characteristics,
diverse telecommunications equipment and network effects. Our technology achieves low residual echo and fast response time to render echo effects virtually
unnoticeable.
Fax transmission. There are two widely used techniques for real time transmission of fax over networks based on Internet protocols: fax relay and
fax spoofing. Fax relay takes place when a fax is sent from a fax machine through a gateway over networks based on Internet protocols in real time to a fax
machine at the other end of the network. At the gateway, the analog fax signals are demodulated back into digital data, converted into packets, routed over the
packet network and reassembled at the receiving end. Fax relay is used when the round trip network delay is small (typically below one second). When the
round trip network delay increases, one of the fax machines may time out while waiting for a response from the other fax machine to arrive.
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Data modem technology. We have developed data modem technologies that facilitate data relay over packet networks. Our data modem relay
software algorithms support all existing data modem standards up to a bit rate of 14.4 kbps.
Telephony signaling processing. Various telephony signaling standards and protocols are employed to route calls over the traditional telephone
network, some of which use “in-band” methods, which means that the signaling tones are sent over the telephone line just like the voice signal. As a result, in-
band signaling tones may have to undergo the compression process just like the voice signal. Most low bit-rate voice coders, however, are optimized for
speech signals and exhibit poor tone transfer performance. To overcome this, our processors are equipped with tone detection and tone generation algorithms.
To provide seamless transparency between the traditional telephone network and packet networks for signaling, we employ various digital signal processing
techniques for efficient tone processing.
Voice Communications Software
To transmit the compressed voice and fax over packet networks, voice packetization processes are required to construct and deconstruct each packet
of data for transmission. The processing involves breaking up information into packets and adding address and control fields information according to the
specifications of the appropriate packet network protocol. In addition, the software provides the interface with the signal processors and addresses packet
delay and packet loss issues.
Media Processing
Our media processing products provide the enabling technology and platforms for developing enhanced voice service applications for legacy and
next generation networks. We have developed media processing technologies such as message recording/playback, announcements, voice coding and mixing
and call progress tone detection that enable our customers to develop and offer advanced revenue generating services such as conferencing, network
announcements, voice mail and interactive voice response.
Our media processing technology is integrated into our enabling technology platforms like Voice over Packet processors and VoIP blades, as well as
into our network platforms like the Mediant media gateways and the IPMedia media servers. The same technology is also integrated into our multi-service
business gateways, enabling the use of these platforms to run third party VoIP software, offloading media processing from the host CPU.
Addressing Multiple Networks and Standards Concurrently
Convergence of wireline and wireless networks is becoming a key driver for deployment of voice over packet networks, enabling operators to use
common equipment for both networks, thus lowering capital expenditures and operating expenses, while offering enriched services.
Our voice over packet products provide a cost-effective solution for these convergence needs, complying with the requirements of broadband
wireline operators using xDSL technologies, cable operators, mobile operators, FTTx operators, Internet telephony service providers, or ITSPs, and virtual
network operators (VNOs). This includes support for relevant vocoders (wireline and wireless concurrently), interfaces and protocols.
Our products are also positioned to support the requirement of all types of enterprise customers. From SOHO, SMB all the way up to large
enterprises, our products can provide integrated VoIP services and service provider access to enterprises in multiple vertical markets.
Hardware Architectures for Dense Multi-Trunk Voice over Packet Systems
Our voice over packet product offerings include high density, multi-trunk voice over packet systems for standards-based open telecommunications
platforms in access equipment. Multi-trunk processing is centered on a design encompassing two key processing elements, signal processors performing
voice, fax and data processing and a communications processor. Overall system performance, reliability, capacity, size, cost and power consumption are
optimized, based on our hardware architecture, which supports high throughput rates for multi-trunk processing. On-board efficient network and system
interfaces relieve the system controller from extensive real time data transfer and processing of data streams.
Carrier Grade System Expertise
To provide state of the art carrier grade media gateways, we have developed a wide expertise in a number of fields essential to such a product line.
We have developed or integrated the various components required to implement a full digital media gateway solution that behaves as a unified entity to the
external world. This required a major investment in adapting standard cPCI and MicroTCA (AMC) platforms to our needs. Such adaptation included
optimizing power supply and cooling requirements, adding centralized shelf controllers, fabric switches and alarm cards to the chassis. Another aspect of the
expertise we developed relates to high availability software and hardware design. High availability is a required feature in any carrier grade media gateway
platform. We have also developed a sophisticated EMS to complete our offering. Our EMS enables the user to provision and monitor a number of media
gateways from a centralized location.
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Networking Products
Session Border Controllers (SBC) and Media Gateways (MG)
AudioCodes’ Mediant family of Session Border Controllers (SBCs) and Media Gateways (MG) is a line of versatile IP communications platforms
that connect VoIP and TDM networks.
SBCs are deployed at the border between the enterprise and the service provider. In the enterprise environment, they form an effective demarcation
point between a business’s VoIP network and a service provider’s SIP Trunk, performing SIP protocol mediation and media handling (interoperability) and
securing the enterprise VoIP network. In the service provider core, SBC provides security and protocol normalization.
The Mediant SBC family includes a range of platforms that offer cost-efficient SBC and hybrid gateway functionality (SIP to TDM, SIP to SIP).
AudioCodes’ family of High-Availability Media Gateways is a line of highly reliable IP communications platforms that connect VoIP and TDM
networks. Featuring NEBS Level 3 compliance and cost-effective redundancy configurations, the AudioCodes platforms meet the stringent availability
requirements of service providers. AudioCodes High-Availability Media Gateways serve as an efficient junction between VoIP networks, legacy TDM
equipment, and the PSTN. They interwork with most market-leading softswitches, application servers, IP-PBXs, and other standards-based VoIP elements.
AudioCodes’ MediaPack 1xx series of Analog VoIP Gateways are cost-effective, stand-alone VoIP gateways that provide superior voice technology
for connecting legacy telephones, fax machines and PBX systems with IP telephony networks and IP-based PBX systems. The MediaPack 1xx gateways are
fully interoperable with leading softswitches and SIP servers and support a wide variety of service provider and enterprise applications.
Service providers can use MediaPack gateways to connect Multi-Tenant Units (MTUs), IP Centrex subscribers, payphones, and rural users over
wireless and satellite links.
Enterprises can use MediaPack gateways to connect their legacy PBX systems over an IP infrastructure. In addition, in IP Centrex and central IP-
PBX applications, MediaPack enhances remote location availability and provides Stand Alone Survivability (SAS) when there is no IP connection between
branch locations and a central SIP server, SIP proxy or central IP-PBX.
The new MediaPack(MP)-1288 is a high density analog media gateway. Supporting up to 288 analog ports in a compact 3U chassis. The MP-1288
offers a cost-effective solution for organizations transitioning to all-IP that need to integrate large numbers of analog devices into their new infrastructure. The
MP-1288 enables these organizations to protect the investment made in their analog devices and cabling while enjoying the functional and cost benefit of the
move to the all-IP infrastructure.
Multi-Service Business Routers (MSBR)
AudioCodes’ family of Multi-Service Business Routers (MSBR) offers service providers a range of all-in-one SOHO, SMB and SME routers
combining access, data, voice and security onto a single device. It is designed for managed data, SIP trunking, hosted PBX, and cloud-based services, and
allows service providers to deploy flexible and cost-effective solutions.
AudioCodes’ Multi-Service Business Routers allows service providers to provide their business customers much more than just an internet
connection. In addition to its integrated powerful routing and security software, the MSBR also features a multi-core architecture that aids consistent high
performance, allowing end customers to maximize their broadband connections for both data and voice applications.
Service providers offering hosted PBX or SIP trunking communication services will benefit from AudioCodes’ MSBR, which includes integrated
voice gateway, analog and digital interfaces with various codecs that support analog phones, fax, PBX and PSTN connectivity, and session border controllers
(SBC).
IP Phones and Huddle Room Solution
The AudioCodes 400HD series of IP Phones includes a range of easy-to-use, feature-rich products for the service provider hosted services, enterprise
IP telephony and contact center markets. Based on the same advanced, field-proven underlying technology as our other VoIP products, AudioCodes high
quality IP phones enable systems integrators and end-customers to build end-to-end VoIP solutions. AudioCodes Huddle Room Solution (HRS) delivers a
voice-meeting solution for small and medium sized meeting rooms.
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Managed IP Phones solution
AudioCodes IP phones can be offered as part of our of Managed IP Phones solution which defines the IP phone as an IT-managed entity and delivers
complete life-cycle management of end-user desktop devices.
CloudBond 365, Cloud Connector Edition (CCE) appliances, and User Management Pack 365 (UMP 365)
AudioCodes CloudBond™ 365 is a modular, adaptable solution for the data center, customer premises or the branch. A versatile all-in-one Skype for
Business appliance designed for hybrid environments, it combines Skype for Business server, the Cloud-PBX and the service provider’s voice services. While
Microsoft’s Cloud PBX offering is still evolving into a full PBX replacement, CloudBond 365 bridges the gap, creating the critical bond between tUC and the
developing cloud business.
AudioCodes CloudBond 365 CCE appliances allow Microsoft Skype for Business cloud PBX customers to connect to their local existing voice
services (such as E1/T1, ISDN and SIP Trunks). AudioCodes CloudBond CCE appliances package Microsoft CCE code along with AudioCodes SBC and
gateway technology and a management application for simplified installation and operation.
AudioCodes User Management Pack 365 (UMP 365) is a software management application that allows IT managers and service providers to easily
operate Skype for Business deployments. UMP 365 does not require knowledge and expertise in Microsoft’s PowerShell tools. Instead, it allows helpdesk
level engineers to operate the daily tasks using an intuitive graphical user interface.
Survivable Branch Appliances
AudioCodes’ family of Survivable Branch Appliances (SBA) is a line of enterprise-class integrated CPEs designed to ensure access to data and voice
services in the event of a WAN outage. AudioCodes SBAs are an element in multisite Skype for Business deployments, and are fully certified by Microsoft
for use with Skype for Business Server.
A Survivable Branch Appliance (SBA) is a hardware device that ensures the availability of enterprise-wide voice service and voice mail. It also
contains a public switched telephone network (PSTN) gateway for use in the event of VoIP failure. As part of our One Voice for Skype for Business portfolio,
AudioCodes offers Survivable Branch Appliances that fit any enterprise location size, providing branch office voice resiliency for up to 1000 users.
VoIP Management and Routing
AudioCodes’ management and operations solutions are a suite of holistic lifecycle applications suitable for large scale cloud or premises-based
unified communications deployments. The management and operations suite supports the entire set of actions required to manage a voice network in a unified
communications environment. In conjunction, the applications form the basis of a powerful network operation center (NOC) with complete end-to-end
network control, service assurance capabilities and comprehensive optimization and future planning tools. The management and operations suite uniformly
manages, monitors and operates the entire AudioCodes One Voice portfolio, including SBCs, Media Gateways, Microsoft specific appliances and IP phones.
AudioCodes One Voice Operations Center (OVOC) is a web-based voice network management solution that combines management of voice
network devices and quality of experience monitoring into a single, intuitive web-based application. OVOC enables administrators to adopt a holistic
approach to network lifecycle management by simplifying everyday tasks and assisting in troubleshooting all the way from detection to correction.
OVOC’s clear GUI design, system allows administrators to manage the full lifecycle of VoIP devices and elements from a single centralized
location, saving time and costs. Tasks that would normally be complex and time-consuming, such as performing root cause analysis, adding new devices to
the VoIP network and initiating bulk software updates, can be carried out simply and rapidly using the AudioCodes OVOC management suite.
AudioCodes IP Phone Manager is a powerful and intuitive lifecycle management tool for enterprise IP phone deployments that enables
administrators to deliver a reliable desktop phone service within their organization. With the ability to deploy and monitor AudioCodes 400HD IP phones,
identify problems, and then fix them rapidly and efficiently, AudioCodes IP Phone Manager increases employee satisfaction and productivity and lower IT
expenses.
Managing the dial plan and call routing rules of multi-site, multi-vendor enterprise VoIP networks can be extremely complicated. AudioCodes
Routing Manager (ARM) delivers a powerful, innovative solution to this problem by enabling centralized control of all session routing decisions. Through
ARM’s highly intuitive graphical user interface, system administrators can design and modify their voice network topologies and call routing policies from a
single location, resulting in significant time and cost savings. Time-consuming tasks such as adding a new PSTN or SIP trunk interconnection, adding a new
branch office or modifying individual users’ calling privileges can be carried out simply and rapidly.
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Mobility Plus
AudioCodes MobilityPLUS is a Mobile VoIP (mVoIP) Solution from AudioCodes comprised of a Client Management System (CMS) and a variety
of Mobile Soft Clients for leading Mobile Operating Systems and Smartphones. MobilityPLUS is currently available for leading smartphone operating
systems including iOS and Android.
VocaNOM
AudioCodes VocaNOM allows callers to say the name of a person or a department and be automatically transferred to the requested party, thus,
relieving the need for searching for phone numbers or waiting to speak to an operator. The solution can be used by external users and by company personnel
for internal calls. Combining powerful speech recognition with a simple-to-use conversational interface, VocaNOM provides reliable, 24x7 call routing for
organizations.
SmartTAP Call Recording
AudioCodes SmartTAP Call Recording is an enterprise-wide compliance and liability recorder supporting Skype for Business. Though most
recorders in the market focus on Contact Center features, SmartTAP is deployed across the enterprise to capture calls, either on-demand or, in some cases, full
time, when calls about compliance and liability occur more frequently. With an integral Skype for Business recording toolbar, enterprise users can record with
SmartTAP anywhere and anytime they are on Skype for Business calls. SmartTAP can initially be deployed on a small scale and be scaled up to support many
thousands of users using the product’s linear scalability feature.
Auto Attendant
AudioCodes Auto Attendant is a powerful and flexible tool for managing inbound calls and delivering them efficiently to the correct destination
based on the caller’s selection. AudioCodes Auto Attendant supports advanced call queuing for Automatic Call Distribution (ACD) based on different routing
modes and agent availability.
As part of AudioCodes One Voice for Skype for Business offering, AudioCodes’ Auto Attendant application can be deployed together with
AudioCodes’ Survivable Branch Appliances (SBA) in branch offices to complement the Skype for Business Response Group Service (RGS) when the
connection with the central servers is lost. AudioCodes Auto Attendant is a pure software application which can also be deployed on standard server
hardware.
Fax Server
AudioCodes’ Fax Server is a powerful and flexible tool for managing inbound and outbound enterprise fax transmissions. The Fax Server
application is part of AudioCodes One Voice for Skype for Business, a unified product and service program intended to simplify and accelerate voice-
enablement of Microsoft UC implementations. AudioCodes Fax Server is a software application which can be deployed on a standard server or on
AudioCodes Mediant SBC/media gateways and Survivable Branch Appliances (SBA) in branch offices. For multi-site organizations the Fax Server
application may be deployed at branch offices or as a centralized application in the datacenter serving all remote branches.
SIP Phone Support
AudioCodes SIP Phone Support (SPS) is a value-added application for AudioCodes Mediant Session Border Controllers (SBC) and gateways that
enables smooth connectivity between IP DECT devices and Skype for Business. By connecting Skype for Business with IP DECT phones, SPS enables
campus mobility for Microsoft UC deployments including advanced features such as simultaneous ringing, enhanced presence, Active Directory integration
and seamless handover between DECT base stations.
SOHO Routers
AudioCodes’ family of SOHO Routers offers service providers a range of all-in-one SOHO and small businesses routers combining access, data and
voice onto a single device. It is perfectly suited for managed data, SIP trunking, hosted PBX, and cloud-based services, and allows service providers to deploy
flexible and cost-effective solutions. Service providers offering hosted PBX or SIP trunking communication services will benefit from AudioCodes’ All-in-
One SOHO Routers with built-in multiple WAN access interfaces, LAN and Wi-Fi connectivity, DECT support, analog phones and fax interfaces and
integrated MicroPBX with multi-line and multi-extensions support.
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Technology Products
Voice over Packet Processors
Our signal processor chips compress and decompress voice, data and fax communications. This enables these communications to be sent from
circuit-switched telephone networks to packet networks. Our chips are digital signal processors on which we have embedded our algorithms. These signal
processor chips are the basic building blocks used by our customers and us to enable their products to transmit voice, fax and data over packet networks.
These chips may be incorporated into our communications boards, media gateway modules and analog media gateways for access and enterprise applications
or they may be purchased separately and incorporated into other boards or customer products.
TrunkPackTM VoIP Communication Boards
Our communications boards are designed to operate in gateways connecting the circuit-switched telephone network to packet networks based on
Internet protocols. Our boards comply with VoIP industry standards and allow for interoperability with other gateways. Our boards support standards-based
open telecommunications architecture systems and combine our signal processor chips with communications software, signaling software and proprietary
hardware architecture to provide a cost efficient interoperable solution for high capacity gateways. We believe that using open architecture permits our
customers to bring their systems to market quickly and to integrate our products more easily within their systems.
IPmediaTM Boards for Enhanced Services and Functionalities
The IPmediaTM product family is designed to allow OEMs and application partners to provide sophisticated content and services that create revenue
streams and customer loyalty through the ability to provide additional services. The IPmedia TM boards provides voice and fax processing capabilities to
enable, together with our partners, an architecture for development and deployment of enhanced services.
Voice and Data Logging Hardware Integration Board Products
The SmartWORKSTM family of products is our voice and data logging hardware integration board product line. SmartWORKSTM boards for the
call recording and voice voice/data logging industry are compatible with a multitude of private branch exchange, or PBX, telephone system integrations.
AudioCodes Services
AudioCodes offers a comprehensive portfolio of global planning, implementation, operations and support services. AudioCodes’ The Voice Experts
@ Your Service program allows partners to complement their own services offering with our modular portfolio of Professional Services. The result is a
complete network life-cycle model. Our Professional Services portfolio enables seamless integration, high availability, and non-stop scalability to meet
business and network demands.
AudioCodes offers flexible technical support services that ensure customer care and optimized network performance and availability. AudioCodes is
committed to providing customers and partners with the most comprehensive, qualified customer support. Our global customer support team delivers
customer-oriented technical support, training, and consulting that enhances the value provided by AudioCodes products.
AudioCodes Academy offers a comprehensive set of technical training courses for AudioCodes’ partners and customers. By providing several levels
of certification, distinct training programs and a combination of theory and hands-on studies, the academy is built to help system integrators, resellers, and
distributors equip their people with the necessary skills to deploy and maintain AudioCodes networking technology in the field.
Customers
Our customers consist of service providers (with direct and indirect relationship), enterprises (with indirect relationship) and OEM customers.
Our service provider customers include a range of tier 1, 2 and 3 service providers that deploy our solution as part of their voice service or UC
offering for their business customers. Our solutions are deployed both at the customer premise and at the service core to provide connectivity and high-quality
voice services. AudioCodes’ range of products and wide interoperability allows service providers to deploy our solutions in practically any environment (e.g.,
together with BroadSoft, (acquired by Cisco) Huawei, Alcatel, MetaSwitch) and for a wide range of customers. Our solutions are sold to service provider
customers in 100 countries mainly through a wide range of distributors and some direct sales.
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Our enterprise customers include a range of Fortune 1000 organizations as well as smaller enterprises that use our equipment to enable their UC
solution. Our solutions are sold to enterprise customer through a wide network of resellers and distributors and the vast majority of the business is done in two
tiers in over 100 countries. AudioCodes solutions are enabling enterprises to smoothly migrate their communications infrastructure to all-IP UC solution.
AudioCodes OEM customers include vendors that leverage on AudioCodes technology and quality to deliver VoIP products and solutions.
Historically, a substantial portion of our revenue has been derived from OEM customers that sold our technology products as part of their voice solution.
Sales and Marketing
Our sales and marketing strategy is to secure the leading channels and system integrators in each region, partner with leading application companies
and achieve design wins with network equipment providers in our targeted markets. We select our partners based on their ability to provide effective field
sales, marketing communications and technical support to our customers. In addition, we engage in direct sales and marketing with significant operators and
enterprises. Prospective customers and channels generally must make a commitment of resources to test and evaluate our products and to integrate them into
larger systems, networks and applications. As a result, our sales process is often subject to delays associated with lengthy approval processes that typically
accompany the design and testing of new communications equipment. For these reasons, the sales cycles of our products to new customers are often lengthy;
averaging approximately six to twelve months after achieving a design win. This time may be further extended because of internal testing, field trials and
requests for the addition or customization of features.
We market our products in the United States, Europe, Asia, Latin America and Israel primarily through a direct sales force. We have invested
significant resources in setting up local sales forces giving us a presence in relevant markets. We have given particular emphasis to emerging markets such as
Latin America, Asia and Eastern Europe in addition to continuing to sell our products in developed countries.
We have generally entered into a combination of exclusive and non-exclusive sales representation agreements with these customers in each of the
major countries in which we do business. These agreements are typically for renewable 12-month terms, are terminable at will by us upon 90 days’ notice,
and do not commit the customer to any minimum sales of our products to third parties. Some of our customers have the ability to return some of the products
they have previously purchased and purchase more up to date models.
The One Voice marketing message positions AudioCodes as a one-stop-vendor for various echo systems telephony solutions. The marketing
campaign started with the positioning of One Voice for LYNC (now called Skype for Business), which presented the AudioCodes value proposition as a
vendor of comprehensive voice networking for Microsoft unified communications with many certified IP PHONES and connectivity products such as SBAs
many type of GWs and SBCs. Additionally, One Voice positions AudioCodes as a vendor that can deliver end-to-end support and that offers value-added
professional services including design, implementation, and network readiness assessment, among others. We later also introduced One Voice for Hosted
Services which similarly positions AudioCodes as a one-stop vendor for Operators hosted services, mainly in collaboration with BroadSoft. AudioCodes
believes it can deliver a full suite of voice and networking equipment that is required to connect business customers to an operator’s network.
In 2017, we continued to enhance our field marketing efforts with direct touch enterprise engagements, along with channel recruitments and generic
marketing activities including tradeshows, webinars, seminars, on-line and social marketing. The AudioCodes One Voice positioning is strongly emphasized
in our marketing efforts. We also changed our logo and updated our website.
Manufacturing
Some of our components are obtained from single suppliers. For example, Texas Instruments Incorporated supplies all of our DSP components,
while Motorola and Cavium Networks provide embedded CPU and network processors. Other components are generic in nature and we believe they can be
obtained from multiple suppliers.
We have not entered into any long-term supply agreements. However, we have worked for years in several countries with established global
manufacturing leaders such as Flextronics and have had significant experience with their level of commitment and ability to deliver. To date, we have been
able to obtain sufficient amounts of these components to meet our needs and do not foresee any supply difficulty in obtaining timely delivery of any parts or
components. However, an interruption in supply from any of these sources, especially with regard to DSP components from Texas Instruments Incorporated
and CPU and network processors from both Cavium Networks and Motorola, or an unexpected termination of the manufacture of certain electronic
components, could disrupt production, thereby adversely affecting our results. We generally maintain an inventory of critical components used in the
manufacture and assembly of our products although our inventory of signal processor chips would likely not be sufficient in the event that we had to engage
an alternate supplier for these components.
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We utilize contract manufacturing for substantially all of our manufacturing processes. Most of our manufacturing is carried out by third-party
subcontractors in Israel and China. Our internal manufacturing activities consist primarily of the production of prototypes, test engineering, materials
purchasing and inspection, final product configuration and quality control and assurance.
In addition, we have engaged several original design manufacturers, or ODM, based in Asia to design and manufacture some of our products. We
may engage additional ODMs in the future. Termination of our commercial relationship with an ODM or the discontinuance of manufacturing of products by
an ODM would negatively affect our business operations.
We are obligated under certain agreements with our suppliers to purchase goods and to purchase excess inventory. Aggregate non-cancellable
obligations under these agreements as of December 31, 2017 were approximately $18.5 million.
Industry Standards and Government Regulations
Our products must comply with industry standards relating to telecommunications equipment. Before completing sales in a country, our products
must comply with local telecommunications standards, recommendations of quasi-regulatory authorities and recommendations of standards-setting
committees. In addition, public carriers require that equipment connected to their networks comply with their own standards. Telecommunication-related
policies and regulations are continuously reviewed by governmental and industry standards-setting organizations and are always subject to amendment or
change. Although we believe that our products currently meet applicable industry and government standards, we cannot be sure that our products will comply
with future standards.
We are subject to telecommunication industry regulations and requirements set by telecommunication carriers that address a wide range of areas
including quality, final testing, safety, packaging and use of environmentally friendly components. We comply with the European Union’s Restriction of
Hazardous Substances Directive (under certain exemptions) that requires telecommunication equipment suppliers to not use some materials that are not
environmentally friendly. These materials include cadmium, hexavalent chromium, lead, mercury, polybrominated biphenyls and polybrominatel diphenyl
ethers. We expect that other countries, including countries we operate in, will adopt similar directives or other additional directives and regulations.
Competition
Competition in our industry is intense and we expect competition to increase in the future. Our competitors currently sell products that provide
similar benefits to those that we sell. There has been a significant amount of merger and acquisition activity, frequently involving major telecommunications
equipment manufacturers acquiring smaller companies, as well as strategic alliances entered into by competitors. We expect that these activities will result in
an increasing concentration of market share among these companies, many of whom are our customers.
Our principal competitors in the area of analog media gateways (2 to 24 ports) for access and enterprise are Grandstream, Natex, Iskratel, Zyxel,
Adtran, Media5, Cisco, Sangoma, Innovaphone AG, Patton, Dialogic and Edgewater.
In the area of low and mid density digital gateways we face competition from companies such as Ribbon Communications (formerly Sonus
Networks), Huawei, Cisco, Dialogic, NewRock, Edgewater, Patton, Ferrari and Sangoma.
Our competitors in the area of MSBRs are companies such as Cisco, Juniper, Adtran, One-Access, Patton, Huawei, HP/3COM and Alcatel-Lucent.
Specifically in the area of enterprise class session border controller technology we compete with Oracle, Cisco, Avaya, Ribbon Communications
(formerly Sonus Networks), MetaSwich, Ingate and Edgewater.
Our competitors in the Microsoft Skype for Business certified gateways, session border controller, Survivable Branch Appliance and IP Phone
markets include Ribbon Communications (formerly Sonus Networks), Dialogic, Cisco, Oracle, Polycom, Snom, Sangoma, Yealink, Patton and EdgeWater.
Our competitors in the area of contact center vendors are Ribbon Communications (formerly Sonus Networks), Oracle, Polycom and Yealink.
Our principal competitors in the sale of signal processing chips are DSP Group, Broadcom, Octasic and Mindspeed. Other indirect competition is a
result of the integration of VoIP functionality into processors (running VoIP signal processing on generic ARM/MIPS cores), thus decreasing the need for
dedicated signal processing chips in the VoIP product. Examples of such manufacturers are Cavium and Texas Instruments. Our principal competitors in the
communications board market are Dialogic, Sangoma and PIKA Technologies.
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Our principal competitors in the area of IP Phones are comprised of “best-of-breed” IP phone vendors and end-to-end IP telephony vendors. “Best of
breed” IP phone vendors sell standards-based SIP phones that can be integrated into any standards-based IP-PBX or hosted IP telephony system. These
competitors include Polycom, HP, Grandstream, Yealink, VTEC (acquired SNOM). End-to-end IP telephony vendors sell IP phones that only work in their
proprietary systems. These competitors include Cisco, Avaya, Alcatel-Lucent, Siemens, Mitel and NEC.
Some of our competitors are also customers of our products and technologies.
Our principal competitors in the sale of signal processing chips are Broadcom, Octasic and Mindspeed. Other indirect competition is arriving from
the integration of VoIP functionality into processors (running the VoIP signal processing on generic ARM/MIPS cores), thus decreasing the need for dedicated
signal processing chips in a VoIP product, Examples to such manufacturers are Cavium, Texas Instruments and more. Our principal competitors in the
communications board market are Dialgic, Sangoma and PIKA Technologies.
Our principal competitors in the area of IP phones are comprised of “best-of-breed” IP phone vendors and end-to-end IP telephony vendors. “Best-
of-breed” IP phone vendors sell standard-based SIP phones that can be integrated into any standards-based IP-PBX or hosted IP telephony systems. These
competitors include Polycom, HP, Yaelink, Obihai and SNOM. End-to-end IP telephony vendors sell IP phones that only work in their proprietary systems.
These competitors include Cisco, Avaya, Alcatel-Lucent, Siemens, Aastra and NEC.
Many of our competitors have the ability to offer vendor-sponsored financing programs to prospective customers. Some of our competitors with
broad product portfolios may also be able to offer lower prices on products that compete with ours because of their ability to recoup a loss of margin through
sales of other products or services. Additionally, voice, audio and other communications alternatives that compete with our products are being continually
introduced.
In the future, we may also develop and introduce other products with new or additional telecommunications capabilities or services. As a result, we
may compete directly with VoIP companies and other telecommunications infrastructure and solution providers, some of which may be our current customers.
Additional competitors may include companies that currently provide communication software products and services. The ability of some of our competitors
to bundle other enhanced services or complete solutions with VoIP products could give these competitors an advantage over us.
Intellectual Property and Proprietary Rights
Our success is dependent in part upon proprietary technology. We rely primarily on a combination of patent, copyright and trade secret laws, as well
as confidentiality procedures and contractual provisions, to protect our proprietary rights. We also rely on trademark protection concerning various names and
marks that serve to identify it and our products. While our ability to compete may be affected by our ability to protect our intellectual property, we believe
that because of the rapid pace of technological change in our industry maintaining our technological leadership and our comprehensive familiarity with all
aspects of the technology contained in our signal processors and communication boards is also of primary importance.
We own U.S. patents that relate to our voice compression and session border control technologies. We also actively pursue patent protection in
selected other countries of interest to us. In addition to patent protection, we seek to protect our proprietary rights through copyright protection and through
restrictions on access to our trade secrets and other proprietary information which we impose through confidentiality agreements with our customers,
suppliers, employees and consultants.
There are a number of companies besides us who hold or may acquire patents for various aspects of the technology incorporated in the ITU’s
standards or other industry standards or proprietary standards, for example, in the fields of wireless and cable. While we have obtained cross-licenses from
some of the holders of these other patents, we have not obtained a license from all of the holders. The holders of these other patents from whom we have not
obtained licenses may take the position that we are required to obtain a license from them. Companies that have submitted their technology to the ITU (and
generally other industry standards making bodies) for adoption as an industry standard are required by the ITU to undertake to agree to provide licenses to
that technology on reasonable terms. Accordingly, we believe that even if we were required to negotiate a license for the use of such technology, we would be
able to do so at an acceptable price. Similarly, third parties who also participate with respect to the same standards-setting organizations as do we may be able
to negotiate a license for use of our proprietary technology at a price acceptable to them, but which may be lower than the price we would otherwise charge.
Under a pooling agreement dated March 3, 1995, as amended, between AudioCodes and DSP Group, Inc., on the one hand, and France Telecom,
Université de Sherbrooke and their agent, Sipro Lab Telecom, on the other hand, we and DSP Group, Inc. granted to France Telecom and Université de
Sherbrooke the right to use certain of our specified patents, and any other of our and DSP Group, Inc. intellectual property rights incorporated in the ITU
G.723.1 standard. Likewise France Telecom and Université de Sherbrooke granted AudioCodes and DSP Group, Inc. the right to use certain of their patents
and any other intellectual property rights incorporated in the G.723.1 standard. In each case, the rights granted are to design, make and use products
developed or manufactured for joint contribution to the G.723.1 standard without any payment by any party to the other parties.
- 38 -
In addition, each of the parties to the agreement granted to the other parties the right to license to third parties the patents of any party included in the
intellectual property required to meet the G.723.1 standard, in accordance with each licensing party’s standard patent licensing agreement. The agreement
provides for the fee structure for licensing to third parties. The agreement provides that certain technical information be shared among the parties, and each of
the groups agreed not to assert any patent rights against the other with respect of the authorized use of voice compression products based upon the technical
information transferred. Licensing by any of the parties of the parties’ intellectual property incorporated in the G.723.1 standard to third parties is subject to
royalties that are specified under the agreement.
Each of the parties to the agreement is free to develop and sell products embodying the intellectual property incorporated into the G.723.1 standard
without payment of royalties to other parties, so long as the G.723.1 standard is implemented as is, without modification. The agreement expires upon the last
expiration date of any of the AudioCodes, DSP Group, Inc., France Telecom or Université de Sherbrooke patents incorporated in the G.723.1 standard. The
parties to the agreement are not the only claimants to technology underlying the G.723.1 standard.
We are aware of parties who may be infringing our technology that is part of the G.723.1 standard. We evaluate these matters on a case by case basis,
directly or through our licensing partner. Although we have not yet determined whether to pursue legal action, we may do so in the future. There can be no
assurance that any legal action will be successful.
Third parties have claimed, and from time to time in the future may claim, that our past, current or future products infringe their intellectual property
rights. Intellectual property litigation is complex and there can be no assurance of a favorable outcome of any litigation. Any future intellectual property
litigation, regardless of outcome, could result in substantial expense to us and significant diversion of the efforts of our technical and management personnel.
Litigation could also disrupt or otherwise severely impact our relationships with current and potential customers as well as our manufacturing, distribution
and sales operations in countries where relevant third party rights are held and where we may be subject to jurisdiction. An adverse determination in any
proceeding could subject us to significant liabilities to third parties, require disputed rights to be licensed from such parties, assuming licenses to such rights
could be obtained, or require us to cease using such technology and expend significant resources to develop non-infringing technology. We may not be able to
obtain a license at an acceptable price.
We have entered into technology licensing fee agreements with third parties. Under these agreements, we agreed to pay the third parties royalties,
based on sales of relevant products.
Legal Proceedings
None.
C.
ORGANIZATIONAL STRUCTURE
List of Significant Subsidiaries
AudioCodes Inc., our wholly-owned subsidiary, is a Delaware corporation.
AudioCodes Development Ltd., our wholly-owned subsidiary, is based in Beer Sheva, Israel.
D.
PROPERTY, PLANTS AND EQUIPMENT
We lease our main facilities, located in Airport City, Lod, Israel, which occupy approximately 274,000 square feet for annual lease payments of
approximately $5.9 million (including management fees). The term of this lease extends until January 31, 2024.
Our U.S. subsidiary, AudioCodes Inc., leases approximately 28,000 square foot facility in Somerset, New Jersey through December 31 2018.
AudioCodes Inc. also leases offices in Plano, Texas, San Jose, California, Raleigh, North Carolina, Boston, Massachusetts and Mexico. The annual lease
payments in 2017 (including management fees) for all our offices in the United States were approximately $600,000.
We lease additional offices in Israel as well as for our international offices. We do not believe the lease agreements for these offices to be material.
We believe that these properties are sufficient to meet our current needs. However, we may need to increase the size of our current facilities, seek
new facilities, close certain facilities or sublease portions of our existing facilities in order to address our needs in the future.
- 39 -
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America, or
U.S. GAAP. These accounting principles require management to make certain estimates, judgments and assumptions based upon information available at the
time that they are made, historical experience and various other factors that are believed to be reasonable under the circumstances. These estimates, judgments
and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues
and expenses during the periods presented.
Our management has reviewed our critical accounting policies and related disclosures with our Audit Committee. See Note 2 to our Consolidated
Financial Statements included elsewhere in this Annual Report, which contain additional information regarding our accounting policies and other disclosures
required by U.S. GAAP.
On an on-going basis, management evaluates its estimates and judgments, Management bases its estimates and judgments on historical experience
and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Management believes the significant accounting policies that affect its
more significant judgments and estimates used in the preparation of its consolidated financial statements and are the most critical to aid in fully understanding
and evaluating AudioCodes’ reported financial results include the following:
·
·
·
·
·
·
·
·
·
Revenue recognition and allowance for sales returns;
Allowance for doubtful accounts;
Inventories;
Intangible assets;
Goodwill;
Income taxes and valuation allowance;
Share-based compensation;
Contingent liabilities; and
Contingent consideration.
Revenue Recognition and Allowance for Sales Returns
We generate our revenues mainly from the sale of products and related services. We sell our products through a direct sales force and sales
representatives. Our customers include original equipment manufacturers, or OEMs, network equipment providers, systems integrators and distributors in the
telecommunications and networking industries, all of whom are considered end-users.
Revenues from products and services are recognized in accordance with Accounting Standards Codification (“ASC”) 605, “Revenue Recognition”,
when the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery of the product has occurred; (iii) the fee is fixed or
determinable; and (iv) collectability is reasonably assured. We have no obligation to customers after the date on which products are delivered, other than
pursuant to warranty obligations and any applicable right of return. We grant to some of our customers the right of return or the ability to exchange a specific
percentage of the total price paid for products they have purchased over a limited period for other products.
We maintain a provision for product returns and exchanges and other incentives. This provision is based on historical sales returns, analysis of credit
memo data and other known factors. This provision amounted to $1.9 million and $2.2 million as of December 31, 2016 and 2017, respectively.
- 40 -
Under Accounting Standards Update (“ASU”) No. 2009-13, Topic 605, “Multiple-Deliverable Revenue Arrangements”, the selling price for a
deliverable is based on its vendor-specific objective evidence (“VSOE”) if available, third-party evidence (“TPE”) if VSOE is not available, or estimated
selling price (“ESP”) if neither VSOE nor TPE is available. We then recognize revenue on each deliverable in accordance with our policies for product and
service revenue recognition. VSOE of selling price is based on the price charged when the element is sold separately. In determining VSOE, we require that a
substantial majority of the selling prices fall within a narrow range based on standalone rates. TPE of selling price is established by evaluating largely
interchangeable competitor products or services in stand-alone sales to similarly situated customers. However, as our products contain a significant element of
proprietary technology and our solutions offer substantially different features and functionality, the comparable pricing of products with similar functionality
typically cannot be obtained. Additionally, as we are unable to reliably determine the selling prices of competitors’ products on a stand-alone basis, we are not
typically able to determine TPE. The ESP is established considering multiple factors including, but not limited to, pricing practices in different geographical
areas and through different sales channels, gross margin objectives, internal costs, the pricing strategies of our competitors, and industry technology
lifecycles. The selling price of the products and professional services was based on ESP. Maintenance and professional services selling prices were based on
either VSOE or ESP.
We limit the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services
or subject to customer-specific return or refund privileges. We evaluate each deliverable in an arrangement to determine whether it represents a separate unit
of accounting.
Allowance for Doubtful Accounts
Our trade receivables are derived from sales to customers located primarily in the Americas, the Far East, Israel and Europe. We perform ongoing
credit evaluations of our customers and to date have not experienced any material losses from uncollected receivables. An allowance for doubtful accounts is
determined with respect to those amounts that we have recognized as revenue and determined to be doubtful of collection. We usually do not require
collateral on trade receivables because most of our sales are made to large and well-established companies. On occasion we may purchase credit insurance to
cover credit exposure for a portion of our sales and this may mitigate the amount we need to write off as a result of doubtful collections.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the “weighted average cost” method for raw materials and
finished products. We periodically evaluate the quantities on hand relative to current and historical selling prices and historical and projected sales volume
and technological obsolescence. Based on these evaluations, inventory write-offs are provided to cover risks arising from slow moving items, technological
obsolescence, excess inventories, discontinued products and for net realizable value lower than cost. We wrote-off inventory in a total amount of $0.7 million,
$2.2 million and $1.9 million in the years ended December 31, 2015, 2016, and 2017, respectively.
Intangible assets
As a result of our acquisitions, our balance sheet included acquired intangible assets in the aggregate amount of approximately $2.8 million and $2
million as of December 31, 2016 and 2017, respectively.
We allocated the purchase price of the companies we have acquired to the tangible and intangible assets acquired and liabilities assumed based on
their estimated fair values. These valuations require management to make significant estimations and assumptions, especially with respect to intangible assets.
Critical estimates in valuing intangible assets include future expected cash flows from technology acquired, trade names, backlog and customer relationships.
In addition, other factors considered are the brand awareness and market position of the products sold by the acquired companies and assumptions about the
period of time the brand will continue to be used in the combined company’s product portfolio. Management’s estimates of fair value are based on
assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.
If we did not appropriately allocate these components or we incorrectly estimate the useful lives of these components, our computation of
amortization expense may not appropriately reflect the actual impact of these costs over future periods, which will affect our operating results.
Intangible assets are comprised of acquired technology, customer relations and licenses. Intangible assets that are not considered to have an
indefinite useful life are amortized using the straight-line basis over their estimated useful lives, which range from four and a half to ten years. Recoverability
of these assets is measured by a comparison of the carrying amount of the asset to the undiscounted future cash flows expected to be generated by the assets.
If the assets are considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the
impaired assets.
During the years ended December 31, 2015, 2016 and 2017, no impairment charges were identified.
- 41 -
Goodwill
As a result of our acquisitions, our balance sheet included acquired goodwill in the aggregate amount of approximately $36.2 million as of December
31, 2016 and 2017. Goodwill represents the excess of the purchase price and related costs over the fair value of net tangible and identifiable intangible assets
of businesses acquired and accounted for under the purchase method. In accordance with ASC 350, “Intangible, Goodwill and Other,” goodwill is not
amortized and is tested for impairment at least annually. Our annual impairment test is performed at the end of the fourth quarter each year. If events or
indicators of impairment occur between the annual impairment tests, we perform an impairment test of goodwill at that date.
ASC 350, “Intangibles – Goodwill and Other” prescribes a two-phase process for impairment testing of goodwill. The first phase screens for
impairment, while the second phase (if necessary) measures impairment. Goodwill impairment is deemed to exist if the net book value of a reporting unit
exceeds its estimated fair value. In such case, the second phase is then performed, and we measure impairment by comparing the carrying amount of the
reporting unit’s goodwill to the implied fair value of that goodwill. An impairment loss is recognized in an amount equal to the excess. We have an option to
perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount prior to
performing the two-step goodwill impairment test. If this is the case, the two-step goodwill impairment test is required. If it is more-likely-than-not that the
fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required.
During the years ended December 31, 2015, 2016 and 2017, no impairment losses were identified.
Income Taxes and Valuation Allowance
As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax expense in each of the
jurisdictions in which we operate. This process involves us estimating our actual current tax exposure, which is accrued as taxes payable, together with
assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets,
which are included within our consolidated balance sheet. We may record a valuation allowance to reduce our deferred tax assets to the amount of future tax
benefit that is more likely than not to be realized.
Although we believe that our estimates are reasonable, there is no assurance that the final tax outcome and the valuation allowance will not be
different than those which are reflected in our historical income tax provisions and accruals.
We have filed or are in the process of filing U.S. federal, state and foreign tax returns that might be subject to audit by the respective tax authorities.
Although the ultimate outcome is unknown, we believe that adequate amounts have been provided for and any adjustments that may result from tax return
audits are not likely to materially adversely affect our consolidated results of operations, financial condition or cash flows.
Share-based compensation
We account for share-based compensation in accordance with ASC 718, “Compensation-Stock Compensation”. We utilize the Black-Scholes option
pricing model to estimate the fair value of share-based compensation at the date of grant. The Black-Scholes model requires subjective assumptions regarding
dividend yields, expected volatility, expected life of options and risk-free interest rates. These assumptions reflect management’s best estimates. Changes in
these inputs and assumptions can materially affect the estimate of fair value and the amount of our share-based compensation expenses relating to share
options. We estimated the forfeiture rate based on historical forfeitures of equity awards and adjusted the rate to reflect changes in facts and circumstances, if
any. We revised our estimated forfeiture rate if actual forfeitures differed from our initial estimates. Effective as of January 1, 2016, we adopted a change in
accounting policy in accordance with ASU 2016-09, “Compensation Stock Compensation (Topic 718)” to account for forfeitures as they occur. The change
was applied on a modified retrospective basis with a cumulative effect adjustment to retained earnings as of January 1, 2016. No prior periods were recast as a
result of this change in accounting policy. We recognized share-based compensation expense of $2.4 million in each of the years ended December 31, 2015
and 2016 and $2.3 million in the year ended December 31, 2017. As of December 31, 2017, there was approximately $3.3 million of total unrecognized
stock-based compensation expense related to non-vested stock-based compensation arrangements granted by us. As of December 31, 2017, that expense is
expected to be recognized over a weighted-average period of 1.09 years.
Contingent liabilities
We are, from time to time, involved in claims, lawsuits, government investigations, and other proceedings arising from the ordinary course of our
business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred, and the amount can be reasonably
estimated. Significant judgment is required to determine both probability and the estimated amount. Such 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.
- 42 -
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
income approach, taking into account the potential cash payments discounted to arrive at a present value amount, based on our expectation. The discount rate
was based on the market interest rate and estimated operational capitalization rate.
Recently Issued Accounting Pronouncements
See Note 2z to our Consolidated Financial Statements included elsewhere in this Annual Report.
A.
OPERATING RESULTS
You should read this discussion with the consolidated financial statements and other financial information included in this Annual Report.
Overview
We design, develop and sell advanced products and services for advanced voice networking and media processing solutions for the digital
workplace. We enable enterprises and service providers to build and operate all-IP voice networks for unified communications, contact centers, and hosted
business services. We offer a broad range of innovative products, solutions and services that are used by large multi-national enterprises and leading tier-1
operators around the world.
Our products enable our customers to build high-quality packet networking equipment and network solutions and provide the building blocks to
connect traditional telephone networks to VoIP networks, as well as connecting and securing multimedia communication between different packet-based
networks. Our products are sold primarily to leading OEMs, system integrators and network equipment providers in the telecommunications and networking
industries. We have continued to broaden our offerings, both from internal and external development and through acquisitions, as we have expanded in the
last few years from selling chips to boards, subsystems, media gateway systems, media servers, session border controllers and messaging platforms. We have
also increased our product portfolio to enhance our position in the market and serve our channels better as a one stop shop for voice over IP hardware.
We have invested significant development resources in complying with Microsoft’s requirements for the purpose of becoming a Microsoft
recognized partner for their unified communication solutions for the enterprise market, which are known as Microsoft Skype for business. We have adapted
some of our gateway products, IP phones, session border controllers, survivable branch applications, value added applications and professional services to
operate in the Microsoft Skype for business environment. Our products to the Skype for Business Unified Communications market are sold primarily to our
channel partners that distribute and integrate the Skype for business solution to enterprises.
In April 2014, NATI approved a three-year program (2014-2016) for approximately NIS 100 million (equal to approximately $28.8 million based on
the exchange rate in effect as of December 31, 2017) to enable us to establish an advanced innovative research and development center for cloud computing
technologies and Unified Communications. In May 2014, the research and development center was established and in June 2016, another three-year program
(2016-2018) for approximately NIS 107 million was approved (equal to approximately $30.9 million based on the exchange rate in effect as of December 31,
2017), in connection with this center. This research and development center employed approximately 100 engineers as of December 31, 2017. We expect that
a significant portion of the cost of this project will continue to be reimbursed to us through grants from NATI. The grants are subject to conditions relating to
grants by NATI. Funding for the whole term of the program is subject to the continued review and approval of the progress of the project by NATI.
We offer a comprehensive professional services program intended to provide responsive, preventive, and consultative support of our networking
products. Our professional services support networking devices, applications and infrastructures, allowing large organizations and service providers to realize
the potential of a high-performance multi-service network.
Our headquarters and research and development facilities are located in Israel with research and development extensions in the U.S. and U.K. We
have other offices located in Europe, the Far East, and Latin America.
The identities of our principal customers have changed and we expect that they will continue to change, from year to year. Historically, a substantial
portion of our revenue has been derived from large purchases by a limited number of original equipment manufacturers, or OEMs, and network equipment
providers, or NEPs, systems integrators and distributors. ScanSource Communications Group, our largest customer, accounted for 15.0%, 16.7% and 17.5%
of our revenues in the years ended December 31, 2015, 2016 and 2017, respectively. In addition, Westcon Group accounted for 12.6%, 11.9% and 12.7% of
our revenues in the years ended December 31, 2015, 2016 and 2017, respectively. Our top five customers accounted for 36.1%, 35.8% and 37.5% of our
revenues in the years ended December 31, 2015, 2016 and 2017, respectively. If we lose a large customer and fail to add new customers to replace lost
revenue, our operating results may be materially adversely affected.
- 43 -
Revenues, based on the location of our customers for the last three fiscal years, are as follows:
Americas
Far East
Europe
Israel
Total
2015
Year Ended December 31,
2016
2017
51.6%
16.0
27.8
4.6
100.0%
50.9%
18.0
26.9
4.2
100.0%
51.7%
15.5
31.4
1.4
100.0%
We believe that prospective customers generally are required to make a significant commitment of resources to test and evaluate our products and to
integrate them into their larger systems. Our sales process is often subject to delays associated with lengthy approval processes that typically accompany the
design and testing of new communications equipment. For these reasons, the sales cycles of our products to new customers are often lengthy, averaging
approximately six to twelve months. As a result, we may incur significant selling and product development expenses prior to generating revenues from sales.
The currency of the primary economic environment in which our operations are conducted is the U.S. dollar and, as such, we use the U.S. dollar as
our functional currency. Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. All transaction gains and
losses from the remeasurement of monetary balance sheet items denominated in non-U.S. dollar currencies are reflected in the statement of operations as
financial income or expenses, as appropriate.
The demand for Voice over IP, or VoIP, technology has increased during recent years. In recent years, the shift from traditional circuit-switched
networks to next generation packet-switched networks continued to gain momentum. As data traffic becomes the dominant factor in communications, service
providers are building and maintaining converged networks for integrated voice and data services. In developed countries, traditional and alternative service
providers have adopted bundled triple play (voice, video and data) and quadruple play (voice, video, data and mobile) offerings. This trend, enabled by voice
and multimedia over IP, has fueled competition among cable, wireline, ISP and mobile operators, increasing the pressure for adopting and deploying VoIP
networks. In addition, underdeveloped markets without basic wire line service in countries such as China and India and certain countries in Eastern Europe
are adopting the use of VoIP technology to deliver voice and data services that were previously unavailable.
The general economic uncertainty, including disruptions in the world credit and equity markets, has had and continues to have a negative impact on
business around the world. This economic environment has had an adverse impact on the technology industry and our major customers. Conditions may
continue to be uncertain or may be subject to deterioration which could lead to a reduction in consumer and customer spending overall, which could have an
adverse impact on sales of our products. A disruption in the ability of our significant customers to access liquidity could cause serious disruptions or an
overall deterioration of their businesses which could lead to a significant reduction in their orders of our products and the inability or failure on their part to
meet their payment obligations to us, any of which could have a material adverse effect on our results of operations and liquidity. In addition, any disruption
in the ability of customers to access liquidity could lead customers to request longer payment terms from us or long-term financing of their purchases from us.
Granting extended payment terms or a significant adverse change in a customer’s financial and/or credit position could also require us to assume greater
credit risk relating to that customer’s receivables or could limit our ability to collect receivables related to purchases by that customer. As a result, our
allowance for doubtful accounts and write-offs of accounts receivable could increase.
- 44 -
Results of Operations
The following table sets forth the percentage relationships of certain items from our consolidated statements of operations, as a percentage of total
revenues for the periods indicated:
Statement of Operations Data:
Revenues:
Products
Services
Total revenues
Cost of revenues:
Products
Services
Total cost of revenues
Gross profit
Operating expenses:
Research and development, net
Selling and marketing
General and administrative
Total operating expenses
Operating income
Financial income (expenses), net
Income before taxes on income
Income tax benefit (expense), net
Net income
2015
Year Ended December 31,
2016
2017
73.0%
27.0%
100.0%
70.3%
29.7%
100.0%
33.8
7.0
40.8
59.2
20.0
31.0
6.2
57.2
2.0
0.3
2.3
(2.0)
0.3%
32.2
7.1
39.3
60.7
20.0
31.0
4.4
55.4
5.3
(0.1)
5.2
6.0
11.2%
68.6%
31.4%
100.0%
30.3
7.3
37.6
62.4
19.4
31.2
5.7
56.3
6.1
0.0
6.1
(3.6)
2.5%
Year Ended December 31, 2017, Compared to Year Ended December 31, 2016
Revenues. Revenues increased 7.6% to $156.7 million in the year ended December 31, 2017, from $145.6 million in the year ended December 31,
2016.
Our revenues from sales of products in the year ended December 31, 2017 increased by 5.1% to $107.5 million, or approximately 69% of total
revenues, from $102.3 million, or 70% of total revenues, in the year ended December 31, 2016. The increase in revenues from sales of products was due to
the increased adoption of SIP Trunk and unified communications and collaboration solutions by enterprises and the increased migration by contact center
customers and service providers from traditional TDM networks to pure IP networks. This migration positively affected the demand for our UC SIP products,
while supporting moderate growth of our media gateway products.
Our revenues from sales of services in the year ended December 31, 2017 increased by 13.6% to $49.2 million, or approximately 31.4% of total
revenues, from $43.3 million, or 29.7% of total revenues, in the year ended December 31, 2016. The increase in revenues from sales of services was primarily
driven by the growth in sales of technical support services, which relate to sales of products in the year ended December 31, 2017 and in previous years and
by the growth in professional services. We have expanded our direct support programs and have launched advanced support programs that enable us to sell
more support services per product. Product support services attributable to sales of products in prior years resulted from renewal of support agreements and
from support services for a larger amount of products being supported. The growth in sales of professional services is attributable to a broader portfolio of
professional services offered by us and an increase in demand for such services.
Cost of Revenues and Gross Profit. Cost of revenues includes the cost of hardware, quality assurance, overhead related to professional and support
customer services, overhead related to manufacturing activity, technology licensing and royalty fees payable to third parties and royalties payable to NATI.
Gross profit increased to $97.8 million in the year ended December 31, 2017, from $88.3 million in the year ended December 31, 2016. Gross profit as a
percentage of total revenues was 62.4% in the year ended December 31, 2017, compared to 60.7% in the year ended December 31, 2016. The increase in the
gross profit as a percentage of total revenues was attributable to the higher increase in our revenues from sales of services, which have a significantly higher
average gross margin and a more favorable mix in the sale of our products. In addition, our gross profit percentage benefited from our fixed overhead costs
being spread over increased revenues. In the year ended December 31, 2017, expenses included in cost of revenues related to share-based compensation were
$84,000 compared to $118,000 in the year ended December 31, 2016.
- 45 -
Cost of revenues related to sales of products increased by 1.1% to $47.4 million in the year ended December 31, 2017, from $46.9 million in the year
ended December 31, 2016.
Cost of revenues related to sales of services in the year ended December 31, 2017 increased by 10.7% to $11.4 million, from $10.3 million in the
year ended December 31, 2016. This increase is primarily attributable to higher support personnel expenses associated with providing services and
implementation of our products with service providers, as well as with enterprise customers. In the year ended December 31, 2017, the gross margin
percentage from sales of services increased to 77%, from 76% in the year ended December 31, 2016. The increase in such gross margin percentage was
primarily attributable spreading our fixed overhead costs over the increased revenues from the sale of services.
Research and Development Expenses, net. Research and development expenses, net, consist primarily of salaries and related costs of employees
engaged in ongoing research and development activities, development-related raw materials and the cost of subcontractors, less grants from NATI. Research
and development expenses increased by 4.1% in the year ended December 31, 2017 to $30.3 million, from $29.1 million in the year ended December 31,
2016. As a percentage of total revenues, research and development expenses decreased to 19.4% in the year ended December 31, 2017, from 20% in the year
ended December 31, 2016. The increase on an absolute basis is primarily due to the appreciation of the NIS against the U.S. dollar. In the year ended
December 31, 2017, expenses included in research and development expenses related to share-based compensation were $383,000, compared to $459,000 in
the year ended December 31, 2016. Grants recognized from NATI were $8.3 million in the year ended December 31, 2017 compared to $7.3 million in the
year ended December 31, 2016.
Selling and Marketing Expenses. Selling and marketing expenses consist primarily of salaries and related costs of selling and marketing personnel,
as well as exhibition, travel and related expenses. Selling and marketing expenses increased by 8.6% in the year ended December 31, 2017 to $49.0 million,
from $45.1 million in the year ended December 31, 2016. As a percentage of total revenues, selling and marketing expenses slightly increased to 31.2% in the
year ended December 31, 2017, from 31.0% in the year ended December 31, 2016. The increase on an absolute basis is primarily due to the appreciation of
the NIS against the U.S. dollar and an increase in the number of employees and related expenses associated with the additional employees. We added
employees in an effort to increase our market share in the areas in which we sell our products and services. This increase was in line with the increase in our
revenues. In the year ended December 31, 2017, expenses included in selling and marketing expenses related to share-based compensation were $1.0 million
compared to $1.1 million in the year ended December 31, 2016.
General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related costs of finance, human
resources and general management personnel, rent, network and allowance for doubtful accounts, as well as insurance and consultant services expenses.
General and administrative expenses increased by 39.1% to $8.9 million in the year ended December 31, 2017, from $6.4 million in the year ended December
31, 2016. As a percentage of total revenues, general and administrative expenses increased to 5.7% in the year ended December 31, 2017 from 4.4% in the
year ended December 31, 2016. The increase in general and administrative expenses was primarily due to the income recorded as a result of the revaluation of
a liability related to potential earn-out payments in the year ended December 31, 2016 and the appreciation of the NIS against the U.S. dollar. In the year
ended December 31, 2017, expenses included in general and administrative expenses related to share-based compensation were $816,000 compared to
$736,000 in the year ended December 31, 2016.
Financial Expenses, Net. Financial expenses, net consists primarily of interest earned on cash and cash equivalents, marketable securities and bank
deposits, net of interest on our bank loans and bank charges. Financial expenses, net, in the year ended December 31, 2017 were $10,000, compared to
$160,000 in the year ended December 31, 2016. The decrease in financial expenses, net in the year ended December 31, 2017 was primarily due to lower
expenses related to exchange rate fluctuations.
Income Tax Benefit (Expense), Net. We had a net income tax expense of $5.6 million in the year ended December 31, 2017, compared to net income
tax benefit of $8.6 million in the year ended December 31, 2016. During the year ended December 31, 2016, we fully utilized the remaining amount of the
deferred tax asset recorded in the year ended December 31, 2013. Based on our earnings history and expected future operating results, we recorded a deferred
tax asset in the amount of $11.6 million as of December 31, 2016. The net income tax benefit in the year ended December 31, 2016 reflected the effect of the
tax benefit associated with the creation of this deferred tax asset. The Company estimates it will utilize the deferred tax asset over the next few years. The net
income tax expense in the year ended December 31, 2017 mainly resulted from the decrease in deferred tax asset due to utilization and the new tax legislation
enacted by the U.S. government in December 2017.
Year Ended December 31, 2016, Compared to Year Ended December 31, 2015
Revenues. Revenues increased 4.2% to $ 145.6 million in the year ended December 31, 2016 from $139.8 million in the year ended December 31,
2015.
- 46 -
Our revenues from sales of products in the year ended December 31, 2016 slightly increased by 0.3% to $102.3 million, or approximately 70% of
total revenues, from $102.0 million, or 73% of total revenues, in the year ended December 31, 2015. The slight increase of 0.3% in revenues from sales of
products is a result of an increase in the sales of our UC-SIP networking products, which was offset by a decrease in the sales of our media gateway and
technology products. The increase in sales of our UC-SIP networking products was due to the increased demand for UC systems and IP PBXs by enterprises
and the increased migration by service providers from traditional TDM networks to pure IP networks. This migration positively affected the demand for our
SBC products, but negatively affected the demand for our media gateway products. As a result, revenues from sales of products in the year ended December
31, 2016 remained about the same as in the year ended December 31, 2015.
Our revenues from sales of services in the year ended December 31, 2016 increased by 14.6% to $43.3 million, or approximately 29.7% of total
revenues, from $37.8 million, or 27% of total revenues, in the year ended December 31, 2015. The increase in revenues from sales of services was primarily
driven by the growth in sales of technical support services, which relate to sales of products in the year ended December 31, 2016 and prior years and by
growth in the sale of professional services. We have expanded our direct support programs and have launched advanced support programs that enable us to
sell more support services per product. Product support services attributable to sales of products in prior years resulted from renewal of support agreements
and from support services for a larger amount of products being supported. The growth in sales of professional services is attributable to a broader portfolio of
professional services offered by us and an increase in demand for such services.
Cost of Revenues and Gross Profit. Cost of revenues includes the cost of hardware, quality assurance, overhead related to professional and support
customer services, overhead related to manufacturing activity, technology licensing and royalty fees payable to third parties and royalties payables to NATI.
Gross profit increased to $88.3 million in the year ended December 31, 2016, from $82.8 million in the year ended December 31, 2015. Gross profit as a
percentage of total revenues was 60.7% in the year ended December 31, 2016, compared to 59.2% in the year ended December 31, 2015. The increase in the
gross profit as a percentage of total revenues was attributable to increase in our revenues from sales of services, which have a significantly higher average
gross margin and a more favorable mix in the sale of our products. In addition, our gross profit percentage benefited from our fixed overhead costs being
spread over increased revenues. In the year ended December 31, 2016, expenses included in cost of revenues related to share-based compensation were
$118,000, compared to $101,000 in the year ended December 31, 2015.
Cost of revenues related to sales of products slightly decreased by 0.6% to $46.9 million in the year ended December 31, 2016, from $47.2 million in
the year ended December 31, 2015.
Cost of revenues related to sales of services in the year ended December 31, 2016 increased by 5.7% to $10.3 million, from $9.7 million in the year
ended December 31, 2015. This increase is primarily attributable to higher support personnel expenses associated with providing services and implementation
of our products with service providers, as well as with enterprise customers. In the year ended December 31, 2016, the gross margin from sales of services
increased to 76%, from 74% in the year ended December 31, 2015. The increase in our gross margin percentage was primarily attributable spreading our
fixed overhead costs over the increased revenues from the sale of services.
Research and Development Expenses, net. Research and development expenses, net, consist primarily of salaries and related costs of employees
engaged in ongoing research and development activities, development-related raw materials and the cost of subcontractors, less grants from NATI. Research
and development expenses increased by 4.1% in the year ended December 31, 2016 to $29.1 million, from $28.0 million in the year ended December 31,
2015. These expenses were 20.0% of revenues in each of the year ended December 31, 2016 and 2015. Research and development expenses increased on an
absolute basis primarily as a result of adding personnel in connection with our continued development of new UC-SIP products as part of our new research
and development center. In the year ended December 31, 2016, expenses included in research and development expenses related to share-based compensation
were $459,000, compared to $429,000 in the year ended December 31, 2015. Grants recognized from NATI were $7.3 million in the year ended December
31, 2016, compared to $5.4 million in the year ended December 31, 2015.
Selling and Marketing Expenses. Selling and marketing expenses consist primarily of salaries and related costs of selling and marketing personnel,
as well as exhibition, travel and related expenses. Selling and marketing expenses increased by 4.0% in the year ended December 31, 2016 to $45.1 million,
from $43.4 million in the year ended December 31, 2015. These expenses were 31.0% of revenues in each of the years ended December 31, 2016 and 2015.
The increase on an absolute basis is primarily due to an increase in the number of employees and related expenses associated with the additional employees.
We added employees in an effort to increase our market share in the areas in which we sell our products and services. This increase was in line with the
increase in our revenues. Expenses included in selling and marketing expenses related to share-based compensation were $1.1 million in the years ended
December 31, 2016 and 2015.
General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related costs of finance, human
resources and general management personnel, rent, network and allowance for doubtful accounts, as well as insurance and consultant services expenses.
General and administrative expenses decreased by 27.1% to $6.4 million in the year ended December 31, 2016, from $8.7 million in the year ended December
31, 2015. As a percentage of total revenues, general and administrative expenses decreased to 4.4% in the year ended December 31, 2016, from 6.2% in the
year ended December 31, 2015. The decrease in general and administrative expenses was primarily due to income recorded as a result of the revaluation of a
liability related to potential earn-out payments. In the year ended December 31, 2016, expenses included in general and administrative expenses related to
share-based compensation were $736,000, compared to $782,000 in the year ended December 31, 2015.
- 47 -
Financial Income (Expenses), Net. Financial income (expenses), net consists primarily of interest earned on cash and cash equivalents, marketable
securities and bank deposits, net of interest on our bank loans and bank charges. Financial expenses, net, in the year ended December 31, 2016 was $160,000,
compared to financial income, net of $442,000 in the year ended December 31, 2015. The increase in financial expenses, net in the year ended December 31,
2016 was primarily due to lower income recorded with respect to interest on our marketable securities and higher expenses related to exchange rate
fluctuations.
Income Tax Benefit (Expense), Net. We had a net income tax benefit of $8.6 million in the year ended December 31, 2016 compared to net income
tax expense of $2.8 million in the year ended December 31, 2015. During the year ended December 31, 2016, we fully utilized the remaining amount of the
deferred tax asset recorded in the year ended December 31, 2013. Based on our earnings history and expected future operating results, we recorded deferred
tax asset in the amount of $11.6 million as of December 31, 2016. This deferred tax asset represents the approximate amount of our net operating losses and
temporary tax differences that the Company estimates it will utilize over the next few years. The net income tax benefit in the year ended December 31, 2016,
reflect the effect of the tax benefit associated with the creation of this deferred tax asset.
Impact of Inflation, Devaluation and Fluctuation of Currencies on Results of Operations, Liabilities and Assets
Since the majority of our revenues are paid in or linked to the U.S. dollar, we believe that inflation and fluctuations in the NIS/U.S. dollar exchange
rate have no material effect on our revenues. However, a majority of the cost of our Israeli operations, mainly personnel and facility-related, is incurred in
NIS. Inflation in Israel and U.S. dollar exchange rate fluctuations have some influence on our expenses and, as a result, on our net income. Our NIS costs, as
expressed in U.S. dollar, are influenced by the extent to which any increase in the rate of inflation in Israel is not offset (or is offset on a lagging basis) by a
devaluation of the NIS in relation to the U.S. dollar.
To protect against the changes in value of forecasted foreign currency cash flows resulting from payments in NIS, we may maintain a foreign
currency cash flow hedging program. We hedge portions of our forecasted expenses denominated in foreign currencies with forward contracts. These
measures may not adequately protect us from material adverse effects due to the impact of inflation in Israel.
The following table presents information about the rate of inflation in Israel, the rate of devaluation of the NIS against the U.S. dollar, and the rate of
inflation in Israel adjusted for the devaluation:
Year Ended
December 31,
2015
2016
2017
B.
LIQUIDITY AND CAPITAL RESOURCES
Israeli
inflation
rate
%
NIS
devaluation or
appreciation rate
%
Israeli
inflation
adjusted for
devaluation
%
(1.0)
(0.2)
0.4
0.3
(1.5)
(9.8)
1.3
(1.3)
(10.2)
We have financed our operations for the last three years primarily from our cash and cash equivalents, bank deposits, bank borrowings and cash from
operations.
As of December 31, 2017, we had $58.7 million in cash and cash equivalents, marketable securities and bank deposits, a decrease of $10.8 million
from $69.5 million at December 31, 2016. As of December 31, 2017, we were restricted with respect to using approximately $6.9 million of our cash as a
result of provisions in our loan agreements, a lease agreement and foreign exchange derivatives transactions.
- 48 -
Share Repurchase Program
In August 2014, our Board of Directors approved a program to repurchase up to $3.0 million of our ordinary shares. In November 2014, we received
court approval in Israel to repurchase up to an additional $15.0 million of our ordinary shares. In May 2015, the court approved an additional $15.0 million in
share repurchases. In each of January, May and October 2016, we received court approval in Israel to repurchase up to an additional $15 million of our
ordinary shares for an aggregate approval to repurchase up to an additional $45 million of our ordinary shares. In May and November 2017, the court
approved additional $15.0 million and $20.0 million respectively in share repurchases. The Israeli court generally limits its approval to six months from the
date of application. As a result, although the program does not have a set end date, it requires renewal each six months by submitting a new court application,
based on the then prevailing facts. No shares were repurchased during the year ended December 31, 2017 other than through the repurchase program. Share
purchases have and will take place in open market transactions or in privately negotiated transactions and may be made from time to time depending on
market conditions, share price, trading volume or other factors. The repurchase program does not require us to purchase a specific number of shares and may
be suspended from time to time or discontinued. In July 2016, we completed a cash self-tender offer and accepted for purchase a total of 3,000,000 of our
ordinary shares, the maximum amount of shares subject to the offer. These shares were purchased under our repurchase program. During the year ended
December 31, 2017, we acquired an aggregate of 3,749,462 of our ordinary shares for approximately $25.6 million. During the year ended December 31,
2016, we acquired an aggregate of 6,198,363 of our ordinary shares for approximately $29.4 million. During the year ended December 31, 2015, we acquired
an aggregate of 4,762,529 of our ordinary shares for approximately $19.5 million.
Bank Loans
In December 2015, we entered into a loan agreement with an Israeli commercial bank that provided loans in the total principal amount of $3.0
million and 3.0 million Euro. The loans bear interest at an annual rate equal to LIBOR plus 1%-2.5% and are repayable in 20 equal quarterly installments. As
of December 31, 2017, there was $4.0 million principal amount of these loans outstanding.
In December 2016, we entered into a loan agreement with an Israeli commercial bank that provided loans in the total principal amount of $6.0
million. The loans bear interest at an annual rate equal to LIBOR plus 1.1%-2.5% and are repayable in 20 equal quarterly installments. As of December 31,
2017, there was $4.8 million principal amount of these loans outstanding.
As of December 31, 2017, we were required to maintain an aggregate of $4.2 million of compensating bank deposits with respect to our bank loans.
The amount of the compensating balances we are required to keep decreases over time as we repay these loans.
The loan agreements require us, among other things, to meet certain financial covenants such as maintaining shareholders’ equity, cash balances, and
liabilities to banks at specified levels, as well as achieving certain levels of operating income.
Cash from Operating Activities
Our operating activities provided cash in the amount of $17.8 million in the year ended December 31, 2017, primarily due to net income of $4.0
million, a decrease of $4.9 million in deferred tax assets, a decrease of $3.4 million in trade receivables and non-cash charges of $2.4 million for depreciation
and amortization and $2.3 million for share-based compensation expenses, offset, in part, by a decrease of $2.1 million in trade payables and an increase of
$1.3 million in other receivables and prepaid expenses. The decrease in deferred tax assets is the result of utilization of the deferred tax assets recorded in the
year ended December 31, 2016 and the effect of the new tax legislation enacted by the U.S. government in December 2017.
Our operating activities provided cash in the amount of $18.3 million in the year ended December 31, 2016, primarily due to a net income of $16.2
million, an increase of $3.2 million in deferred revenues, and non-cash charges of $2.9 million for depreciation and amortization, $1.0 million for
amortization of marketable securities premiums and $2.4 million for share-based compensation expenses, offset, in part, by an increase of $9.5 million in
deferred tax assets. The increase in deferred tax assets is the result of the creation of another deferred tax assets (following the utilization in the year ended
December 31, 2016 of the remaining amount of the deferred tax asset recorded in the year ended December 31, 2013), related to the differences between the
financial reporting and tax bases of assets and liabilities and to the available net carry forward tax losses based on expectations of generating taxable income
in the foreseeable future. Our deferred revenues increased due to the increase in the revenues from services in the year ended December 31, 2016, compared
to the year ended December 31, 2015.
Our operating activities provided cash in the amount of $17.6 million in the year ended December 31, 2015, primarily due to a decrease of $5.6
million in trade receivables, $2.0 million in deferred tax assets and $1.8 million in other receivables and prepaid expenses, an increase of $3.8 million in
deferred revenues and $2.4 million in other payables and accrued expenses, as well as non-cash charges of $3.0 million for depreciation and amortization and
$2.4 million for share-based compensation expenses, offset in part by an increase of $2.0 million in inventories, as well as a decrease of $3.0 million in trade
payables. The deferred tax assets decreased as a result of utilization of these assets. Our deferred revenues increased due to the increase in the revenues from
services and our trade receivables decreased primarily because of our lower sales volume in the year ended December 31, 2015, compared to the year ended
December 31, 2014.
- 49 -
Cash from Investing Activities
In the year ended December 31, 2017, our investing activities provided cash in the amount of $8.4 million from the proceeds $8.1 million from
redemption of marketable securities and from a decrease of $1.9 million in short-term and long-term bank deposits, net, offset, in part, by capital expenditures
of $1.6 million.
In the year ended December 31, 2016, our investing activities provided cash in the amount of $14.1 million, due to proceeds from sale of marketable
securities of $12.4 million, from redemption of marketable securities of $3.2 million and a decrease in short-term bank deposits, net of $2.3 million, offset, in
part, by an increase in long-term bank deposits of $2.4 million and capital expenditures of $1.5 million.
In the year ended December 31, 2015, our investing activities provided cash in the amount of $4.3 million, due to proceeds from redemption of
marketable securities of $2.7 million and of long-term bank deposits of $1.0 million, proceeds from sale of marketable securities of $2.6 million and a
decrease in bank deposits, net of $2.0 million, offset by capital expenditures of $2.0 million and of $2.0 million in cash paid for the acquisition of ACS.
Cash from Financing Activities
In the year ended December 31, 2017, we used $26.3 million of cash in financing activities, primarily as a result of $25.6 million used to repurchase
our shares and $3.5 million used for repayment of bank loans, offset, in part, by $2.8 million of proceeds from the issuance of shares upon exercise of share
options.
In the year ended December 31, 2016, we used $27.0 million of cash in financing activities, primarily as a result of $29.4 million used to repurchase
our shares and $5.4 million used for repayment of bank loans, offset, in part, by $6.0 million in proceeds from bank loans and $2.0 million of proceeds from
the issuance of shares upon exercise of share options.
In the year ended December 31, 2015, we used $17.8 million of cash in financing activities, primarily as a result of $19.5 million used to repurchase
our shares and $4.7 million used for repayment of bank loans offset, in part, by $6.3 million in proceeds from bank loans.
Financing Needs
We anticipate that our operating expenses will be a material use of our cash resources for the foreseeable future. We believe that our current working
capital is sufficient to meet our operating cash requirements for at least the next twelve months, including payments required under our existing bank loans.
Part of our strategy is to pursue acquisition opportunities. If we do not have available sufficient cash to finance our operations and the completion of
additional acquisitions, we may be required to obtain additional debt or equity financing. We cannot be certain that we will be able to obtain, if required,
additional financing on acceptable terms or at all.
C.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
Research and Development
In order to accommodate the rapidly changing needs of our markets, we place considerable emphasis on research and development projects designed
to improve our existing products and to develop new ones. We are developing analog and digital media gateways for carrier and enterprise applications, multi
service business routers and session border controllers, IP phones, management routing and productivity applications, as well as specialized appliances for
Microsoft Skype for Business such as SBA, CCE and CloudBond 365. Our platforms are expected to feature increased session capacity, new functionalities,
enhanced signaling software and compliance with new protocols, as well as new management and productivity applications. We also invest in cloud and
virtualization technologies, making sure our products and technologies suit and are optimized to cloud and hosted services. As of December 31, 2017, 280 of
our employees were engaged primarily in research and development on a full-time basis.
Our research and development expenses, net were $30.3 million in the year ended December 31, 2017, compared to $29.1 million in the year ended
December 31, 2016, and $28.0 million in the year ended December 31, 2015. From time to time we have received royalty-bearing grants from NATI. As a
recipient of grants from NATI, we are obligated to perform all manufacturing activities for projects subject to the grants in Israel unless we receive an
exemption. Know-how from research and development which is used to produce products may not be transferred to third parties without the approval of
NATI and may require significant payments. NATI approval is not required for the export of any products resulting from such research or development.
Through December 31, 2017, we had obtained grants from NATI aggregating $52.5 million for certain of our research and development projects. We are
obligated to pay royalties to NATI, amounting to 1.3%-4.5% of the revenues from the sales of the products and other related revenues generated from such
projects, up to 100% of the grants received, if no additional payments are required, linked to the U.S. dollar and bearing interest at the rate of LIBOR at the
time of grant. The obligation to pay these royalties is contingent on actual sales of the products and in the absence of such sales no payment is required. As of
December 31, 2017, we have contingent obligation to pay royalties in the amount of approximately $58.2 million.
- 50 -
D.
TREND INFORMATION
The accelerated demand for VoIP technology has impacted our business during the last few years. Over the past few years, the shift from traditional
circuit-switched networks to next generation packet-switched networks has continued to gain momentum. As data traffic becomes the dominant factor in
communications, service providers are building and maintaining converged networks for integrated voice and data services. In addition, the growth in
broadband access and related technologies has driven the emergence of alternative service providers. This in turn stimulates competition with incumbent
providers, encouraging them to adopt voice over packet technologies. Additionally, aging legacy TDM switches, high cost maintenance contracts and
regulatory guidelines are driving Service Providers worldwide to announce “PSTN shutdown” programs with dates by which TDM services shall not longer
be available, driving service providers and enterprises to adopt VoIP based technologies and solutions.
While the growth in demand for VoIP services helped create demand for our products and services, there is an ongoing transition in network
architectures that could adversely affect the demand for our products. The growth of services over Internet Protocol (IP) and data usage services over legacy
voice using TDM is driving the transition in network architecture. The demand for our media gateway products is based on the need to interconnect VoIP
networks with traditional non-packet based networks. The demand for our Enterprise Session Border Control (ESBC) products is based on the need to
interconnect IP PBXs or UC systems between each other and to SIP Trunk services or to connect the enterprise to hosted PBX/UC service. The migration
from traditional TDM networks to pure IP networks is gradually increasing. This could positively affect the demand for our ESBC products, but negatively
affect the demand for our media gateway products. In addition, as businesses migrate towards pure IP networks, this could drive demand for our IP Phones
and network management products.
We are experiencing decreasing demand for our technology products from customers who previously manufactured network equipment products
based on our enabling technology. These customers are migrating from AudioCodes’ enabling technology products to diverse integrated comprehensive
solutions and, as a result, the demand for our technology products is being adversely affected.
We continue to experience pressure to shorten our lead times in supplying products to customers. Some of our customers are implementing “demand
pull” programs by which they only purchase our products very close to the time, if not simultaneously with the time, they plan to sell their products. We are
increasing our sales efforts in new markets, such as Latin America, Eastern Europe and Far East. We are still experiencing low visibility into customer
demand for our products which restricts our ability to predict our level of sales.
E.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any “off-balance sheet arrangements” as this term is defined in Item 5E of Form 20-F.
F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
As of December 31, 2017, our contractual obligations were as follows (U.S. dollars in thousands):
LESS THAN
1 YEAR
PAYMENTS DUE BY PERIOD
3-5
YEARS
MORE THAN
5 YEARS
1-3
YEARS
Bank loans
Rent and lease commitments, net (1)
Accrued severance pay, net (2)
Uncertain tax positions (3)
Payment to ACS shareholders
National Authority for Technology and Innovation
Other commitments (4)
$
2,519 $
6,717
-
386
653
-
18,516
5,037 $
11,964
-
-
225
-
-
1,200 $
11,618
-
-
-
-
-
- $
6,473
1,090
-
-
58,155
-
TOTAL
8,756
36,772
1,090
386
878
58,155
18,516
(1)
(2)
(3)
(4)
Our obligation for rent and lease commitments as of December 31, 2017 was approximately $39.2 million. We have rent and lease income in the
amount of approximately $2.4 million, leaving a net obligation of approximately $36.8 million.
Our obligation for accrued severance pay under Israel’s Severance Pay Law as of December 31, 2017 was $21.2 million. This obligation is payable
only upon termination, retirement or death of the respective employee. We have funded $20.1 million through deposits into severance pay funds,
leaving a net obligation of approximately $1.1 million.
Uncertain income tax position under ASC 740, “Income Taxes,” are due upon settlement and we are unable to reasonably estimate the ultimate
amount of timing of settlement. See also Note 13h in our Consolidated Financial Statements for further information regarding our liability under
ASC 740.
Related to non-cancelable inventory purchase commitments.
- 51 -
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth certain information with respect to our directors, senior executive officers and key employees at March 23, 2018:
Name
Age
Position
Stanley B. Stern
Shabtai Adlersberg
Niran Baruch
Lior Aldema
Ofer Nimtsovich
Yair Hevdeli
Eyal Frishberg
Yehuda Herscovici
Nimrode Borovsky
Tal Dor
Shaul Weissman
Joseph Tenne(1)(2)(3)
Dr. Eyal Kishon(1)(2)(3)(4)
Doron Nevo(1)(2)(3)(4)
Zehava Simon (3)
(1) Member of Audit Committee
(2) Member of Nominating Committee
(3) Member of Compensation Committee
(4) Outside Director under Israeli Law
60
65
47
52
49
53
59
51
46
48
52
62
58
62
59
Chairman of the Board of Directors
President, Chief Executive Officer and Director
Chief Financial Officer
Chief Business Officer
Chief Operating Officer
Vice President, Research and Development
Vice President, Operations
Vice President, Products
Vice President, Marketing
Vice President, Human Resources
Vice President, Business Development
Director
Director
Director
Director
Stanley Stern became a director and our Chairman of the Board in December 2012. From 2004 until 2013 Mr. Stern served in various positions at
Oppenheimer& Co., including as a Managing Director and Head of Investment Banking, Technology, Israeli Banking and FIG. Since 2013, Mr. Stern has
served as the president of Alnitak Capital, a private merchant bank and strategic advisory firm. From 2002 until 2004, he was a Managing Director and the
Head of Investment Banking at C.E. Unterberg, Towbin where he focused on technology and defense related sectors. From January 2000 until January 2002,
Mr. Stern was the President of STI Ventures Advisory USA Inc., a venture capital firm focusing on technology investments. Prior to his term at STI Ventures,
he spent over 20 years at CIBC Oppenheimer in the investment banking department and started the technology banking group in 1990. From 2002 until 2012,
Mr. Stern served as the Chairman of the Board of Directors of Tucows, Inc., an internet service provider that is public traded company on AMEX, and, from
2012 until 2013, he served as a Director of Tucows. From 2012 until February 2014, he served as a director of Given Imaging Ltd., a manufacturer of medical
devices, until Given Imaging was acquired by another company. From 2004 until 2009, he served as a director of Odimo Inc. (DBA Diamond.com), an online
jewelry vendor. From 2005 until its sale in 2011, he served as a director and Chairman of the Audit Committee of Fundtech Ltd. From February 2015 Mr.
Stern served as a director at SodaStream International Ltd. and as from February 2015 Mr. Stern is serving as the Chairman of the Board at SodaStream
International Ltd. Mr. Stern received his MBA from Harvard Business School and a BS from Queens College.
Shabtai Adlersberg co-founded AudioCodes in 1993, and has served as our President, Chief Executive Officer and a director since inception. Until
December 2012, Mr. Adlersberg also served as the Chairman of our Board of Directors. Mr. Adlersberg co-founded DSP Group, a semiconductor company, in
1987. From 1987 to 1990, Mr. Adlersberg served as the Vice President of Engineering of DSP Group, and from 1990 to 1992, he served as Vice President of
Advanced Technology. As Vice President of Engineering, Mr. Adlersberg established a research and development team for digital cellular communication
which was spun-off in 1992 as DSP Communications. Mr. Adlersberg also serves as Chairman of the Board of Directors of Natural Speech Communication
Ltd. and as a director of CTI Squared Ltd. Mr. Adlersberg holds a M.Sc. in Electronics and Computer Engineering from Tel Aviv University and a B.Sc. in
Electrical Engineering from the Technion-Israel Institute of Technology, or the Technion.
Niran Baruch became has served as our Chief Financial Officer since July 2016 after serving as our Chief Accounting Officer since May 2015. He
joined AudioCodes in 2005 as Director of Finance and became Vice President of Finance in 2011 responsible for the management of the finance department.
Mr. Baruch has over 17 years of experience with Nasdaq traded public companies, and is a Certified Public Accountant (CPA) with a BA in Business
Management and Accounting.
Lior Aldema has served as Chief Business Officer (“CBO”) since January 2018, and as our Chief Operating Officer and Head of Global Sales from
April 2012 to December 2017. Previously, he served as our Vice President, Product Management from 2002 until 2009, as well as our Vice President
Marketing from February 2003 until 2009. He has been employed by us since 1998, when he was team leader and later headed our System Software Group in
our research and development department. Prior to 1998, Mr. Aldema served as an officer in the Technical Unit of the Intelligence Corps of the Israeli
Defense Forces (Major), heading both operational units and large development groups related to various technologies. Mr. Aldema holds an M.B.A. from Tel
Aviv University and a B.Sc. from the Technion.
- 52 -
Ofer Nimtsovich has served as our Chief Operating Officer since January 2018 and as Vice President, Global Services from March 2013 to
December 2017. From 2000 until February 2013, Mr. Nimtsovich served in various executive positions at Retalix, including Chief Information Officer,
Executive Vice President of Global Services and, most recently as the head of the Software as a Service division of Retalix. From 1994 till 2000, Mr.
Nimtsovich worked for Scitex Corporation Ltd., where he held various technical and management positions, including as the Global Microsoft Infrastructure
manager for Scitex. Mr. Nimtsovich graduated from the Business Administration College in Israel in 1997 with a B.A. in Business Administration and
Marketing, and also holds an MBA degree from the University of Texas.
Yair Hevdeli joined AudioCodes in July 2013 as Vice President, Research and Development. From 2003 until 2013, Mr. Hevdeli served in various
executive positions at Veraz/Dialogic, including Global Vice President, Research and Development and, most recently, as Senior Vice President, Research and
Development and General Manager, Bandwidth Optimization BU. From 1998 until 2003, Mr. Hevdeli worked for ECI Ltd, where he held various technical
and management positions. Mr. Hevdeli has over 20 years of experience leading large multidisciplinary global research and development teams in the telecom
industry. Mr. Hevdeli graduated in 1995 with an M.B.A. in Business Management from Bar Ilan University, Israel and in 1992 received his B.A. in Computer
Science and Economics, from Bar Ilan University.
Eyal Frishberg has served as our Vice President, Operations since October 2000. From 1997 to 2000, Mr. Frishberg served as Associate Vice
President, SDH Operations in ECI Telecom Ltd., a major telecommunication company. From 1987 to 1997, Mr. Frishberg worked in various operational
positions in ECI Telecom including as manager of ECI production facility and production control. Mr. Frishberg worked from 1994 until 1997 for ELTA
company, part of Israeli Aircraft Industries in the planning and control department. Mr. Frishberg holds a B.Sc. in Industrial Engineering from Tel Aviv
University and an M.B.A. from Ben-Gurion University of the Negev.
Yehuda Herscovici has served as our Vice President, Products, overlooking Product Management and Product Marketing since 2010. From 2003 till
2010, Mr. Herscovici served as our Vice President, Systems Group since 2003. From 2001 to 2003, Mr. Herscovici served as our Vice President, Advanced
Products. From 2000 to 2001, Mr. Herscovici served as our Director of Advanced Technologies. From 1994 to 1998 and during 1999, Mr. Herscovici held a
variety of research and development positions at Advanced Recognition Technologies, Ltd., a voice and handwriting recognition company, heading its
research and development from 1999 to 2000 as Vice President, Research and Development. From 1998 to 1999, Mr. Herscovici was engaged in developing
various wireless communication algorithms at Comsys, a telecommunications company. Mr. Herscovici holds an M.Sc. and a B.Sc., from the Technion both
in the area of Telecommunications.
Tal Dor has served as our Vice President of Human Resources since March 2000. Prior to March 2000, Ms. Dor acted for several years as a
consultant in Israel to, among others, telephone and cable businesses, as well as health and social service organizations. Ms. Dor holds a B.A. in Psychology,
from Ben-Gurion University of the Negev and an M.A. in Psychology from Tel Aviv University.
Nimrode Borovsky has served as our Vice President, Marketing since October 2013 and heads the strategic global marketing and business
development efforts with AudioCodes partners and channels. From January 2013 until October 2013, Mr. Borovsky served as our Vice President of Unified
Communications. Mr. Borovsky has been with AudioCodes since 2005 and has served in numerous product, marketing and business development positions
with us. He has worked in telecom and VoIP markets for approximately 20 years. Prior to joining AudioCodes, Mr. Borovsky spent eight years at VocalTec
Communications where he served in several positions in research and development, product management and marketing. Mr. Borovsky holds a B.Sc. degree
in Electrical Engineering from the New Jersey Institute of Technology, and a M.Sc. degree in Biomedical Engineering from Tel Aviv University.
Shaul Weissman has served as our Vice President, Business Development since January 2014. Mr. Weissman has been with AudioCodes since 1994,
serving in various positions. From 2007 until 2014, Mr. Weissman served as our Residential Business Line Manager. In addition Mr. Weissman has served as
our Vice President and Manager of our chip business line since 2006. From 2001 until 2005, Mr. Weissman served as our Support and Professional Services
Manager for our chip business line; and from 1994 until 2000 he served as a digital signal processing engineer. Prior to joining AudioCodes, Mr. Weissman
served as Captain in the Israeli Air Force. Mr. Weissman holds an M.Sc. and a B.Sc., from the Technion, both in the area of Telecommunications.
- 53 -
Joseph Tenne has served as one of our directors since June 2003. Since May 2017, Mr. Tenne has served as a financial advisor to Itamar Medical
Ltd., an Israeli company listed on the Tel Aviv Stock Exchange. Mr. Tenne serves as a director of Orbothech Ltd., an Israeli company listed on Nasdaq,
MIND CTI Ltd., an Israeli company listed on Nasdaq, OPC Energy Ltd., an Israeli company listed on the Tel Aviv Stock Exchange, Ability Inc., A Cayman
Island company listed on Nasdaq and on the Tel Aviv Stock Exchange, and Ratio Oil Explorations (Finance) Ltd., an Israeli company listed on the Tel Aviv
Stock Exchange. From August 2014 to April 2017, Mr. Tenne served as the Vice President Finance and Chief Financial Officer of Itamar Medical Ltd. From
March 2014 to July 2014, Mr. Tenne served as the Chief Financial Officer of Orgenesis Inc., a U.S. company traded on the Nasdaq. From March 2005 until
April 2013, Mr. Tenne served as the Chief Financial Officer of Ormat Technologies, Inc., a company listed on the New York Stock Exchange. From January
2006 until April 2013, Mr. Tenne also served as the Chief Financial Officer of Ormat Industries Ltd., an Israeli holding company which was listed on the Tel-
Aviv Stock Exchange and was the parent company of Ormat Technologies, Inc. From 2003 to 2005, Mr. Tenne was the Chief Financial Officer of Treofan
Germany GmbH & Co. KG, a German company, which is engaged in the development, production and marketing of oriented polypropylene films. From 1997
until 2003, Mr. Tenne was a partner in Kesselman & Kesselman, Certified Public Accountants in Israel (PwC Israel) and a member of
PricewaterhouseCoopers International Limited. Mr. Tenne holds a B.A. in Accounting and Economics and an M.B.A. from Tel Aviv University. Mr. Tenne is
also a Certified Public Accountant in Israel.
Dr. Eyal Kishon has served as one of our directors since 1997. Since 1996, Dr. Kishon has been Managing Partner of Genesis Partners, an Israel-
based venture capital fund. From 1993 to 1996, Dr. Kishon served as Associate Director of Dovrat-Shrem/Yozma-Polaris Fund Limited Partnership. Prior to
that, Dr. Kishon served as Chief Technology Officer at Yozma Venture Capital from 1992 to 1993. From 1991 to 1992, Dr. Kishon was a Research Fellow in
the Multimedia Department of IBM Science & Technology. From 1989 to 1991, Dr. Kishon worked in the Robotics Research Department of AT&T Bell
Laboratories. Dr. Kishon holds a B.A. in Computer Science from the Technion - Israel Institute of Technology and an M.Sc. and a Ph.D. in Computer Science
from New York University.
Doron Nevo has served as one of our directors since 2000. Mr. Nevo is President and CEO of KiloLambda Technologies Ltd., an optical nano-
technology company, which he co-founded in 2001. From 1999 to 2001, Mr. Nevo was involved in fund raising activities for Israeli-based startup companies.
From 1996 to 1999, Mr. Nevo served as President and CEO of NKO, Inc. Mr. Nevo established NKO in early 1995 as a startup subsidiary of Clalcom, Ltd.
NKO designed and developed a full scale, carrier grade, IP telephony system platform and established its own IP network. From 1992 to 1996, Mr. Nevo was
President and CEO of Clalcom Ltd. Mr. Nevo established Clalcom in 1992 as a telecom service provider in Israel. He also serves as a director of Ultracharge
LTD.(ASX: UTR) and of a number of private companies. Mr. Nevo holds a B.Sc. in Electrical Engineering from the Technion – Israel Institute of Technology
and an M.Sc. in Telecommunications Management from Brooklyn Polytechnic.
Zehava Simon was appointed a director in February 2014. Ms. Simon served as a Vice President of BMC Software Inc. from 2000 until September
2013, most recently as Vice President, Corporate Development. From 2002 to 2011, Ms. Simon served as Vice President and General Manager of BMC
Software in Israel. Prior to joining BMC Software, Ms. Simon held a number of executive positions at Intel Corporation. In her last position at Intel, she led
Finance and Operations and Business Development for Intel in Israel. Ms. Simon has served as a board member of various companies, including Tower
Semiconductor from 1999-2004, M-Systems from 2005-2006 and InSightec from 2005-2012. Ms. Simon is also a board member at Nova Measuring
Instruments Ltd, Amiad Water System Ltd. and Nice Statements Ltd Ms. Simon holds a bachelor’s degree in Social Sciences from the Hebrew University, a
law degree (LL.B.) from the Interdisciplinary Center in Herzlia and a master’s degree in Business and Management from Boston University.
B.
COMPENSATION
The table and summary below outline the compensation granted to our five most highly compensated office holders during or with respect to the
year ended December 31, 2017. 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, 2017.
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Name and
Principal Position
Shabtai Adlersberg – CEO
Lior Aldema – CBO
Niran Baruch – CFO
Yehuda Herscovici – VP Products
Nimrode Borovsky – VP Marketing
Salary ($)
Bonus
($) (1)
Equity-Based
Compensation
($) (2)
All Other
Compensation
($) (3)
$
$
$
$
$
345,779 $
253,391 $
202,087 $
208,083 $
169,487 $
316,879 $
145,920 $
63,277 $
45,477 $
58,733 $
442,093 $
249,514 $
138,496 $
139,160 $
133,367 $
224,168 $
102,449 $
81,317 $
77,939 $
76,561 $
Total ($)
1,328,919
751,274
485,177
470,659
438,148
(1)
(2)
(3)
Amounts reported in this column represent annual incentive bonuses granted to the Covered Executives based on performance-metric formulas set
forth in their respective employment agreements.
Amounts reported in this column represent the expense recorded in our financial statements for the year ended December 31, 2017, with respect to
equity-based compensation granted to the Covered Executive.
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 insurance 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.
The aggregate direct remuneration paid during the year ended December 31, 2017 to the 15 persons who served in the capacity of director, senior
executive officer or key employee during 2017 was approximately $4.1 million, including approximately $509,000 which was set aside for pension and
retirement benefits. The compensation amounts do not include amounts expended by us for automobiles made available to our officers, expenses (including
business, travel, professional and business association dues and expenses) reimbursed to officers and other fringe benefits commonly reimbursed or paid by
companies in Israel.
We currently pay each of our non-employee directors an annual fee of $32,000 and a fee of $1,040 for each board meeting or committee meeting
attended. In the event that a director attends a meeting by phone or a resolution is adopted by written consent, then the fee is reduced to 60% and 50% of the
regular meeting fee, respectively. Such fees are in accordance with the rates prescribed by the Israeli Companies Law Regulation for fees of outside directors.
Only directors who are not officers receive compensation for serving as directors. Our director, Mr. Adlersberg, who also serves as our President and Chief
Executive Officer, does not receive board meeting fees. Instead, he receives compensation in accordance with the terms of his employment agreement, a copy
of which is filed as an exhibit to this Annual Report.
Upon election or reelection to the board of directors for a term of three years, each non-employee director is granted options to purchase 22,500
RSUs, of which 7,500 vest on each of the first, second and third anniversary of the grant date.
Options to purchase our ordinary shares granted under our 2008 Equity Incentive Plan to persons who served in the capacity of director or executive
officer are generally exercisable at the fair market value at the date of grant and expire seven years from the date of grant. The options generally vest in four
equal annual installments, commencing one year from the date of grant.
A summary of our stock option and restricted share units (“RSUs”) activity and related information for the years ended December 31, 2015, 2016
and 2017 for the persons who served in the capacity of director, senior executive or key employee officer during those years is as follows:
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2015
Number
of
Options and
RSUs
Weighted Number
Average
Exercise
Price
of
Options and
RSUs
2016
Weighted Number
Average
Exercise
Price
of
Options and
RSUs
2017
Weighted
Average
Exercise
Price
Outstanding at the beginning of the year
(*) 1,994,425 $
3.95
2,225,048 $
3.83
2,030,210 $
Granted
Cancelled
Options exercised / RSUs vested
349,867 $
-
(119,244) $
2.22
1.13
315,217 $
(132,500)
(377,555) $
2.87
2.42
456,293 $
-
(402,341) $
Outstanding at the end of the year
2,225,048 $
3.83
2,030,210 $
3.95
2,084,162 $
3.95
3.02
3.54
3.82
(*) Including outstanding options granted to new executive officer in previous years, prior to joining management.
As of December 31, 2017, options to purchase 1,140,512 ordinary shares were exercisable by the 15 persons who served as an officer or director
during 2017 at an average exercise price of $4.57 per share. As of December 31, 2017, the 15 persons who served as an officer, director or key employee
during 2017 held an aggregate of 401,435 RSUs.
C.
BOARD PRACTICES
Corporate Governance Practices
We are incorporated in Israel and therefore are subject to various corporate governance practices under the Israeli Companies Law, 1999, or the
Companies Law, relating to such matters as outside directors, the audit committee, compensation committee, the internal auditor and approvals of interested
party transactions and of compensation of officers and directors. These matters are in addition to the ongoing listing conditions of the Nasdaq Global Select
Market and other relevant provisions of U.S. securities laws. Under the Nasdaq rules, a foreign private issuer may generally follow its home country rules of
corporate governance in lieu of the comparable Nasdaq requirements, except for certain matters such as composition and responsibilities of the audit
committee and the independence of its members. For further information, see Item 16.G – “Corporate Governance.”
Independent Directors
Under the Companies Law, Israeli companies that have offered securities to the public in or outside of Israel are required to appoint at least two
“outside” directors. Doron Nevo and Dr. Eyal Kishon currently serve as our outside directors. Under the requirements for listing on the Nasdaq Global Select
Market, a majority of our directors are required to be independent as defined by Nasdaq rules. Doron Nevo, Dr. Eyal Kishon, Zehava Simon, Stanley Stern
and Joseph Tenne qualify as independent directors under the applicable SEC and Nasdaq rules, as well as under the Companies Law.
Under the Companies Law, a person may not serve as an outside director if at the date of the person’s election or within the prior two years the
person is a relative of the company’s controlling shareholder, or the person or his or her relatives, partners, employers, supervisors or entities under the
person’s control, have or had any affiliation with us or with a controlling shareholder or relatives of a controlling shareholder, and, in the case of a company
without a controlling shareholder or a shareholder holding at least 25% of the voting rights, any affiliation, at the time of election, to the chairman of the
board of directors, the chief executive officer, an interested party or the company’s most senior finance officer. Under the Companies Law, “affiliation”
includes:
·
·
·
·
an employment relationship,
a business or professional relationship maintained on a regular basis,
control, and
service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such
director was appointed or elected as a director of the private company in order to serve as an outside director following the initial public
offering.
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In addition, a person may not serve as an outside director:
·
·
if the person or his or her relatives, partners, employers, supervisors or entities under the person’s control, maintains a business or professional
relationship with the company, even if such relationship is not on a regular basis, other than a negligible business or professional relationship, or
if the person received compensation as an outside director in excess of the amounts permitted by the Companies Law and regulations there
under.
In addition, no individual may serve as an outside director if the individual’s position or other activities create or may create a conflict of interest
with his or her role as an outside director or are likely to interfere with his or her ability to serve as a director. Until the lapse of two years from the
termination of office, the company, a controlling shareholder and entities under the company’s control may not grant the outside director or any of his or her
relatives, directly or indirectly, any benefit, or engage the outside director or his or her relatives as an office holder of the company, of a controlling
shareholders or of an entity under the company’s control, and may not employ or receive services from the outside director or any of his or her relatives,
either directly or indirectly, including through a corporation controlled by that person. The restriction on a relative that is not the spouse or child of the outside
director is limited to one year from the termination of office instead of two years. Pursuant to the Companies Law, at least one of the outside directors
appointed by a publicly-traded company must have “financial and accounting expertise.” The other outside directors are required to possess “financial and
accounting expertise” or “professional expertise,” as these terms are defined in regulations promulgated under the Companies Law. Joseph Tenne is
designated as the “audit committee financial expert” as that term is defined in SEC rules.
Outside directors are elected by a majority vote at a shareholders’ meeting. In addition to the majority vote, the shareholder approval of the election
of an outside director must satisfy either of two additional tests:
·
·
the majority includes at least a majority of the shares voted by shareholders other than our controlling shareholders or shareholders who have a
personal interest in the election of the outside directors (excluding a personal interest that is not related to a relationship with the controlling
shareholders); or
the total number of shares held by non-controlling shareholders and disinterested shareholders that voted against the election of the outside
director does not exceed 2% of the aggregate voting rights of our company.
The initial term of an outside director is three years and may be extended for up to two additional three-year terms. Thereafter, he or she may be
reelected by our shareholders for additional periods of up to three years each only if the audit committee and the board of directors confirm that, in light of the
outside director’s expertise and special contribution to the work of the Board of Directors and its committees, the reelection for such additional period is
beneficial to the company. Reelection of an outside director may be effected through one of the following mechanisms: (1) the board of directors proposed the
reelection of the nominee and the election was approved by the shareholders by the majority required to appoint outside directors for their initial term; or (2)
one or more shareholders holding one percent or more of a company’s voting rights or the outside director proposed the reelection of the nominee, and the
reelection is approved by a majority of the votes cast by the shareholders of the company, excluding the votes of controlling shareholders and those who have
a personal interest in the matter as a result of their relations with the controlling shareholders, provided that the aggregate votes cast in favor of the reelection
by such non-excluded shareholders constitute more than two percent of the voting rights in the company.
Pursuant to the Companies Law, an Israeli company whose shares are publicly traded may elect to adopt a provision in its articles of association
pursuant to which a majority of its board of directors (or a third of its board of directors in case the company has a controlling shareholder) will constitute
individuals complying with certain independence criteria prescribed by the Companies Law. Pursuant to the related regulations, directors who comply with
the independence requirements of the Nasdaq and SEC regulations are deemed to comply with the independence requirements of the Companies Law. We
have not included such a provision in our articles of association since our board of directors complies with the independence requirements of the Nasdaq and
SEC regulations described above. In any event, as described above, a majority of our board of directors and all members of our audit committee are directors
who comply with the independence criteria prescribed by the Companies Law.
An outside director is entitled to compensation as provided in the regulations adopted under the Israeli Companies Law and is otherwise prohibited
from receiving any other compensation, directly or indirectly, from the company. In accordance with such regulations, our shareholders approved that our
outside directors are to receive compensation equal to that paid to the other members of the board of directors. For further information, please see Item 6.B -
“Directors, Senior Management and Employees—Compensation” in this Annual Report.
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Audit Committee
Under the Companies Law and the requirements for listing on the Nasdaq Global Select Market, our board of directors is required to appoint an audit
committee. Our audit committee must be comprised of at least three directors, including all of the outside directors (one of whom must serve as the chair of
the audit committee), and a majority of the committee members must comply with the director independence requirements prescribed by the Companies Law.
The audit committee consists of: Dr. Eyal Kishon, Doron Nevo and Joseph Tenne, with Doron Nevo serving as the chairman of the audit committee. Our
board of directors has determined that Joseph Tenne is an “audit committee financial expert” as defined in SEC rules and that all members of the audit
committee are independent under the applicable SEC rules, Nasdaq rules and provisions of the Companies Law.
The audit committee may not include the chairman of the board, or any director employed by us, by a controlling shareholder or by any entity
controlled by a controlling shareholder, or any director providing services to us, to a controlling shareholder or to any entity controlled by a controlling
shareholder on a regular basis, or any director whose income is primarily dependent on a controlling shareholder, and may not include a controlling
shareholder or any relatives of a controlling shareholder. Individuals who are not permitted to be audit committee members may not participate in the
committee’s meetings other than to present a particular issue. However, an employee who is not a controlling shareholder or relative may participate in the
committee’s discussions but not in any vote, and the company’s legal counsel and corporate secretary may participate in the committee’s discussions and
votes if requested by the committee.
Under the Companies Law, a meeting of the audit committee is properly convened if a majority of the committee members attend the meeting, and in
addition a majority of the attending committee members are independent directors within the meaning of the Companies Law and include at least one outside
director.
We have adopted an audit committee charter as required by Nasdaq rules. The audit committee’s duties include providing assistance to the board of
directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal
compliance functions by approving the fees of, and services performed by, our independent accountants and reviewing their reports regarding our accounting
practices and systems of internal accounting controls. The audit committee also oversees the audit efforts of our independent accountants and takes those
actions as it deems necessary to satisfy itself that the accountants are independent of management. Under the Companies Law, the audit committee also is
required to monitor deficiencies in the administration of our company, including by consulting with the internal auditor and independent accountants, to
review, classify and approve related party transactions and extraordinary transactions, to review the internal auditor’s audit plan and to establish and monitor
whistleblower procedures.
Nominating Committee
Nasdaq rules require that director nominees be selected or recommended for the board’s selection either by a committee composed solely of
independent directors or by a majority of independent directors. Our nominating committee assists the board of directors in its selection of individuals as
nominees for election to the board of directors and/or to fill any vacancies or newly created directorships on the board of directors. The nominating committee
consists of Dr. Eyal Kishon, Doron Nevo and Joseph Tenne, with Doron Nevo serving as the chairman of the nominating committee. All members of the
nominating committee are independent under the applicable Nasdaq rules and provisions of the Companies Law.
Compensation Committee
Under the Companies Law, the board of directors of any public company must establish a compensation committee. The compensation committee
must consist of at least three directors, include all of the outside directors (including one outside director serving as the chair of the compensation committee),
and a majority of the committee members must comply with the director independence requirements prescribed by the Companies Law. Similar to the rules
that apply to the audit committee, the compensation committee may not include the chairman of the board, or any director employed by us, by a controlling
shareholder or by any entity controlled by a controlling shareholder, or any director providing services to us, to a controlling shareholder or to any entity
controlled by a controlling shareholder on a regular basis, or any director whose primary income is dependent on a controlling shareholder, and may not
include a controlling shareholder or any of its relatives. Individuals who are not permitted to be compensation committee members may not participate in the
committee’s meetings other than to present a particular issue; however, an employee who is not a controlling shareholder or relative may participate in the
committee’s discussions, but not in any vote, and the company’s legal counsel and corporate secretary may participate in the committee’s discussions and
votes if requested by the committee.
The compensation committee’s duties include recommending to the board of directors a compensation policy for executives and monitor its
implementation, approve compensation terms of executive officers, directors and employees affiliated with controlling shareholders, make recommendations
to the board of directors regarding the issuance of equity incentive awards under our equity incentive plan and exempt certain compensation arrangements
from the requirement to obtain shareholder approval under the Companies Law. The compensation committee meets at least twice a year, with further
meetings to occur, or actions to be taken by unanimous written consent, when deemed necessary or desirable by the committee or its chairperson. For
information regarding the compensation policy for executives, see Item 10.C - “Additional Information - Memorandum and Articles of Association –
Compensation of Executive Officers and Directors; Executive Compensation Policy.”
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The compensation committee consists of Dr. Eyal Kishon, Doron Nevo, Joseph Tenne and Zehava Simon, with Doron Nevo serving as the chairman
of the compensation committee. All members of the compensation committee are independent under the applicable SEC rules, Nasdaq rules and provisions of
the Companies Law.
Internal Auditor
Under the Companies Law, our board of directors is also required to appoint an internal auditor proposed by the audit committee. The internal
auditor may be our employee, but may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a
member of our independent accounting firm. The role of the internal auditor is to examine, among other things, whether our activities comply with the law
and orderly business procedure. Corpocheck Global has been our internal auditor since May 2015.
Board Classes
Pursuant to our articles of association, our directors, other than our outside directors, are classified into three classes (classes I, II and III). The
members of each class of directors and the expiration of his or her current term of office are as follows:
Zehava Simon
Joseph Tenne
Class I
2019
Class II
2020
Shabtai Adlersberg
Class III
2018
Stanley B. Stern
Class III
2018
Our outside directors under the Companies Law, Doron Nevo and Dr. Eyal Kishon, are not members of any class and serve in accordance with the
provisions of the Companies Law. Mr. Nevo’s term ends in 2018 and Dr. Kishon’s term ends in 2020.
Chairman of the Board
Under the Companies Law, the chief executive officer of a company (or a relative of the chief executive officer) may not serve as the chairman of the
board of directors, and the chairman of the board of directors (or a relative of the chairman of the board of directors) may not serve as the chief executive
officer, unless approved by the shareholders by a special majority vote prescribed by the Companies Law. The shareholder vote cannot authorize the
appointment for a period of longer than three years, which period may be extended from time to time by the shareholders with a similar special majority vote.
The chairman of the board of directors shall not hold any other position with the company (except as chief executive officer if approved in accordance with
the above procedure) or in any entity controlled by the company, other than as chairman of the board of directors of a controlled entity, and the company shall
not delegate to the chairman duties that, directly or indirectly, make him or her subordinate to the chief executive officer. Stanley B. Stern is our chairman of
the board and Shabtai Adlersberg is our chief executive officer.
D.
EMPLOYEES
We had the following number of employees as of December 31, 2015, 2016 and 2017 in the departments set forth in the table below:
Research and development
Sales and marketing, technical service and support
Operations
Management and administration
2015
As of December 31,
2016
2017
248
276
82
35
641
284
297
81
38
700
280
303
77
38
698
- 59 -
Our employees were located in the following areas as of December 31, 2015, 2016 and 2017.
Israel
United States
Europe
Far East
Latin America
2015
As of December 31,
2016
2017
397
113
38
80
13
641
426
124
54
83
13
700
403
130
59
92
14
698
Israeli labor laws and regulations are applicable to our employees in Israel. These laws principally concern matters such as paid annual vacation,
paid sick days, length of the workday, pay for overtime, insurance for work-related accidents, severance pay and other conditions of employment. Israeli law
generally requires severance pay, which may be funded by Manager’s Insurance, described below, upon the retirement or death of an employee or termination
of employment without cause (as defined under Israeli law). Furthermore, Israeli employees and employers are required to pay predetermined sums to the
National Insurance Institute, which include payments for national health insurance. The payments to the National Insurance Institute currently range from
approximately 6.95% to 19.5% of wages up to specified wage levels, of which the employee contributes approximately 55% and the employer contributes
approximately 45%.
Our employees in Israel are subject to certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor
in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists Associations) by order of the Israeli Minister of Economy and
Industry (formerly known as Minister of Industry, Trade and Labor). These provisions principally concern cost of living increases, recreation pay and other
conditions of employment. We generally provide our employees with benefits and working conditions above the required minimums. Our employees, as a
group, are not currently represented by a labor union. To date, we have not experienced any work stoppages.
Pursuant to an order issued by the Israeli Minister of Industry, Trade and Labor, provisions relating to pension arrangements in the collective
bargaining agreements between the Histadrut and the Coordination Bureau of Economic Organizations apply to all employees in Israel, including our
employees in Israel. We regularly contribute to a “Manager’s Insurance Fund” or to a privately managed pension fund on behalf of our employees located in
Israel. These funds provide employees with a lump sum payment upon retirement (or a pension, in case of a pension fund) and severance pay, if legally
entitled thereto, upon termination of employment. We provide for payments to a Manager’s Insurance Fund and pension fund contributions in the amount of
14.83% of an employee’s salary on account of severance pay and provident payment or pension, with the employee contributing 6.0% of his salary. We also
pay an additional amount of up to 2.5% of certain of our employees’ salaries in connection with disability payments. In addition, we administer an Education
Fund for our Israeli employees and pay 7.5% of these employees’ salaries thereto, with the employees contributing 2.5% of their salary.
- 60 -
E.
SHARE OWNERSHIP
The following table sets forth the share ownership of our directors and officers as of March 23, 2018 and the outstanding number of options held by
them that vest within 60 days of March 23, 2018.
Name
Shabtai Adlersberg
Stanley B. Stern
Niran Baruch
Lior Aldema
Ofer Nimtsovich
Yair Hevdeli
Eyal Frishberg
Yehuda Herscovici
Nimrode Borovsky
Tal Dor
Shaul Weissman
Joseph Tenne
Dr. Eyal Kishon
Doron Nevo
Zehava Simon
* Less than one percent.
Total
Shares
Beneficially
Owned
Percentage of
Ordinary
Shares
Number of
Options
4,995,328
*
*
*
*
*
*
*
*
*
*
*
*
*
*
17.3%
*
*
*
*
*
*
*
*
*
*
*
*
*
*
495,002
*
*
*
*
*
*
*
*
*
*
*
*
*
*
Our officers and directors have the same voting rights as our other shareholders.
The following table sets forth information with respect to the options to purchase our ordinary shares held by Mr. Adlersberg as of March 23, 2018.
Number of
Options
Grant Date
Exercise
Price
Exercised
Cancelled
Vesting
Expiration Date
122,201 December 14, 2011 $
113,876 December 14, 2012 $
116,031 December 14, 2013 $
127,829 December 14, 2014 $
114,275 December 14, 2015 $
$
95,293 March 20, 2017
15,000 December 14, 2017 $
$
15,000 March 14, 2018
3.66
3.02
6.69
4.60
4.03
6.90
7.13
7.56
-
50,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4 years December 14, 2018
4 years December 14, 2019
4 years December 14, 2020
4 years December 14, 2021
4 years December 14, 2022
4 years March 20, 2024
4 years December 14, 2024
4 years March 14, 2025
The following table sets forth information with respect to the RSUs granted to Mr. Adlersberg as of March 23, 2018. These RSUs vest quarterly over
a four-year period from the date of grant, subject to his continuing service to us.
Number of
RSUs
Grant Date
Issued
42,610
38,092
32,717
60,000
December 14, 2014
December 14, 2015
December 14, 2016
December 14, 2017
34,621
21,425
10,222
3,750
- 61 -
Employee Share Plans
We have Employee Share Purchase Plans for the sale of shares to our employees and an Equity Incentive Plan for the granting of options, RSUs and
restricted shares to our employees, officers, directors and consultants. Our 2008 Equity Incentive Plan is pursuant to the Israeli Income Tax Ordinance,
entitling the beneficiaries who are our employees to tax benefits under Israeli law. There are various conditions that must be met in order to qualify for these
benefits, including registration of the options in the name of a trustee for each of the beneficiaries who is granted options. For tax benefits each option, and
any ordinary shares acquired upon the exercise of the option, must be held by the trustee at least for a period commencing on the date of grant and ending no
later than 24 months after the date of grant, in accordance with the period of time specified by Section 102 of Israel’s Income Tax Ordinance, and deposited in
trust with the trustee.
Employee Share Option Plans
2008 Equity Incentive Plan. We adopted an equity incentive plan under Section 102 of the Israeli Income Tax Ordinance, or Section 102, which
provides certain tax benefits in connection with stock-based compensation to employees, officers and directors. This plan, our 2008 Equity Incentive Plan,
was approved by the Israeli Tax Authority.
Under our equity incentive plan, we may grant our directors, officers and employees restricted shares, restricted share units and options to purchase
our ordinary shares under Section 102. We may also grant other persons awards under our equity incentive plan. However, such other persons (controlling
shareholders and consultants) will not enjoy the tax benefits provided by Section 102. The total number of ordinary shares that were originally available for
grant under the 2008 Plan was 2,009,122, which was increased during the years to 8,009,122. This number is reduced by one share for each equity grant we
make under the 2008 Plan. During 2017, options to purchase 264,543 ordinary shares and 333,962 restricted share units were granted under the 2008 Plan. As
of December 31, 2017, 1,221,941 ordinary shares remained available for grant under the 2008 Plan. As of December 31, 2017 there are 2,881,642 options to
purchase ordinary shares and 575,397 restricted share units outstanding under the plan.
The Israeli Tax Authority approved the 2008 Plan under the capital gains tax track of Section 102. Based on Israeli law currently in effect and the
election of the capital gains tax track, and provided that options, restricted shares and restricted shares units granted or, upon their exercise or vesting, the
underlying shares, issued under the plan are held by a trustee for the two years following the date in which such awards are granted, our employees, officers
and directors will be (i) entitled to defer any taxable event with respect to the awards until the underlying ordinary shares are sold, and (ii) subject to capital
gains tax of 25% on the sale of the shares. However, if we grant awards at a value below the underlying shares’ market value at the date of grant, the 25%
capital gains tax rate will apply only with respect to capital gains in excess of the underlying shares’ market value at the date of grant and the remaining
capital gains will be taxed at the grantee’s regular tax rate. We may not recognize a tax benefit pertaining to the employees’ restricted shares, restricted share
units and options for tax purposes except in the events described above under which the gain is taxed at the grantee’s regular tax rate.
Restricted shares, restricted share units and options granted under the 2008 Plan will generally vest over four years from the grant date. If the
employment of an employee is terminated for any reason, the employee (or in the case of death, the designated beneficiary) may exercise his or her vested
options within ninety days of the date of termination (or within twelve months of the date of termination in the case of death or disability) and shall be entitled
to any rights upon vested restricted shares and vested restricted share units to be delivered to the employee to the extent that they were vested prior to the date
his or her employment terminates. Directors are generally eligible to exercise his or her vested options within twelve months from the date the director ceases
to serve on the board of directors.
The holders of options under all of the plans are responsible for all personal tax consequences relating to the options. The exercise prices of the
options are based on the fair value of the ordinary shares at the time of grant as determined by our board of directors. The current practice of our board of
directors is to grant options with exercise prices that equal 100% of the closing price of our ordinary shares on the applicable date of grant.
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
MAJOR SHAREHOLDERS
To our knowledge, (A) we are not directly or indirectly owned or controlled (i) by another corporation or (ii) by any foreign government and (B)
there are no arrangements, the operation of which may at a subsequent date result in a change in control of AudioCodes. The following table sets forth, as of
March 23, 2018 the number of our ordinary shares, which constitute our only outstanding voting securities, beneficially owned by (i) all shareholders known
to us to own more than 5% of our outstanding ordinary shares, and (ii) all of our directors and senior executive officers as a group.
- 62 -
Identity of Person or
Group
Shabtai Adlersberg(1)
Leon Bialik(2)
Senvest Management, LLC(3)
Morgan Stanley(4)
All directors and senior executive officers as a group (15 persons) (5)
Amount
Owned
Percent of
Class
5,490,329
3,874,022
2,066,374
1,689,115
6,168,961
19.0%
13.4%
7.2%
5.8%
21.4%
(1) Includes options to purchase 495,002 shares, exercisable within 60 days of March 23, 2018
(2) The information is derived from a statement on Schedule 13G/A, dated February 13, 2018, of Leon Bialik filed with the SEC.
(3) The information is derived from a statement on Schedule 13G/A, dated February 12, 2018, of Senvest Management, LLC (“Senvest”) and Richard
Mashaal (“Mashaal”) filed with the SEC. Such Schedule 13G/A reflected (i) sole voting and dispositive power as to zero (0) Ordinary Shares, and shared
voting and dispositive power as to 2,066,374 Ordinary Shares, by Mashaal and (ii) sole voting and dispositive power as to zero (0) Ordinary Shares, and
shared voting and dispositive power as to 2,066,374 Ordinary Shares, by Senvest. Mashaal, in his capacity as the managing member of Senvest, has
voting or dispositive power as to all Ordinary Shares owned by Senvest’s investment vehicles.
(4) The information is derived from a statement on Schedule 13G/A, dated February 12, 2018, of Morgan Stanley and Morgan Stanley Capital Services LLC
filed with the SEC.
(5) Includes 1,164,883 ordinary shares which may be purchased pursuant to options exercisable within sixty days following March 23, 2018 and 8,750
ordinary shares issuable pursuant to restricted share units that vest within 60 days of March 23, 2018.
Mr. Adlersberg held 18.6% of our ordinary shares as of December 31, 2017 as compared to 16.4% of our ordinary shares as of December 31, 2016
and 14.2% of our ordinary shares as of December 31, 2015.
Mr. Bialik held 13.2% of our ordinary shares as of December 31, 2017 as compared to 12.1% of our ordinary shares as of December 31, 2016 and
10.6% of our ordinary shares as of December 31, 2015.
Senvest Management, LLC (formerly Rima Senvest Management LLC) held 7.0% of our ordinary shares as of December 31, 2017 as compared to
8.5% of our ordinary shares as of December 31, 2016 and 8.2% of our ordinary shares as of December 31, 2015.
Morgan Stanley and Morgan Stanley Capital Services LLC held 5.7% of our ordinary shares as of December 31, 2017 as compared to, to our
knowledge, less than 5.0% of our ordinary shares as of December 31, 2016 and December 31, 2015.
As of March 23, 2018, there were approximately 9 holders of record of our ordinary shares in the United States, although we believe that the number
of beneficial owners of the ordinary shares is significantly greater. The number of record holders in the United States is not representative of the number of
beneficial holders nor is it representative of where such beneficial holders are resident since many of these ordinary shares were held of record by brokers or
other nominees.
The major shareholders have the same voting rights as the other shareholders.
B.
RELATED PARTY TRANSACTIONS
Not applicable.
C.
INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 18.
- 63 -
Legal Proceedings
None.
Dividend Policy
For a discussion of our dividend policy, please see Item 10B-“Additional Information-Memorandum and Articles of Association-Dividends.”
B.
SIGNIFICANT CHANGES
No significant change has occurred since December 31, 2017, except as otherwise disclosed in this Annual Report.
ITEM 9.
THE OFFER AND LISTING
A.
OFFER AND LISTING DETAILS UPDATE ALL TABLES AND DISCLOSURE IN THIS SECTION
Our ordinary shares are listed on the Nasdaq Global Select Market and the TASE under the symbol “AUDC.”
The following table sets forth, for the periods indicated, the high and low sales prices of our ordinary shares as reported by the Nasdaq Global Select
Market.
Calendar Year
2017
2016
2015
2014
2013
Calendar Period
2018
First quarter (through March 23, 2018)
2017
Fourth Quarter
Third Quarter
Second Quarter
First quarter
2016
Fourth quarter
Third quarter
Second quarter
First quarter
Calendar Month
2018
February
January
2017
December
November
October
September
Price Per Share
High
Low
8.43 $
6.50 $
5.58 $
9.12 $
7.62 $
5.83
3.66
2.69
4.11
3.02
Price Per Share
High
Low
7.90 $
6.88
8.43 $
7.21 $
7.04 $
7.26 $
6.50 $
5.75 $
4.72 $
4.77 $
Price Per Share
High
Low
7.81 $
7.90 $
7.39 $
7.20 $
8.43 $
7.21 $
6.15
5.87
5.83
5.95
5.07
4.05
3.68
3.66
6.88
7.25
6.77
6.15
6.58
6.62
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
- 64 -
The following table sets forth, for the periods indicated, the high and low sales prices of our ordinary shares as reported by The Tel Aviv Stock
Exchange. All share prices shown in the following table are in NIS. As of December 31, 2017, the exchange rate was equal to approximately NIS 3.467 per
U.S. $1.00.
Calendar Year
2017
2016
2015
2014
2013
Calendar Period
2017
Price Per Share
High
Low
NIS
NIS
NIS
NIS
NIS
29.38 NIS
24.90 NIS
22.50 NIS
32.24 NIS
26.48 NIS
20.85
14.08
10.01
15.88
11.37
Price Per Share
High
Low
First quarter (through March 23, 2018)
NIS
27.67 NIS
23.00
2017
Fourth quarter
Third quarter
Second quarter
First quarter
2016
Fourth quarter
Third quarter
Second quarter
First quarter
Calendar Month
2018
February
January
2017
December
November
October
September
B.
PLAN OF DISTRIBUTION
Not applicable.
C.
MARKETS
NIS
NIS
NIS
NIS
NIS
NIS
NIS
NIS
NIS
NIS
NIS
NIS
NIS
NIS
29.38 NIS
25.30 NIS
25.80 NIS
27.07 NIS
24.90 NIS
21.98 NIS
17.97 NIS
18.74 NIS
Price Per Share
High
Low
27.67 NIS
26.99 NIS
26.15 NIS
25.32 NIS
29.38 NIS
25.30 NIS
21.51
20.85
21.32
22.40
18.92
15.42
14.08
14.76
23.00
24.67
23.99
21.51
23.69
23.55
Our ordinary shares are listed for trading on the Nasdaq Global Select Market under the symbol “AUDC.” Our ordinary shares are also listed for
trading on The Tel-Aviv Stock Exchange under the symbol “AUDC.” In addition, we are aware of our ordinary shares being traded on the following markets:
Frankfurt Stock Exchange, Berlin Stock Exchange, Munich Stock Exchange, Stuttgart Stock Exchange, the German Composite and XETRA.
D.
SELLING SHAREHOLDERS
Not applicable.
E.
DILUTION
Not applicable.
F.
EXPENSES OF THE ISSUE
Not applicable.
- 65 -
ITEM 10.
ADDITIONAL INFORMATION
A.
SHARE CAPITAL
Not applicable.
B.
MEMORANDUM AND ARTICLES OF ASSOCIATION
Objects and Purposes
We were incorporated in 1992 under the laws of the State of Israel. Our registration number with the Israeli Registrar of Companies is 520044132.
Our objects and purposes, set forth in Section 2 of our memorandum of association, are:
·
·
·
·
to plan, develop and market voice signal systems;
to purchase, import, market and wholesale and retail distribute, in Israel and abroad, consumption goods and accompanying products;
to serve as representatives of bodies, entrepreneurs and companies from Israel and abroad with respect to their activities in Israel and abroad;
and
to carry out any activity as determined by the lawful management.
Share Capital
Our authorized share capital consists of NIS 1,025,000 divided into 100,000,000 ordinary shares, nominal value NIS 0.01 per share, and 2,500,000
preferred shares, nominal value NIS 0.01 per share. As of March 23, 2018, we had 28,892,277 ordinary shares outstanding (which does not include
28,036,642 treasury shares) and no preferred shares outstanding.
Borrowing Powers
The board of directors has the power to cause us to borrow money and to secure the payment of borrowed money. The board of directors specifically
has the power to issue bonds or debentures, and to impose mortgages or other security interests on all or any part of our property.
Amendment of Articles of Association
Shareholders may amend our articles of association by a resolution adopted at a shareholders meeting by the holders of 50% of voting power
represented at the meeting in person or by proxy and voting thereon.
Qualification of Directors
No person shall be disqualified to serve as a Director by reason of his not holding shares in the Company or by reason of his having served as a
Director in the past.
Dividends
Under the Israeli Companies Law, we may pay dividends only out of our profits. The amount of any dividend to be distributed among shareholders is
based on the nominal value of their shares. Our board of directors has determined that we will not distribute any amounts of our undistributed tax exempt
income as dividend. We intend to reinvest our tax-exempt income and not to distribute such income as a dividend. Accordingly, no deferred income taxes
have been provided on income attributable to our Approved Enterprise program as the undistributed tax exempt income is essentially permanent in duration.
Voting Rights and Powers
Unless any shares have special rights as to voting, every shareholder has one vote for each share held of record. A shareholder is not entitled to vote
at any shareholders meeting unless all calls then payable by him in respect of his shares have been paid (this does not apply to separate meetings of the
holders of a particular class of shares with respect to the modification or abrogation of their rights).
- 66 -
Under our articles of association, we may issue preferred shares from time to time, in one or more series. However, in connection with our listing on
The Tel-Aviv Stock Exchange in 2001, we agreed that for such time as our ordinary shares are traded on The Tel-Aviv Stock Exchange, we will not issue any
of the 2,500,000 preferred shares, nominal value NIS 0.01, authorized in our articles of association. Notwithstanding the foregoing, we may issue preferred
shares if the preference of those shares is limited to a preference in the distribution of dividends and such preferred shares have no voting rights.
Business Combinations
Our articles of association impose restrictions on our ability to engage in any merger, asset or share sale or other similar transaction with a
shareholder holding 15% or more of our voting shares.
Winding Up
Upon our liquidation, our assets available for distribution to shareholders will be distributed to them in proportion to the nominal value of their
shares.
Redeemable Shares
Subject to our undertaking to the Tel-Aviv Stock Exchange as described above, we may issue and redeem redeemable shares.
Modification of Rights
Subject to the provisions of our memorandum of association, and without prejudice to any special rights previously conferred upon the holders of our
existing shares, we may, from time to time, by a resolution approved by the holders of 75% voting power represented at the meeting in person or by proxy and
voting thereon, provide for shares with such preferred or deferred rights or rights of redemption, or other special rights and/or such restrictions, whether in
regard to dividends, voting repayment of share capital or otherwise, as may be stipulated in such resolution.
If at any time our share capital is divided into different classes of shares, we may modify or abrogate the rights attached to any class, unless
otherwise provided by the articles of association, by a resolution approved by the holders of 75% voting power represented at the meeting in person or by
proxy and voting thereon, subject to the consent in writing of the holders of 75% of the issued shares of that class.
The provisions of our articles of association relating to general meetings also apply to any separate general meeting of the holders of the shares of a
particular class, except that two or more members holding not less than 75% of the issued shares of that class must be present in person or by proxy at that
separate general meeting for a quorum to exist.
Unless otherwise provided by our articles of association, the increase of an authorized class of shares, or the issuance of additional shares thereof out
of the authorized and unissued share capital, shall not be deemed to modify or abrogate the rights attached to previously issued shares of that class or of any
other class.
Shareholder Meetings
An annual meeting of shareholders is to be held once a year, within 15 months after the previous annual meeting. The annual meeting may be held in
Israel or outside of Israel, as determined by the board of directors.
The board of directors may, whenever it thinks fit, convene a special shareholders meeting. The board of directors must convene a special
shareholders meeting at the request of:
·
·
·
at least two directors;
at least one-quarter of the directors in office; or
one or more shareholders who hold at least 5% of the outstanding share capital and at least 1% of the voting rights, or one or more shareholders
who hold at least 5% of the outstanding voting rights.
A special shareholders meeting may be held in Israel or outside of Israel, as determined by the board of directors.
- 67 -
Notice of General Meetings; Omission to Give Notice
The provisions of the Companies Law and the related regulations override the provisions of our articles of association, and provide for notice of a
meeting of shareholders to be sent to each registered shareholder at least 21 days or 35 days in advance of the meeting depending on the items included in the
meeting agenda. Notice of a meeting of shareholders must also be published in two Israeli newspapers at least five days prior to the record date for the
meeting.
Notice of a meeting of shareholders must specify the type of meeting, the place and time of the meeting, the agenda, a summary of the proposed
resolutions, the majority required to adopt the proposed resolutions, and the record date for the meeting. The notice must also include the address and
telephone number of our registered office, and a list of times at which the full text of the proposed resolutions may be examined at the registered office.
The accidental omission to give notice of a meeting to any shareholder, or the non-receipt of notice sent to such shareholder, does not invalidate the
proceedings at the meeting.
Limitations on Foreign Shareholders to Hold or Exercise Voting Rights
There are no limitations on foreign shareholders in our articles of association. Israeli law restricts the ability of citizens of countries that are in a state
of war with Israel to hold shares of Israeli companies.
Fiduciary Duties; Approval of Transactions under Israeli Law
Fiduciary duties. The Companies Law codifies the fiduciary duties that office holders, which under the Companies Law includes our directors and
executive officers, owe to a company. An office holder’s fiduciary duties consist of a duty of loyalty and a duty of care.
The duty of loyalty requires an office holder to act in good faith and for the benefit of the company, including to avoid any conflict of interest
between the office holder’s position in the company and personal affairs, and prohibits any competition with the company or the exploitation of any business
opportunity of the company in order to receive a personal advantage for himself or herself or for others. This duty also requires an office holder to reveal to
the company any information or documents relating to the company’s affairs that the office holder has received due to his or her position as an office holder.
A company may approve any of the acts mentioned above provided that all the following conditions apply: the office holder acted in good faith and neither
the act nor the approval of the act prejudices the good of the company and, the office holder disclosed the essence of his personal interest in the act, including
any substantial fact or document, a reasonable time before the date for discussion of the approval. A director is required to exercise independent discretion in
fulfilling his or her duties and may not be party to a voting agreement with respect to his or her vote as a director. A violation of these requirements is deemed
a breach of the director’s duty of loyalty.
The duty of care requires an office holder to act with a level of care that a reasonable office holder in the same position would employ under the
same circumstances. This includes the duty to use reasonable means to obtain information regarding the advisability of a given action submitted for his or her
approval or performed by virtue of his or her position and all other relevant information material to these actions.
Disclosure of personal interest. The Companies Law requires that an office holder promptly disclose to the company any personal interest that he or
she may have and all related material information or documents known to him or her, in connection with any existing or proposed transaction by the
company. “Personal interest,” as defined by the Companies Law, includes a personal interest of any person in an act or transaction of the company, including
a personal interest of his relative or of a corporation in which that person or a relative of that person is a 5% or greater shareholder, a holder of 5% or more of
the voting rights, a director or general manager, or in which he or she has the right to appoint at least one director or the general manager, and includes shares
for which the person has the right to vote pursuant to a power-of-attorney. “Personal interest” does not apply to a personal interest stemming merely from
holding shares in the company.
The office holder must make the disclosure of his personal interest no later than the first meeting of the company’s board of directors that discusses
the particular transaction. This duty does not apply to the personal interest of a relative of the office holder in a transaction unless it is an “extraordinary
transaction.” The Companies Law defines an “extraordinary transaction” as a transaction that is not in the ordinary course of business, not on market terms or
that is likely to have a material impact on the company’s profitability, assets or liabilities.
Approvals. The Companies Law provides that a transaction with an office holder or a transaction in which an office holder has a personal interest
requires board approval, unless the transaction is an extraordinary transaction or the articles of association provide otherwise. Our articles of association do
not provide otherwise. The transaction may be approved only if it is in our best interest. If the transaction is an extraordinary transaction, then the approvals of
the company’s audit committee and the board of directors are required. If the transaction concerns exculpation, indemnification, insurance or compensation of
an office holder, then the approvals of the company’s compensation committee and the board of directors are required, except if the compensation
arrangement is an immaterial amendment to an existing compensation arrangement of an officer who is not a director, in which case the approval of the
compensation committee is sufficient. Exculpation, indemnification, insurance or compensation of a director or the Chief Executive Officer also requires
shareholder approval.
- 68 -
A person who has a personal interest in a matter that is considered at a meeting of the board of directors or the audit committee generally may not
attend that meeting or vote on that matter, unless a majority of the board of directors or the audit committee has a personal interest in the matter or if such
person is invited by the chair of the board of directors or audit committee, as applicable, to present the matter being considered. If a majority of the board of
directors or the audit committee has a personal interest in the transaction, shareholder approval also would be required.
Shareholders
The Companies Law imposes on a controlling shareholder of a public company the same disclosure requirements described above as it imposes on
an office holder. For this purpose, a “controlling shareholder” is any shareholder who has the ability to direct the company’s actions, including any
shareholder holding 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company. Two or more
shareholders with a personal interest in the approval of the same transaction are deemed to be one shareholder.
Approval of the audit committee, the board of directors and our shareholders, in that order, is required for extraordinary transactions, including a
private placement, with a controlling shareholder or in which a controlling shareholder has a personal interest.
Approval of the compensation committee, the board of directors and our shareholders, in that order, is required for the terms of compensation or
employment of a controlling shareholder or his or her relative, as an officer holder or employee of our company or as a service provider to the company,
including through a company controlled by a controlling shareholder.
Shareholder approval must include the majority of shares voted at the meeting. In addition to the majority vote, the shareholder approval must satisfy
either of two additional tests:
·
·
the majority includes at least a majority of the shares voted by shareholders who have no personal interest in the transaction; or
the total number of shares held by disinterested shareholders that voted against the approval of the transaction does not exceed 2% of the
aggregate voting rights of our company.
Generally, the approval of such a transaction may not extend for more than three years, except that in the case of an extraordinary transaction,
including a private placement, with a controlling shareholder or in which a controlling shareholder has a personal interest that does not concern compensation
for employment or service, the transaction may be approved for a longer period if the audit committee determines that the approval of the transaction for a
period longer than three years is reasonable under the circumstances.
Compensation of Executive Officers and Directors; Executive Compensation Policy
In accordance with the Companies Law, we have adopted a compensation policy for our executive officers and directors. The purpose of the policy is
to describe our overall compensation strategy for our executive officers and directors and to provide guidelines for setting their compensation, as prescribed
by the Companies Law. In accordance with the Companies Law, the policy must be reviewed and readopted at least once every three years.
Approval of the compensation committee, the board of directors and our shareholders, in that order, is required for the adoption of the compensation
policy. The shareholders’ approval must include the majority of shares voted at the meeting. In addition to the majority vote, the shareholder approval must
satisfy either of two additional tests:
·
·
the majority includes at least a majority of the shares voted by shareholders other than our controlling shareholders or shareholders who have a
personal interest in the adoption of the compensation policy; or
the total number of shares held by non-controlling shareholders and disinterested shareholders that voted against the adoption of the
compensation policy does not exceed 2% of the aggregate voting rights of our company.
Under the Companies Law, the compensation arrangements for officers (other than the Chief Executive Officer) who are not directors require the
approval of the compensation committee and the board of directors; provided, however, that if the compensation arrangement is not in compliance with our
executive compensation policy, the arrangement may only be approved by the compensation committee and the board of directors for special reasons to be
noted, and the compensation arrangement shall also require a special shareholder approval. If the compensation arrangement is an immaterial amendment to
an existing compensation arrangement of an officer who is not a director and is in compliance with our executive compensation policy, the approval of the
compensation committee is sufficient.
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Arrangements regarding the compensation of the Chief Executive Officer and directors require the approval of the compensation committee, the
board and the shareholders, in that order. In certain limited cases, the compensation of a new Chief Executive Officer who is not a director may be approved
without approval of the shareholders.
Duties of Shareholders. Under the Israeli Companies Law, a shareholder also has a duty to act in good faith towards the company and other
shareholders and refrain from abusing his or her power in the company, including, among other things, voting in the general meeting of shareholders on the
following matters:
·
·
·
·
any amendment to the articles of association;
an increase of the company’s authorized share capital;
a merger; or
approval of related party transactions that require shareholder approval.
In addition, any controlling shareholder, any shareholder who can determine the outcome of a shareholder vote and any shareholder who, under the
company’s articles of association, can appoint or prevent the appointment of an office holder, is under a duty to act with fairness towards the company. The
Israeli Companies Law also provides that a breach of the duty of fairness will be governed by the laws governing breach of contract; however, the Israeli
Companies Law does not describe the substance of this duty.
Anti-Takeover Provisions Under Israeli Law
The Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would hold 25% or more of the voting rights in the company, unless there is already another shareholder of the company with 25%
or more of the voting rights. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a tender
offer if as a result of the acquisition the purchaser would hold more than 45% of the voting rights in the company, unless there is a shareholder with more than
45% of the voting rights in the company.
The Companies Law requires the parties to a proposed merger to file a merger proposal with the Israeli Registrar of Companies, specifying certain
terms of the transaction. Each merging company’s board of directors and shareholders must approve the merger. Shares in one of the merging companies held
by the other merging company or certain of its affiliates are disenfranchised for purposes of voting on the merger. A merging company must inform its
creditors of the proposed merger. Any creditor of a party to the merger may seek a court order blocking the merger, if there is a reasonable concern that the
surviving company will not be able to satisfy all of the obligations of the parties to the merger. Moreover, a merger may not be completed until at least 50
days have passed from the time that the merger proposal was filed with the Israeli Registrar of Companies and at least 30 days have passed from the approval
of the shareholders of each of the merging companies.
Finally, in general, Israeli tax law treats stock-for-stock acquisitions less favorably than does U.S. tax law. Israeli tax law provides for tax deferral in
specified acquisitions, including transactions where the consideration for the sale of shares is the receipt of shares of the acquiring company. Nevertheless,
Israeli tax law may subject a shareholder who exchanges his ordinary shares for shares in a foreign corporation to immediate taxation or to taxation before his
investment in the foreign corporation becomes liquid, although in the case of shares of a foreign corporation that are traded on a stock exchange, the tax may
be postponed subject to certain conditions.
Insurance, Indemnification and Exculpation of Directors and Officers; Limitations on Liability
Insurance of Office Holders
The Companies Law permits a company, if permitted by its articles of association, to insure an office holder in respect of liabilities incurred by the
office holder as a result of:
·
·
breach of the duty of care owed to the company or a third party;
breach of the fiduciary duty owed to the company, provided that the office holder acted in good faith and had reasonable grounds to believe that
his action would not harm the company’s interests;
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· monetary liability imposed on the office holder in favor of a third party; and
·
reasonable litigation expenses, including attorney fees, incurred by the office holder as a result of an administrative enforcement proceeding
instituted against him (without limiting from the generality of the foregoing, such expenses will include a payment imposed on the office holder
in favor of an injured party as set forth in Section 52(54)(a)(1)(a) of the Israel Securities Law, 5728-1968, as amended (the “Israeli Securities
Law”), and expenses that the office holder incurred in connection with a proceeding under Chapters H’3, H’4 or I’1 of the Israeli Securities
Law, including reasonable legal expenses, which term includes attorney fees).
Indemnification of Office Holders
Under the Companies Law, a company can, if permitted by its articles of association, indemnify an office holder for any of the following obligations
or expenses incurred in connection with his or her acts or omissions as an office holder:
· monetary liability imposed on an office holder in favor of a third party in a judgment, including a settlement or an arbitral award confirmed by a
court;
·
reasonable legal costs, including attorney’s fees, expended by an office holder as a result of:
–
an investigation or proceeding instituted against the office holder by a competent authority, provided that such investigation or
proceeding concludes without the filing of an indictment against the office holder, and either:
o
o
no financial liability was imposed on the office holder in lieu of criminal proceedings, or
financial liability was imposed on the office holder in lieu of criminal proceedings but the alleged criminal offense does
not require proof of criminal intent; and (y) in connection with an administrative enforcement proceeding or a financial
sanction (without derogating from the generality of the foregoing, such expenses will include a payment imposed on
the Office Holder in favor of an injured party as set forth in Section 52(54)(a)(1)(a) of the Israeli Securities Law, and
expenses that the Office Holder incurred in connection with a proceeding under Chapters H’3, H’4 or I’1 of the Israeli
Securities Law, including reasonable legal expenses, which term includes attorney fees); and
·
reasonable legal costs, including attorneys’ fees, expended by the office holder or for which the office holder is charged by a court:
–
–
–
in an action brought against the office holder by or on behalf of the company or a third party, or
in a criminal action in which the office holder is found innocent, or
in a criminal action in which the office holder is convicted and in which a proof of criminal intent is not required.
o
A company may indemnify an office holder in respect of these liabilities either in advance of an event or following an
event. If a company undertakes to indemnify an office holder in advance of an event, the indemnification, other than
legal costs, must be limited to foreseeable events in light of the company’s actual activities when the company
undertook such indemnification, and reasonable amounts or standards, as determined by the board of directors.
Exculpation of Office Holders
Under the Companies Law, a company may, if permitted by its articles of association, also exculpate an office holder in advance, in whole or in part,
from liability for damages sustained by a breach of duty of care to the company, other than in connection with distributions.
Limitations on Exculpation, Insurance and Indemnification
Under the Companies Law, a company may indemnify or insure an office holder against a breach of duty of loyalty only to the extent that the office
holder acted in good faith and had reasonable grounds to assume that the action would not prejudice the company. In addition, a company may not indemnify,
insure or exculpate an office holder against a breach of duty of care if committed intentionally or recklessly (excluding mere negligence), or committed with
the intent to derive an unlawful personal gain, or for a fine or forfeit levied against the office holder in connection with a criminal offense.
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Our articles of association allow us to insure, indemnify and exculpate office holders to the fullest extent permitted by law, provided such insurance
or indemnification is approved in accordance with law. Pursuant to the Companies Law, exculpation of, procurement of insurance coverage for, and an
undertaking to indemnify or indemnification of, our office holders must be approved by our audit committee and our board of directors and, if the office
holder is a director, also by our shareholders.
We have entered into agreements with each of our directors and senior officers to insure, indemnify and exculpate them to the full extent permitted
by law against some types of claims, subject to dollar limits and other limitations. These agreements have been ratified by our audit committee, board of
directors and shareholders. We have acquired directors’ and officers’ liability insurance covering our officers and directors and the officers and directors of
our subsidiaries against certain claims.
C.
MATERIAL CONTRACTS
Not applicable.
D.
EXCHANGE CONTROLS
Non-residents of Israel who own our ordinary shares may freely convert all amounts received in Israeli currency in respect of such ordinary shares,
whether as a dividend, liquidation distribution or as proceeds from the sale of the ordinary shares, into freely-repatriable non-Israeli currencies at the rate of
exchange prevailing at the time of conversion (provided in each case that the applicable Israeli income tax, if any, is paid or withheld).
Since January 1, 2003, all exchange control restrictions on transactions in foreign currency in Israel have been eliminated, although there are still
reporting requirements for foreign currency transactions. Legislation remains in effect, however, pursuant to which currency controls may be imposed by
administrative action at any time.
The State of Israel does not restrict in any way the ownership or voting of our ordinary shares by non-residents of Israel, except with respect to
subjects of countries that are in a state of war with Israel.
E.
TAXATION
The following is a summary of the material Israeli and United States federal tax consequences, Israeli foreign exchange regulations and certain
Israeli government programs affecting us. To the extent that the discussion is based on new tax or other legislation that has not been subject to judicial or
administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax or other authorities in question.
The discussion is not intended, and should not be construed, as legal or professional tax advice, is not exhaustive of all possible tax considerations and should
not be relied upon for tax planning purposes. Potential investors are urged to consult their own tax advisors as to the Israeli tax, United States federal income
tax and other tax consequences of the purchase, ownership and disposition of ordinary shares, including, in particular, the effect of any foreign, state or local
taxes.
Israeli Tax Considerations and Government Programs
The following is a brief summary of the material Israeli income tax laws applicable to us, and certain Israeli Government programs that benefit us.
This section also contains a discussion of material Israeli income tax consequences concerning the ownership and disposition of our ordinary shares. This
summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances
or to some types of investors subject to special treatment under Israeli law. Examples of such investors include residents of Israel or traders in securities who
are subject to special tax regimes not covered in this discussion. Several parts of this discussion are based on new tax legislation that has not yet been subject
to judicial or administrative interpretation.
General Corporate Tax Structure in Israel
Israeli companies are generally subject to corporate tax on their taxable income. As of 2016, the corporate tax rate is 25% (in 2014 and 2015, the
corporate tax rate was 26.5%). In December 2016, the Israeli Parliament approved the Economic Efficiency Law (Legislative Amendments for Applying the
Economic Policy for the 2017 and 2018 Budget Years), 2016 which reduces the corporate income tax rate to 24% (instead of 25%) effective from January 1,
2017 and to 23% effective from January 1, 2018. The deferred tax balances as of December 31, 2016 and 2017 have been calculated based on the revised tax
rates.
However, the effective tax rate payable by a company that qualifies as an Industrial Company that derives income from an Approved Enterprise, a
Beneficiary Enterprise or a Preferred Enterprise (as discussed below) may be considerably less. Capital gains derived by an Israeli company are subject to the
prevailing corporate tax rate.
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Law for the Encouragement of Capital Investments, 5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959, generally referred to as the Investment Law, provides certain incentives for
capital investments in production facilities (or other eligible assets) by “Industrial Enterprises” (as defined under the Investment Law).
The Investment Law was significantly amended effective April 1, 2005 (the “2005 Amendment”), and further amended as of January 1, 2011 (the
“2011 Amendment”) and January 1, 2017 (the “2017 Amendment”). Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions
of the Investment Law prior to its revision by the 2005 Amendment remain in force but any benefits granted subsequently are subject to the provisions of the
2005 Amendment. Similarly, the 2011 Amendment introduced new benefits to replace those granted in accordance with the provisions of the Investment Law
in effect prior to the 2011 Amendment. However, companies entitled to benefits under the Investment Law as in effect prior to January 1, 2011 were entitled
to choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead irrevocably to forego such benefits and have the benefits
of the 2011 Amendment apply. The 2017 Amendment was designed to accommodate the implementation of the “Nexus Principles” (based on OECD
guidelines published as part of the Base Erosion and Profit Shifting (BEPS) project).
Tax Benefits Prior to the 2005 Amendment
An investment program that is implemented in accordance with the provisions of the Investment Law prior to the 2005 Amendment, referred to as an
“Approved Enterprise,” is entitled to certain benefits. A company that wished to receive benefits as an Approved Enterprise must have received approval
from the Investment Center of the Israeli Ministry of Economy and Industry (formerly the Ministry of Industry, Trade and Labor), or the Investment Center.
Each certificate of approval for an Approved Enterprise relates to a specific investment program in the Approved Enterprise, delineated both by the financial
scope of the investment and by the physical characteristics of the facility or the asset.
In general, an Approved Enterprise is entitled to receive a grant from the Government of Israel and certain tax benefits under the “Grant Track” or an
alternative package of tax benefits under the “Alternative Track”. The tax benefits from any certificate of approval relate only to taxable profits attributable to
the specific Approved Enterprise. Income derived from activity that is not approved by the Investment Center or not integral to the activity of the Approved
Enterprise does not enjoy tax benefits.
The tax benefits include a tax exemption for at least the first two years of the benefit period from the first year of taxable income (depending on the
geographic location of the Approved Enterprise facility within Israel) and the taxation of income generated from an Approved Enterprise at a reduced
corporate tax rate of between 10% to 25% for the remainder of the benefit period depending on the level of foreign investment in the company in each year as
detailed below. The benefit period is ordinarily seven years commencing with the year in which the Approved Enterprise first generates taxable income. The
benefit period is limited to 12 years from the operational year as determined by the Investment Center or 14 years from the start of the tax year in which
approval of the Approved Enterprise is obtained, whichever is earlier.
A company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a Foreign Investors Company, or a FIC,
which is a company with a level of foreign investment, as defined in the Investment Law, of more than 25%. The level of foreign investment is measured as
the percentage of rights in the company (in terms of shares, rights to profits, voting and appointment of directors), and of combined share and loan capital,
that are owned, directly or indirectly, by persons who are not residents of Israel. The determination as to whether a company qualifies as a FIC is made on an
annual basis. A company that qualifies as a FIC and has an Approved Enterprise program is eligible for an extended ten-year benefit period. As specified
above, depending on the geographic location of the Approved Enterprise within Israel, income derived from the Approved Enterprise program may be exempt
from tax on its undistributed income for a period of between two to ten years, and will be subject to a reduced tax rate for the remainder of the benefit period.
The tax rate for the remainder of the benefits period will be 25%, unless the level of foreign investment exceeds 49%, in which case the tax rate will be 20%
if the foreign investment is more than 49% and less than 74%; 15% if more than 74% and less than 90%; and 10% if 90% or more.
If a company elects the Alternative Track and distributes a dividend out of income derived from the Approved Enterprise during the tax exemption
period, such dividend will be subject to tax on the gross amount distributed. The tax rate will be the rate which would have been applicable had the company
not been tax-exempt under the alternative package of benefits. This rate is generally 10%-25%, depending on the percentage of the company’s shares held by
foreign shareholders. The dividend recipient is subject to withholdings of tax at the source by the company at the reduced rate applicable to dividends from
Approved Enterprises, which is 15% (or such lower rate as may be provided in an applicable tax treaty) if the dividend is distributed during the tax exemption
period or within 12 years after the period. This limitation does not apply to an FIC.
The benefits available to an Approved Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations and
the criteria in the specific certificate of approval. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, as
adjusted by the Israeli consumer price index, and interest or other monetary penalty.
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Our production facilities in Israel have been granted the status of an Approved Enterprise in accordance with the Investment Law under four separate
investment programs. In accordance with the provisions of the Investment Law, we have elected the Alternative Track.
Therefore, our income derived from the Approved Enterprise will be entitled to a tax exemption for a period of two years and to an additional period
of five to eight years of reduced tax rates of 10% -25% (based on the percentage of foreign ownership).
Tax Benefits Subsequent to the 2005 Amendment
The 2005 Amendment changed certain provisions of the Investment Law. As a result of the 2005 Amendment, a company referred to as a
“Beneficiary Enterprise”, was no longer obliged to obtain Approved Enterprise status in order to receive the tax benefits previously available under the
Alternative Track, and therefore generally there was no need to apply to the Investment Center for this purpose (Approved Enterprise status remains
mandatory for companies seeking cash grants). Rather, the Company may claim the tax benefits offered by the Investment Law directly in its tax returns by
notifying the Israeli Tax Authority within 12 months of the end of that year, provided that its facilities meet the criteria for tax benefits set out by the 2005
Amendment. Companies are also granted the right to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the 2005
Amendment.
The 2005 Amendment applies to new investment programs and investment programs with an election year commencing after 2004, but does not
apply to investment programs approved prior to April 1, 2005. The 2005 Amendment provides that terms and benefits included in any certificate of approval
that was granted before the 2005 Amendment became effective (April 1, 2005) will remain subject to the provisions of the Investment Law as in effect on the
date of such approval.
Tax benefits are available under the 2005 Amendment to production facilities (or other eligible facilities), which are generally required to derive
more than 25% of their business income from export to specific markets with a population of at least 12 million (following an amendment which became
effective as of July 2013, the export criteria was increased to markets with population of at least 14 million; such export criteria will further increase in the
future by 1.4% per annum) and meet additional criteria stipulate in the amendment (referred to as a “Beneficiary Enterprise”). In order to receive the tax
benefits, the 2005 Amendment states that a company must make an investment which meets all of the conditions, including exceeding a minimum investment
amount specified in the Investment Law. Such investment may be made over a period of no more than three years ending at the end of the year in which the
company requested to have the tax benefits apply to its Beneficiary Enterprise (the “Year of Election”).
The extent of the tax benefits available under the 2005 Amendment to qualifying income of a Beneficiary Enterprise depend on, among other things,
the geographic location in Israel of the Beneficiary Enterprise. The geographic location of the company at the year of election will also determine the period
for which tax benefits are available. Such tax benefits include an exemption from corporate tax on undistributed income for a period of between two to ten
years, depending on the geographic location of the Beneficiary Enterprise in Israel, and a reduced corporate tax rate of between 10% to 25% for the remainder
of the benefits period, depending on the level of foreign investment in the company in each year if it is a qualified FIC. A company qualifying for tax benefits
under the 2005 Amendment which pays a dividend out of income derived by its Beneficiary Enterprise during the tax exemption period will be subject to
corporate tax in respect of the gross amount of the dividend at the otherwise applicable rate of 10%-25%. Dividends paid out of income attributed to a
Beneficiary Enterprise are generally subject to withholding tax at source at the rate of 15% or such lower rate as may be provided in an applicable tax treaty.
The duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from the Commencement Year, or 12 years from the first day of
the Year of Election.
The benefits available to a Beneficiary Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations. If a
company does not meet these conditions, it may be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index, and interest,
or other monetary penalties.
We have elected 2008 and 2011 as “Years of Election” under the Investment Law for our Beneficiary Enterprise status.
Tax Benefits under the 2011 and 2017 Amendments
The 2011 Amendment canceled the availability of the benefits granted to companies under the Investment Law prior to 2011 and, instead, introduced
new benefits for income generated by a “Preferred Company” through its “Preferred Enterprise” (as such terms are defined in the Investment Law) as of
January 1, 2011. Similarly to “Beneficiary Company”, a Preferred Company is an industrial company owning a Preferred Enterprise which meets certain
conditions (including a minimum threshold of 25% export). However, under this new legislation the requirement for a minimum investment in productive
assets was cancelled.
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Pursuant to the 2011 Amendment, a Preferred Company is entitled to a reduced corporate tax rate of 16% in 2014, unless the Preferred Company is
located in a certain development zone, in which case the rate will be 9%. Pursuant to the 2017 Amendment, in 2017 and thereafter, a Preferred Company is
entitled to a reduced corporate tax rate of 16% and 7.5%, respectively.
Dividends paid out of income attributed to a Preferred Enterprise during 2014 and thereafter are generally subject to withholding tax at the rate of
20% or such lower rate as may be provided in an applicable tax treaty. However, if such dividends are paid to an Israeli company, no tax is required to be
withheld (however, if afterward distributed to individuals or non-Israeli company a withholding of 20% or such lower rate as may be provided in an
applicable tax treaty, will apply).
The 2011 Amendment also provided transitional provisions to address companies already enjoying existing tax benefits under the Investment Law.
These transitional provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as
amended in 2011 with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval that was granted
to an Approved Enterprise which chose to receive grants and certain tax benefits under the Grant Track before the 2011 Amendment became effective will
remain subject to the provisions of the Investment Law as in effect on the date of such approval, and subject to certain conditions; and (ii) terms and benefits
included in any certificate of approval that was granted to an Approved Enterprise under the Alternative Track before the 2011 Amendment became effective
will remain subject to the provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are met; and (iii) a
Beneficiary Enterprise can elect to continue to benefit from the benefits provided to it before the 2011 Amendment came into effect, provided that certain
conditions are met.
We have reviewed and evaluated the implications and effect of the benefits under the 2011 Amendment, and, while potentially eligible for such
benefits, we have not yet chosen to be subject to the tax benefits introduced by the 2011 Amendment.
The 2017 Amendment provides that a preferred enterprise located in development area A will be subject to a tax rate of 7.5% instead of 9% effective
from January 1, 2017 and thereafter (the tax rate applicable to preferred enterprises located in other areas remains at 16%).
The 2017 Amendment provides new tax tracks as follows: Preferred Technology Enterprise - an enterprise for which total consolidated revenues of
its parent company and all subsidiaries are less than NIS 10 billion for a tax year. A technological preferred enterprise, as defined 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 (in development area A - a tax rate of 7.5%).
The above changes in the tax rates relating to technological enterprises were not taken into account in the computation of deferred taxes as of
December 31, 2016 and 2017.
Tax Benefits and Funding for Research and Development
Israeli tax law allows, under specific conditions, a tax deduction in the year incurred for expenditures, including capital expenditures, relating to
scientific research and development projects, for the year in which they are incurred if:
·
·
·
The expenditures are approved by the relevant Israeli government ministry, determined by the field of research;
The research and development is for the promotion or development of the company; and
The research and development is carried out by or on behalf of the company seeking the deduction.
However, the amount of such deductible expenses shall be reduced by the sum of any funds received through government grants for the finance of
such scientific research and development projects. Expenditures not so approved are deductible over a three-year period if the R&D is for the promotion or
development of the company.
Law for the Encouragement of Industry (Taxes), 5729-1969
The Law for the Encouragement of Industry (Taxes), 5729-1969 , generally referred to as the Industry Encouragement Law, provides several tax
benefits for “Industrial Companies.” We currently qualify as an Industrial Company within the meaning of the Industry Encouragement Law.
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The Industry Encouragement Law defines an “Industrial Company” as a company resident in Israel, of which 90% or more of its income in any tax
year, other than income from defense loans, is derived from an “Industrial Enterprise” owned by it and located in Israel. An “Industrial Enterprise” is defined
as an enterprise whose principal activity in a given tax year is industrial production.
The following corporate tax benefits, among others, are available to Industrial Companies:
·
·
·
amortization over an eight-year period of the cost of purchased know-how and patents and rights to use a patent and know-how which are used
for the development or advancement of the company;
under limited conditions, an election to file consolidated tax returns with related Israeli Industrial Companies; and
expenses related to a public offering are deductible in equal amounts over a three-year period.
Eligibility for benefits under the Industry Encouragement Law is not contingent upon the approval of any governmental authority. The Israeli tax
authorities may determine that we do not qualify as an Industrial Company, which could entail our loss of the benefits that relate to this status. There can be
no assurance that we will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.
Taxation of our Shareholders
Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders. A non-Israeli resident who derives capital gains from the sale of shares in an
Israeli resident company that were purchased after the company was listed for trading on a stock exchange outside of Israel will be exempt from Israeli tax so
long as the shares were not held through a permanent establishment that the non-resident maintains in Israel. However, non-Israeli corporations will not be
entitled to the foregoing exemption if Israeli residents: (i) have a controlling interest of 25% or more in such non-Israeli corporation or (ii) are the
beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. Additionally, such
exemption is not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to be business income.
Additionally, a sale of securities by a non-Israeli resident may be exempt from Israeli capital gains tax under the provisions of an applicable tax
treaty. For example, under the United States-Israel Tax Treaty, the disposition of shares by a shareholder who is a United States resident (for purposes of the
treaty) holding the shares as a capital asset is generally exempt from Israeli capital gains tax unless, among other things, (i) the capital gain arising from the
disposition is attributed to business income derived by a permanent establishment of the shareholder in Israel; (ii) the shareholder holds, directly or indirectly,
shares representing 10% or more of the voting capital during any part of the 12-month period preceding the disposition; or (iii) such U.S. resident is an
individual and was present in Israel for 183 days or more in the aggregate during the relevant taxable year.
In some instances where our shareholders may be liable for Israeli tax on the sale of their ordinary shares, the payment of the consideration may be
subject to the withholding of Israeli tax at source.
Taxation of Non-Israeli Shareholders on Receipt of Dividends. Non-Israeli residents (whether individuals or corporations) generally will be subject
to Israeli income tax on the receipt of dividends paid on our ordinary shares at the rate of 25%, which tax will be withheld at source, unless relief is provided
in a treaty between Israel and the shareholder’s country of residence (subject to the receipt in advance of a valid certificate from the Israel Tax Authority
allowing for a reduced tax rate). With respect to a person who is a “substantial shareholder” at the time of receiving the dividend or on any time during the
preceding twelve months, the applicable tax rate is 30%. A “substantial shareholder” is generally a person who alone or together with such person’s relative
or another person who collaborates with such person on a permanent basis, holds, directly or indirectly, at least 10% of any of the “means of control” of the
corporation. “Means of control” generally include the right to vote, receive profits, nominate a director or an executive officer, receive assets upon liquidation,
or order someone who holds any of the aforesaid rights how to act, regardless of the source of such right.
However, a distribution of dividends to non-Israeli residents is subject to withholding tax at source at a rate of 15% if the dividend is distributed from
income attributed to an Approved Enterprise or a Beneficiary Enterprise, unless a reduced tax rate is provided under an applicable tax treaty. If the dividend is
being paid out of certain income attributable to a Preferred Enterprise, the dividend will be subject to tax at the rate of 20%. A different rate may be provided
in a treaty between Israel and the shareholder’s country of residence, as mentioned below.
In this regard, under the United States-Israel Tax Treaty, the maximum rate of tax withheld at source in Israel on dividends paid to a holder of our
ordinary shares who is a United States resident (for purposes of the United States-Israel Tax Treaty) is 25%. Consequently, distributions to U.S. residents of
income attributed to an Approved Enterprise or a Beneficiary Enterprise will be subject to withholding tax at a rate of 15% (20% with respect to Preferred
Enterprise). However, generally, the maximum rate of withholding tax on dividends, not generated by an Approved Enterprise, a Preferred Enterprise or a
Beneficiary Enterprise, that are paid to a United States corporation holding 10% or more of the outstanding voting capital throughout the tax year in which the
dividend is distributed as well as during the previous tax year, is 12.5%, provided that not more than 25% of the gross income for such preceding year consists
of certain types of dividends and interest. We cannot assure you that we will designate the profits that we may distribute in a way that will reduce
shareholders’ tax liability.
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Excess Tax
Individuals who are subject to tax in Israel (whether any such individual is an Israeli resident or non-Israeli resident) are also subject to an additional
tax at the rate of 2% on annual taxable income exceeding NIS 803,520 in 2016 (and as of 2017, the additional tax was increased to a rate of 3% on annual
income exceeding NIS 640,000) which amount is linked to the annual change in the Israeli consumer price index, including, but not limited to, dividends,
interest and capital gain.
U.S. Federal Income Tax Considerations
The following summary describes the material U.S. federal income tax consequences to “U.S. Holders” (as defined below) arising from the
acquisition, ownership and disposition of our ordinary shares. This summary is based on the Internal Revenue Code of 1986, as amended, or the “Code,” the
final, temporary and proposed U.S. Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof, all as of the date
hereof and all of which are subject to change (possibly with retroactive effect) or different interpretations. For purposes of this summary, a “U.S. Holder” will
be deemed to refer only to any of the following beneficial owners of our ordinary shares:
·
·
·
·
an individual who is either a U.S. citizen or a resident of the United States for U.S. federal income tax purposes;
a corporation or other entity taxable as a corporation for U.S. federal income tax purposes created or organized in or under the laws of the
United States or any political subdivision thereof;
an estate the income of which is subject to U.S. federal income tax regardless of the source of its income; and
a trust, if (a) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust, or (b) the trust has a valid election in effect under applicable U.S. Treasury Regulations
to be treated as a U.S. person.
This summary does not consider all aspects of U.S. federal income taxation that may be relevant to particular U.S. Holders by reason of their
particular circumstances, including potential application of the U.S. federal estate, gift or alternative minimum tax, or any aspect of state, local or non-U.S.
federal tax laws or U.S. federal tax laws other than U.S. federal income tax laws. In addition, this summary is directed only to U.S. Holders that hold our
ordinary shares as “capital assets” within the meaning of Section 1221 of the Code and does not address the considerations that may be applicable to
particular classes of U.S. Holders, including U.S. expatriates, banks, financial institutions, regulated investment companies, real estate investment trusts,
pension funds, insurance companies, broker-dealers or traders in securities, commodities or currencies, tax-exempt organizations, grantor trusts, partnerships
(including entities classified as partnerships for U.S. federal income tax purposes) or other pass-through entities, holders that will hold our ordinary shares in
partnerships or other pass-through entities, holders whose functional currency is not the U.S. dollar, holders who have elected mark-to-market accounting,
holders who acquired our ordinary shares through the exercise of options or otherwise as compensation for the performance of services, holders who hold our
ordinary shares as part of a “straddle,” “hedge” or “conversion transaction,” holders selling our ordinary shares short, holders deemed to have sold our
ordinary shares in a “constructive sale,” holders required to accelerate the recognition of any item of gross income with respect to our ordinary shares as a
result of such income being recognized on an applicable financial statement, holders that are resident or ordinarily resident in or have a permanent
establishment in a jurisdiction outside the United States; and holders, directly, indirectly or through attribution, of 10% or more (by vote or value) of our
outstanding ordinary shares. If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds our ordinary shares, the
U.S. federal income tax consequences relating to an investment in our ordinary shares will depend in part upon the status of the partner and the activities of
the partnership. Such a partner or partnership should consult its tax advisor regarding the U.S. federal income tax consequences of acquiring, owning and
disposing of our ordinary shares in its particular circumstances.
Each U.S. Holder should consult with its own tax advisor as to the particular tax consequences to it of the acquisition, ownership and
disposition of our ordinary shares, including the effects of applicable tax treaties, state, local, foreign or other tax laws and possible changes in the
tax laws.
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Distributions With Respect to Our Ordinary Shares
We do not expect to pay cash dividends for the foreseeable future. In the event we do make a distribution with respect to our ordinary shares, subject
to the discussion below under “Passive Foreign Investment Company Status,” for U.S. federal income tax purposes, the amount of the distribution will equal
the U.S. dollar value of the gross amount of cash and/or the fair market value of any property distributed, including the amount of any Israeli taxes withheld
on such distribution as described above under “Israeli Tax Considerations – Taxation of Non-Israeli Shareholders on Receipt of Dividends.” Other than
distributions in liquidation or in redemption of our ordinary shares that are treated as exchanges, a distribution with respect to our ordinary shares to a U.S.
Holder generally will be treated as a dividend to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax
purposes. The amount of any distribution that exceeds these earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S.
Holder’s tax basis in its ordinary shares (but not below zero), and then generally as capital gain from a deemed sale or exchange of such ordinary shares.
Corporate U.S. Holders generally will not be allowed a deduction under Section 243 of the Code for dividends received on our ordinary shares and thus will
be subject to tax at the rate applicable to their taxable income. Currently, a noncorporate U.S. Holder’s “qualified dividend income” generally is subject to tax
at lower long-term capital gains rates. For this purpose, “qualified dividend income” generally includes dividends paid by a foreign corporation if, among
other things, the noncorporate U.S. Holder meets certain minimum holding period requirements, is not under an obligation to make related payments with
respect to positions in substantially similar or related property, and either (a) the stock of such corporation is readily tradable on an established securities
market in the U.S., including the Nasdaq Global Select Market, or (b) such corporation is eligible for the benefits of a comprehensive income tax treaty with
the United States that includes an information exchange program and is determined to be satisfactory by the U.S. Secretary of the Treasury. The U.S.
Secretary of the Treasury has indicated that the income tax treaty between the United States and Israel is satisfactory for this purpose. Dividends paid by us
will not be treated as qualified dividend income, however, if we are treated, for the tax year in which the dividends are paid or the preceding tax year, as a
“passive foreign investment company” for U.S. federal income tax purposes. See the discussion below under the heading “Passive Foreign Investment
Company Status.” A noncorporate U.S. Holder may be subject to an additional tax based on its “net investment income,” (which generally is computed as
gross income from interest, dividends, annuities, royalties and rents and gain from the sale of property (other than property held in the active conduct of a
trade or business that does not regularly trade financial instruments or commodities), less the amount of deductions properly allocable to such income or gain.
Such tax is equal to 3.8% of the lesser of an individual U.S. Holder’s (i) net investment income or (ii) the excess of such U.S. Holder’s “modified adjusted
gross income” (adjusted gross income plus the amount of any foreign earned income excluded from income under Section 911(a)(1) of the Code, net of
deductions and exclusions disallowed with respect to such foreign earned income) over a specified threshold amount ($250,000 in the case of a joint return or
surviving spouse, $125,000 in the case of a married individual filing a separate return and $200,000 in any other case). In the case of a U.S. Holder which is
an estate or trust, the tax is equal to 3.8% of the lesser of (i) undistributed net investment income or (ii) the excess of adjusted gross income (as defined in
Section 67(e) of the Code) over the dollar amount at which the highest tax bracket applicable to an estate or trust begins.
U.S. Holders are urged to consult their own tax advisors regarding the U.S. federal income tax consequences of their receipt of any
distributions with respect to our ordinary shares.
A dividend paid by us in NIS will be included in the income of U.S. Holders at the U.S. dollar amount of the dividend, based on the “spot rate” of
exchange in effect on the date of receipt or deemed receipt of the dividend, regardless of whether the payment is in fact converted into U.S. dollars. U.S.
Holders will have a tax basis in the NIS for U.S. federal income tax purposes equal to that U.S. dollar value. Any gain or loss upon the subsequent conversion
of the NIS into U.S. dollars or other disposition of the NIS will constitute foreign currency gain or loss taxable as ordinary income or loss and will be treated
as U.S.-source income or loss for U.S. foreign tax credit purposes.
Dividends received with respect to our ordinary shares will constitute “portfolio income” for purposes of the limitation on the deductibility of
passive activity losses and, therefore, generally may not be offset by passive activity losses. Dividends received with respect to our ordinary shares also
generally will be treated as “investment income” for purposes of the investment interest deduction limitation contained in Section 163(d) of the Code, and
generally as foreign-source passive income for U.S. foreign tax credit purposes. Subject to certain limitations, U.S. Holders may elect to claim as a foreign tax
credit against their U.S. federal income tax liability any Israeli income tax withheld from distributions with respect to our ordinary shares which constitute
dividends under U.S. income tax law. A U.S. Holder that does not elect to claim a foreign tax credit may instead claim a deduction for Israeli income tax
withheld, but only if the U.S. Holder elects to do so with respect to all foreign income taxes in such year. If a refund of the tax withheld is available under the
applicable laws of Israel or under the Israel-U.S. income tax treaty, the amount of tax withheld that is refundable will not be eligible for such credit against
your U.S. federal income tax liability (and will not be eligible for the deduction against your U.S. federal taxable income). In addition, special rules may
apply to the computation of foreign tax credits relating to “qualified dividend income,” as defined above. The calculation of foreign tax credits and, in the
case of a U.S. Holder that elects to deduct foreign income taxes, the availability of deductions involve the application of complex rules that depend on a U.S.
Holder’s particular circumstances. U.S. Holders are urged to consult their own tax advisors regarding the availability to them of foreign tax credits or
deductions in respect of any Israeli tax withheld or paid with respect to any dividends which may be paid with respect to our ordinary shares, including
limitations pursuant to the U.S.-Israel income tax treaty.
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Disposition of Our Ordinary Shares
Subject to the discussion below under “Passive Foreign Investment Company Status,” a U.S. Holder’s sale, exchange or other taxable disposition of
our ordinary shares generally will result in the recognition by such U.S. Holder of capital gain or loss in an amount equal to the difference between the U.S.
dollar value of the amount realized and the U.S. Holder’s tax basis in the ordinary shares disposed of (measured in U.S. dollars). This gain or loss will be
long-term capital gain or loss if such ordinary shares have been held or are deemed to have been held for more than one year at the time of the disposition.
Non-corporate U.S. Holders currently are subject to a maximum tax rate of 20% on long-term capital gains, also may be subject to the additional tax on “net
investment income” described above in “Distributions With Respect to Our Ordinary Shares.” If the U.S. Holder’s holding period on the date of the taxable
disposition is one year or less, such gain or loss will be a short-term capital gain or loss. Short-term capital gains generally are taxed at the same rates
applicable to ordinary income. See “Israeli Tax Considerations - Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders” for a discussion of
taxation by Israel of capital gains realized on sales of our ordinary shares. Any capital loss realized upon the taxable disposition of our ordinary shares
generally will be deductible only against capital gains and not against ordinary income, except that noncorporate U.S. Holders generally may deduct annually
from ordinary income up to $3,000 of net capital losses. In general, any capital gain or loss recognized by a U.S. Holder upon the taxable disposition of our
ordinary shares will be treated as U.S.-source income or loss for U.S. foreign tax credit purposes, although the tax treaty between the United States and Israel
may permit gain derived from the taxable disposition of ordinary shares by a U.S. Holder to be treated as foreign-source income for U.S. foreign tax credit
purposes under certain circumstances.
A U.S. Holder’s tax basis in its ordinary shares generally will be equal to the U.S. dollar purchase price paid by such U.S. Holder to acquire such
ordinary shares. The U.S. dollar cost of ordinary shares purchased with foreign currency generally will be equal to the U.S. dollar value of the purchase price
on the date of purchase or, in the case of ordinary shares that are purchased by a cash basis U.S. Holder (or an accrual basis U.S. Holder that so elects), on the
settlement date for the purchase. Such an election by an accrual basis U.S. Holder must be applied consistently from year to year and cannot be revoked
without the consent of the U.S. Internal Revenue Service. The holding period of each ordinary share owned by a U.S. Holder will commence on the day
following the date of the U.S. Holder’s purchase of such ordinary share and will include the day on which the ordinary share is sold by such U.S. Holder.
In the case of a U.S. Holder who uses the cash basis method of accounting and who receives NIS in connection with a taxable disposition of ordinary
shares, the amount realized will be based on the “spot rate” of exchange on the settlement date of such taxable disposition. If such U.S. Holder subsequently
converts NIS into U.S. dollars at a conversion rate other than the spot rate in effect on the settlement date, such U.S. Holder may have a foreign currency
exchange gain or loss treated as ordinary income or loss for U.S. federal income tax purposes. A U.S. Holder who uses the accrual method of accounting may
elect the same treatment required of cash method taxpayers with respect to a taxable disposition of ordinary shares, provided that the election is applied
consistently from year to year. Such election may not be changed without the consent of the U.S. Internal Revenue Service. If an accrual method U.S. Holder
does not elect to be treated as a cash method taxpayer (pursuant to U.S. Treasury Regulations applicable to foreign currency transactions), such U.S. Holder
may be deemed to have realized an immediate foreign currency gain or loss for U.S. federal income tax purposes in the event of any difference between the
U.S. dollar value of the NIS on the date of the taxable disposition and the settlement date. Any such currency gain or loss generally would be treated as U.S.-
source ordinary income or loss and would be subject to tax in addition to any gain or loss recognized by such U.S. Holder on the taxable disposition of
ordinary shares.
Passive Foreign Investment Company Status
Generally, a foreign corporation is treated as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes for any tax year
if, in such tax year, either (i) 75% or more of its gross income (including its pro rata share of the gross income of any company in which it is considered to
own 25% or more of the shares by value) is passive in nature (the “Income Test”), or (ii) the average percentage of its assets during such tax year (including
its pro rata share of the assets of any company in which it is considered to own 25% or more of the shares by value) which produce, or are held for the
production of, passive income (determined by averaging the percentage of the fair market value of its total assets which are passive assets as of the end of
each quarter of such year) is 50% or more (the “Asset Test”). Passive income for this purpose generally includes dividends, interest, rents, royalties and gains
from securities and commodities transactions. Cash is treated as generating passive income.
There is no definitive method prescribed in the Code, U.S. Treasury Regulations or relevant administrative or judicial interpretations for determining
the value of a publicly-traded foreign corporation’s assets for purposes of the Asset Test. The legislative history of the U.S. Taxpayer Relief Act of 1997 (the
“1997 Act”) indicates that for purposes of the Asset Test, “the total value of a publicly-traded foreign corporation’s assets generally will be treated as equal to
the sum of the aggregate value of its outstanding stock plus its liabilities.” It is unclear whether other valuation methods could be employed to determine the
value of a publicly-traded foreign corporation’s assets for purposes of the Asset Test.
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We must make a separate determination each taxable year as to whether we are a PFIC. As a result, our PFIC status may change from year to year.
Based on the composition of our gross income and the composition and value of our gross assets for each taxable year from 2004 through 2017, we do not
believe that we were a PFIC during any of such tax years. It is likely, however, that under the asset valuation method described in the legislative history of the
1997 Act, we would have been classified as a PFIC for each of 2001, 2002 and 2003 primarily because (a) a significant portion of our assets consisted of the
remaining proceeds of our two public offerings of ordinary shares in 1999, and (b) the public market valuation of our ordinary shares during such years was
relatively low. There can be no assurance that we will not be deemed a PFIC for the current tax year or any future tax year in which, for example, the value of
our assets, as measured by the public market valuation of our ordinary shares, declines in relation to the value of our passive assets (generally, cash, cash
equivalents and marketable securities). If we are treated as a PFIC with respect to a U.S. Holder for any tax year, the U.S. Holder will be deemed to own
ordinary shares in any of our subsidiaries that are also PFICs.
If we are treated as a PFIC for U.S. federal income tax purposes for any year during a U.S. Holder’s holding period of our ordinary shares and the
U.S. Holder does not make a QEF Election or a “mark-to-market” election (both as described below), the U.S. Holder would be subject to the following rules:
(i)
the U.S. Holder would be required to (a) report as ordinary income any “excess distributions” (as defined below) allocated to the current tax
year and any period prior to the first day of the first tax year in which we were a PFIC, (b) pay tax on amounts allocated to each prior tax
year in which we were a PFIC at the highest rate for individuals or corporations as appropriate in effect for such prior year, and (c) pay an
interest charge on the tax due for prior tax years in which we were a PFIC at the rate applicable to deficiencies of U.S. federal income tax.
“Excess distributions” with respect to any U.S. Holder are amounts received by such U.S. Holder with respect to our ordinary shares in any
tax year that exceed 125% of the average distributions received by such U.S. Holder from us during the shorter of (i) the three previous
years, or (ii) such U.S. Holder’s holding period of our ordinary shares before the then-current tax year. Excess distributions must be
allocated ratably to each day that a U.S. Holder has held our ordinary shares.
(ii)
the entire amount of any gain realized by the U.S. Holder upon the sale or other disposition of our ordinary shares also would be treated as
an “excess distribution” subject to tax as described above.
If we are a PFIC for any tax year in which a U.S. Holder holds our ordinary shares, we generally will continue to be treated as a PFIC as to such
U.S. Holder for all subsequent years during the U.S. Holder’s holding period unless we cease to be a PFIC and the U.S. Holder elects to recognize gain based
on the unrealized appreciation in such U.S. Holder’s ordinary shares through the close of the tax year in which we cease to be a PFIC. Thereafter, so long as
we do not again become a PFIC, such U.S. Holder’s ordinary shares for which an election was made will not be treated as shares in a PFIC.
A U.S. Holder who beneficially owns shares of a PFIC must file U.S. Internal Revenue Service Form 8621 (Return by a Shareholder of a Passive
Foreign Investment Company or Qualified Electing Fund) with the U.S. Internal Revenue Service for each tax year in which such U.S. Holder recognizes
gain upon a disposition of our ordinary shares, receives certain distributions from us or makes the QEF Election or mark-to-market election described below.
For any tax year in which we are treated as a PFIC, a U.S. Holder may elect to treat its ordinary shares as an interest in a qualified electing fund (a
“QEF Election”), in which case the U.S. Holder would be required to include in income currently its proportionate share of our earnings and profits in years
in which we are a PFIC regardless of whether distributions of our earnings and profits are actually made to the U.S. Holder. Any gain subsequently
recognized by the U.S. Holder upon the sale or other disposition of its ordinary shares, however, generally would be taxed as capital gain.
A U.S. Holder may make a QEF Election with respect to a PFIC for any tax year. The election is effective for the tax year for which it is made and
all subsequent tax years of the U.S. Holder. Procedures exist for both retroactive elections and the filing of protective statements. A QEF Election is made by
completing U.S. Internal Revenue Service Form 8621 and attaching it to a timely-filed (including extensions) U.S. federal income tax return for the first tax
year to which the election will apply. A U.S. Holder must satisfy additional filing requirements each year the election remains in effect. Upon a U.S. Holder’s
request, we will provide to such U.S. Holder the information required to make a QEF Election and to make subsequent annual filings.
As an alternative to a QEF Election, a U.S. Holder generally may elect to mark its ordinary shares to market annually, recognizing ordinary income
or loss (subject to certain limitations) equal to the difference, as of the close of each tax year, between the fair market value of its ordinary shares and the
adjusted tax basis of such shares. A U.S. Holder will be allowed a deduction for the excess, if any, of the adjusted basis of its ordinary shares over their fair
market value as of the close of the taxable year. However, deductions will be allowable only to the extent of any net mark-to-market gains on our ordinary
shares included in the U.S. Holder’s income for prior taxable years. Amounts included in a U.S. Holder’s income under a mark-to-market election, as well as
gain on the actual sale or other disposition of ordinary shares, will be treated as ordinary income. Ordinary loss treatment will also apply to the deductible
portion of any mark-to-market loss on ordinary shares, as well as to any loss realized on the actual sale or disposition of ordinary shares, to the extent the
amount of such loss does not exceed the net mark-to-market gains for such ordinary shares previously included in income. A U.S. Holder ‘s basis in our
ordinary shares will be adjusted to reflect any such income or loss amounts. If a U.S. Holder makes a mark-to-market election, any distributions we make
would generally be subject to the rules discussed above under “—Distributions With Respect to Our Ordinary Shares,” except the lower rates applicable to
qualified dividend income would not apply. Once made, a mark-to-market election generally continues unless revoked with the consent of the U.S. Internal
Revenue Service.
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The mark-to-market election is available only for “marketable stock,” which is stock that is regularly traded on a qualified exchange or other market,
as defined in applicable U.S. Treasury regulations. Our ordinary shares are traded on Nasdaq and TASE. Because a mark-to-market election cannot be made
for equity interests in any lower-tier PFICs we own, a U.S. Holder generally will continue to be subject to the PFIC rules with respect to its indirect interest in
any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes. Nasdaq is a qualified exchange, and we
believe TASE should be treated as a qualified exchange but there can be no assurance that the trading in our ordinary shares will be sufficiently regular to
qualify our ordinary shares as marketable stock. U.S. Holders should consult their own tax advisor as to the availability and desirability of a mark-to-market
election, as well as the impact of such election on interests in any lower-tier PFICs.
Due to the complexity of the PFIC rules and the uncertainty of their application in many circumstances, U.S. Holders should consult their
own tax advisors with respect to the U.S. federal income tax risks related to owning and disposing of our ordinary shares, the consequence of our
status as a PFIC and, if we are treated as a PFIC, compliance with the applicable reporting requirements and the eligibility, manner and advisability
of making a QEF Election or a mark-to-market election.
Information Reporting and Backup Withholding
Payments in respect of our ordinary shares that are made in the United States or by certain U.S.-related financial intermediaries may be subject to
information reporting requirements and U.S. backup withholding tax, currently at a rate of 28%. The information reporting requirements will not apply,
however, to payments to certain exempt U.S. Holders, including corporations and tax-exempt organizations. In addition, backup withholding will not apply to
a U.S. Holder that furnishes a correct taxpayer identification number on U.S. Internal Revenue Service Form W-9 (or substitute form). The backup
withholding tax is not an additional tax. Amounts withheld under the backup withholding tax rules may be credited against a U.S. Holder’s U.S. federal
income tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding tax rules by filing the appropriate
claim for refund with the U.S. Internal Revenue Service. U.S. Holders should consult their own tax advisors regarding their qualification for an exemption
from the backup withholding tax and the procedures for obtaining such an exemption, if applicable.
Foreign Asset Reporting
A U.S. Holder with interests in “specified foreign financial assets” (including, among other assets, our ordinary shares, unless such ordinary shares
are held on such U.S. Holder’s behalf through a financial institution) may be required to file an information report with the U.S. Internal Revenue Service if
the aggregate value of all such assets exceeds $50,000 on the last day of the taxable year or $75,000 at any time during the taxable year (or such higher dollar
amount as may be prescribed by applicable U.S. Internal Revenue Service guidance). Regulations extend this reporting requirement to certain entities that are
treated as formed or availed of to hold direct or indirect interests in specified foreign financial assets based on certain objective criteria. A U.S. Holder that
fails to report the required information could be subject to substantial penalties. Each U.S. Holders should consult with its own tax advisor regarding its
obligation to file such information reports in light of its own particular circumstances.
The foregoing discussion of certain U.S. federal income tax considerations is a general summary only and should not be considered as
income tax advice or relied upon for tax planning purposes. Accordingly, each U.S. Holder should consult with its own tax advisor regarding U.S.
federal, state, local and non-U.S. income and other tax consequences of the acquisition, ownership and disposition of our ordinary shares.
F.
DIVIDENDS AND PAYING AGENTS
Not applicable.
G.
STATEMENT BY EXPERTS
Not applicable.
H.
DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers and fulfill
the obligations with respect to such requirements by filing reports with the SEC. You may read and copy any document we file, including any exhibits, with
the SEC without charge at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Copies of such material may be obtained by mail
from the Public Reference Branch of the SEC at such address, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. Certain of our SEC filings are also available to the public at the SEC’s website at http://www.sec.gov.
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As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and 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 file with the SEC an Annual Report on Form 20-F
containing consolidated financial statements audited by an independent accounting firm. We also furnish reports on Form 6-K containing unaudited financial
information after the end of each of the first three quarters. We intend to post our Annual Report on Form 20-F on our website (www.audiocodes.com)
promptly following the filing of our Annual Report with the SEC.
I.
SUBSIDIARY INFORMATION
Not applicable.
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risk associated with changes in foreign currency exchange rates. To mitigate these risks, we use derivative
financial instruments. The majority of our revenues and expenses are generated in U.S. dollars. A portion of our expenses, however, is denominated in NIS. In
order to protect ourselves against the volatility of future cash flows caused by changes in foreign exchange rates, we use currency forward contracts and
currency options. We usually hedge the part of our forecasted expenses denominated in NIS. If our currency forward contracts and currency options meet the
definition of a hedge, and are so designated, changes in the fair value of the contracts will be offset against changes in the fair value of the hedged assets or
liabilities through earnings. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the
period of change. Our hedging program reduces, but does not eliminate, the impact of foreign currency rate movements and due to the general economic
slowdown along with the devaluation of the dollar, our results of operations may be adversely affected. Without taking into account the mitigating effect of
our hedging activity, a 10% decrease in the U.S. dollar exchange rates in effect for the year ending December 31, 2018 would cause a decrease in net income
of approximately $5 million.
We are subject to market risk from exposure to changes in interest rates relating to borrowings under our loan agreements. The interest rate on these
borrowings is based on LIBOR. Based on the scheduled amount of these borrowings to be outstanding in 2018, we estimate that each 100 basis point increase
in our borrowing rates would result in additional interest expense to us of approximately $75,000.
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
PART II
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Vice President Finance and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures (as defined in 13a-15(e) under the Securities Exchange Act) as of December 31, 2017. Based on this
evaluation, our Chief Executive Officer and Vice President Finance and Chief Financial Officer have concluded that, as of such date, our disclosure controls
and procedures were (i) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our
management, including our Chief Executive Officer and Vice President Finance and Chief Financial Officer, by others within those entities, as appropriate to
allow timely decisions regarding required disclosure, particularly during the period in which this report was being prepared and (ii) effective, in that they
provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
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Management’s Annual Report on Internal Control Over Financial Reporting
Our management, under the supervision of our Chief Executive Officer and our Vice President Finance and Chief Financial Officer, is responsible
for establishing and maintaining adequate internal control over our financial reporting, as defined in Rules 13a-15(f) of the Exchange Act. Our internal
control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over
financial reporting includes policies and procedures that:
·
·
·
·
pertain to the maintenance of our records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions;
provide reasonable assurance that our transactions are recorded as necessary to permit the preparation of our financial statements in accordance
with generally accepted accounting principles;
provide reasonable assurance that our receipts and expenditures are made only in accordance with authorizations of our management and board
of directors (as appropriate); and
provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could
have a material effect on our financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017 based on the framework for Internal
Control - Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO). Based on
our assessment under that framework and the criteria established therein, our management concluded that the Company’s internal control over financial
reporting were effective as of December 31, 2017.
Attestation Report of the Registered Public Accounting Firm
This Annual Report includes an attestation report of our registered public accounting firm regarding internal control over financial reporting on page
3 of our audited consolidated financial statements set forth in Item 18 – “Financial Statements,” and is incorporated herein by reference.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting identified with the evaluation thereof that occurred during the period covered
by this Annual Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting
ITEM 16.
[RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Joseph Tenne is an “audit committee financial expert” as defined in Item 16A of Form 20-F and is
“independent” as defined in the applicable regulations.
ITEM 16B. CODE OF ETHICS
We have adopted a Code of Conduct and Business Ethics that applies to our chief executive officer, Vice President Finance and Chief Financial
Officer and other senior financial officers. This Code has been posted on our website, www.audiocodes.com.
- 83 -
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, has served as our independent public accountants for each of the years in the
three-year period ended December 31, 2017. The following table presents the aggregate fees for professional audit services and other services rendered by
Kost Forer Gabbay & Kasierer in 2016 and 2017.
Audit Fees
Audit Related Fees
Tax Fees
Total
Year Ended December 31,
(Amounts in thousands)
2016
2017
$
$
376 $
28
58
462 $
350
52
73
475
Audit Fees consist of fees billed for the annual audit of the company’s consolidated financial statements and the statutory financial statements of the
company. They also include fees billed for other audit services, which are those services that only the external auditor reasonably can provide, and include
services rendered for the integrated audit over internal controls as required under Section 404 of the Sarbanes-Oxley Act applicable in 2016 and 2017, the
provision of consents and the review of documents filed with the SEC.
Audit Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of
the company’s financial statements and include operational effectiveness of systems.
Tax Fees include fees billed for tax compliance services, including the preparation of tax returns and claims for refund; tax consultations, such as
assistance and representation in connection with tax audits and appeals, transfer pricing, and requests for rulings or technical advice from taxing authorities;
tax planning services; and expatriate tax compliance, consultation and planning services.
Audit Committee Pre-approval Policies and Procedures
The audit committee of AudioCodes’ Board of Directors is responsible, among other matters, for the oversight of the external auditor subject to the
requirements of Israeli law. The audit committee has adopted a policy regarding pre-approval of audit and permissible non-audit services provided by our
independent auditors (the “Policy”).
Under the Policy, proposed services either (i) may be pre-approved by the audit committee without consideration of specific case-by-case services as
general pre-approval or (ii) require the specific pre-approval of the audit committee as specific pre-approval. The audit committee may delegate either type of
pre-approval authority to one or more of its members. The appendices to the Policy set out the audit, audit-related, tax and other services that have received
the general pre-approval of the audit committee, including those described in the footnotes to the table, above; these services are subject to annual review by
the audit committee. All other audit, audit-related, tax and other services must receive a specific pre-approval from the audit committee.
The audit committee pre-approves fee levels annually for the audit services. Non-audit services are pre-approved as required. The financial expert of
the audit committee may approve non-audit services of up to $25,000 and then request the audit committee to ratify his decision.
During 2017, no services provided to AudioCodes by Kost Forer Gabbay & Kasierer were approved by the audit committee pursuant to the de
minimis exception to the pre-approval requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. We approve all such compensation by
the audit committee.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
- 84 -
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
In 2017, we repurchased an aggregate of 3,749,462 of our ordinary shares for an aggregate consideration of approximately $25.6 million, as set forth
below:
Period
January 1 – January 31, 2017
February 1 – February 28, 2017
March 1 – March 31, 2017
April 1 – April 30, 2017
May 1 – May 31, 2017
June 1 – June 30, 2017
July 1 – July 31, 2017
August 1 – August 31, 2017
September 1 – September 30, 2017
October 1 – October 31, 2017
November 1 – November 30, 2017
December 1 – December 31, 2017
Total in 2017
(a) Total Number of
Ordinary Shares
Purchased (1)
(b) Average
Price Paid
per
Ordinary
Share ($) (2)
(c) Total Number of
Ordinary Shares
Purchased as Part
of Publicly
Announced
Program
(d) Approximate Dollar
Value of Shares That
May Yet be
repurchased under
the Program ($)
545,212
197,571
362,825
-
153,018
285,406
280,393
383,676
276,037
445,853
475,600
343,871
3,749,462
6.37
7.00
6.74
-
6.63
6.39
6.51
6.74
6.98
7.30
6.87
7.15
6.79
545,212
197,571
362,825
-
153,018
285,406
280,393
383,676
276,037
445,853
475,600
343,871
3,749,462
23,816,664
20,329,548
18,941,020
16,483,671
16,483,671
30,464,975
28,632,775
26,799,489
24,202,119
22,268,083
19,000,232
35,720,135
33,252,370
33,252,370
(1) On August 7, 2014, we announced that our Board had authorized a program to repurchase up to $3 million of our ordinary shares. In November 2014, we
received court approval in Israel to repurchase up to an additional $15 million of our ordinary shares. In May 2015, we received court approval in Israel to
repurchase up to an additional $15 million of our ordinary shares. In each of January, May and October 2016, we received court approval in Israel to
repurchase up to an additional $15 million of our ordinary shares for an aggregate approval of up to an additional $45 million of our ordinary shares. In May
and November 2017, the court approved an additional of $15 million and $20 million in share repurchases, respectively. The Israeli court generally limits its
approval to six months from the date of application. Consequently, although the program does not have a set end date, it requires renewal each 6 months by
submitting new court application based on the then prevailing facts. No shares were repurchased during 2017 other than through the repurchase program.
(2) Excluding commissions.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFIED ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
As a foreign private issuer whose shares are listed on the Nasdaq Global Select Market, we are permitted to follow certain home country corporate
governance practices instead of certain requirements of the Nasdaq Marketplace Rules.
We do not comply with the Nasdaq requirement that we obtain shareholder approval for certain dilutive events, such as for the establishment or
amendment of certain equity based compensation plans. Instead, we follow Israeli law and practice which permits the establishment or amendment of certain
equity based compensation plans approved by our board of directors without the need for a shareholder vote, unless such arrangements are for the
compensation of directors and the chief executive officer, in which case they also require compensation committee and shareholder approval.
We may elect in the future to follow Israeli practice with regard to, among other things, director nomination, composition of the board of directors
and quorum at shareholders’ meetings. In addition, we may follow Israeli law, instead of the Nasdaq Marketplace Rules, which require that we obtain
shareholder approval for an issuance that will result in a change of control of the company, certain transactions other than a public offering involving
issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company.
- 85 -
A foreign private issuer that elects to follow a home country practice instead of Nasdaq requirements must submit to Nasdaq in advance a written
statement from an independent counsel in its home country certifying that its practices are not prohibited by the home country’s laws. In addition, a foreign
private issuer must disclose in its annual reports filed with the SEC or on its website each such requirement that it does not follow and describe the home
country practice followed by the issuer instead of any such requirement. Accordingly, our shareholders may not be afforded the same protection as provided
under Nasdaq’s corporate governance rules.
For a discussion of the requirements of Israeli law with respect to these matters, see Item 6.C - “Directors, Senior Management and Employees -
Board Practices,” and Item 10.B - “Additional Information - Memorandum and Articles of Association.”
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 17.
FINANCIAL STATEMENTS
Not applicable.
ITEM 18.
FINANCIAL STATEMENTS
PART III
Reference is made to pages 1 to 50 of the financial statements attached hereto.
ITEM 19.
EXHIBITS
The following exhibits are filed as part of this Annual Report:
Exhibit
No.
1.1‡
1.2
4.3
4.12
Document
Memorandum of Association of Registrant.
Articles of Association of Registrant, as amended.
Incorporated by Reference
Form
File No.
Date Filed
F-1
333-10352
5/13/1999
20-F
(2011)
000-30070
4/19/2012
License Agreement between AudioCodes Ltd. and DSP Group, Inc., dated as of May 6, 1999.
F-1
333-10352
5/22/1999
Sublease Agreement between AudioCodes USA, Inc. and Continental Resources, Inc., dated
December 30, 2003.
20-F
(2003)
000-30070
6/30/2004
4.13
Addendum No. 2, dated November 6, 2013, to Sublease Agreement, dated December 30, 2003,
6-K
000-30070
3/04/2014
between Continental Resources, Inc., as landlord, and AudioCodes USA Inc., as tenant.
4.13
4.14
Employment Agreement between AudioCodes Ltd. and Shabtai Adlersberg.
6-K
000-30070
11/12/2009
Amendment No. 1 to Employment Agreement between AudioCodes Ltd. and Shabtai
6-K
000-30070
8/8/2013
Adlersberg.
4.15†
Building and Tenancy Lease Agreement, dated May 11, 2007, by and between Airport City Ltd.
and AudioCodes Ltd.
20-F
(2006)
000-30070
6/27/2007
4.16†
English Summary of Addendum, dated September 23, 2013, to Lease and Construction
6-K
000-30070
1/6/2014
Agreement of November 14, 2000, between Airport City Ltd., as landlord and AudioCodes Ltd.,
as tenant.
4.17
AudioCodes Ltd. 2008 Equity Incentive Plan.
20-F
(2008)
000-30070
6/30/2009
4.18
Amendment to AudioCodes Ltd. 2008 Equity Incentive Plan.
S-8
333-170676
11/18/2010
- 86 -
4.19
Amendment No. 2 to AudioCodes Ltd. 2008 Equity Incentive Plan.
S-8
333-190437
8/7/2013
4.21‡
Loan Requests, dated September 27, 2011, between First International Bank of Israel, as lender,
and AudioCodes Ltd., as borrower.
4.22‡
Restated Undertaking Letter to First International Bank of Israel, dated May 6, 2008.
4.23‡
Amendments to Undertaking Letter to First International Bank of Israel, dated September 15,
2009, February 16, 2009, September 26, 2011, December 29, 2011 and July 23, 2012.
4.25‡
Secured Bond, dated July 14, 2008, delivered by AudioCodes Ltd., as borrower, in favor of
Bank Mizrahi Tefahot Ltd., as lender.
4.26‡
Undertaking Letter to Bank Mizrahi Tefahot Ltd, dated December 12, 2011.
4.27‡
Deed of Pledge of Rights, dated December 12, 2011, delivered by AudioCodes Ltd., as
borrower, in favor of Bank Mizrahi Tefahot Ltd., as lender.
4.28‡
Amendment to Undertaking Letter to Bank Mizrahi Tefahot Ltd., dated July 23, 2012.
4.29‡
Loan Requests, dated September 27, 2011, between Bank Leumi Israel Ltd., as lender, and
AudioCodes Ltd., as borrower.
4.30‡
Undertaking Letter to Bank Leumi Israel Ltd., dated December 12, 2011.
4.31‡
Amendment to Undertaking Letter to Bank Leumi Israel Ltd., dated July 24, 2012.
20-F
(2012)
20-F
(2012)
20-F
(2012)
20-F
(2012)
20-F
(2012)
20-F
(2012)
20-F
(2012)
20-F
(2012)
20-F
(2012)
20-F
(2012)
000-30070
4/11/2013
000-30070
4/11/2013
000-30070
4/11/2013
000-30070
4/11/2013
000-30070
4/11/2013
000-30070
4/11/2013
000-30070
4/11/2013
000-30070
4/11/2013
000-30070
4/11/2013
000-30070
4/11/2013
4.32
Form of Insurance, Indemnification and Exculpation Agreement between the Registrant and
6-K
000-30070
11/10/2011
each of its directors and executive officers.
Form of AudioCodes Ltd. Executive Compensation Policy.
6-K
000-30070
8/8/2013
20-F
(2015)
000-30070
3/29/16
4.33
4.34
Summary of Request For Receipt Of A Loan In Foreign Currency - The First International Bank
Of Israel Ltd.
8.1*
Subsidiaries of the Registrant.
12.1*
Certification of Shabtai Adlersberg, President and Chief Executive Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
12.2*
Certification of Niran Baruch, Vice President Finance and Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
13.1*
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.2*
Certification by Vice President Finance and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
15.1*
Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global.
101.1*
Interactive Data Files (XBRL-Related Documents).
†
‡
*
English summary of Hebrew original.
English translation of Hebrew original.
Filed herewith.
- 87 -
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this Annual Report on Form 20-F on its behalf.
SIGNATURES
Date: March 26, 2018
AUDIOCODES LTD.
By:
/s/ SHABTAI ADLERSBERG
Shabtai Adlersberg
President and Chief Executive Officer
- 88 -
AUDIOCODES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2017
IN U.S. DOLLARS
INDEX
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
- - - - - - - - - - -
Page
2 - 3
4 - 5
6
7
8
9 - 10
11 - 50
Kost Forer Gabbay & Kasierer
144 Menachem 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
AUDIOCODES LTD.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AudioCodes Ltd. (the "Company") as of December 31, 2017 and 2016 and the
related consolidated statements of operations, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2017, and related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in
all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended December 31, 2017, 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, 2017, 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 26, 2018 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 consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the 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.
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.
/s/ Kost Forer Gabbay & Kasierer
Kost Forer Gabbay & Kasierer, a Member of Ernst & Young Global
We have served as the Company's auditor since 1997.
Tel-Aviv, Israel
March 26, 2018
- 2 -
Kost Forer Gabbay & Kasierer
144 Menachem 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 Board of Directors and Shareholders of
AUDIOCODES LTD.
Opinion on Internal Control over Financial Reporting
We have audited AudioCodes Ltd.'s (the "Company") internal control over financial reporting as of December 31, 2017, 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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, 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, 2017 and 2016, the related consolidated statements of operations, comprehensive income,
changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and our report dated
March 26, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures, as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control 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.
/s/ Kost Forer Gabbay & Kasierer
Kost Forer Gabbay & Kasierer, a Member of Ernst & Young Global
Tel-Aviv, Israel
March 26, 2018
- 3 -
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Short-term and restricted bank deposits
Short-term marketable securities and accrued interest
Trade receivables (net of allowance for doubtful accounts of $2,573 and $790 at December 31, 2016 and
$
2017, respectively)
Other receivables and prepaid expenses
Inventories
Total current assets
LONG-TERM ASSETS:
Long-term marketable securities
Long-term restricted bank deposits and accrued interest
Deferred tax assets
Severance pay funds
Total long-term assets
PROPERTY AND EQUIPMENT, NET
INTANGIBLE ASSETS, NET
GOODWILL
Total assets
The accompanying notes are an integral part of the consolidated financial statements.
- 4 -
AUDIOCODES LTD.
December 31,
2016
2017
24,344 $
3,401
6,778
25,448
3,377
16,333
79,681
29,540
5,407
11,607
17,820
64,374
3,867
2,832
24,235
2,739
7,087
22,059
4,693
16,563
77,376
20,475
4,207
6,685
20,138
51,505
3,835
2,000
36,222
36,222
$
186,976 $
170,938
CONSOLIDATED BALANCE SHEETS (Cont.)
U.S. dollars in thousands, except share and per share data
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current maturities of long-term bank loans
Trade payables
Other payables and accrued expenses
Deferred revenues
Total current liabilities
LONG-TERM LIABILITIES:
Accrued severance pay
Long-term bank loans, net of current maturities
Deferred revenues and other liabilities
Total long-term liabilities
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Share capital -
Ordinary shares of NIS 0.01 par value -
Authorized: 100,000,000 shares at December 31, 2016 and 2017; Issued: 55,777,786 and 56,558,952 shares at
December 31, 2016 and 2017, respectively; Outstanding: 32,411,296 and 29,443,000 shares at December 31, 2016
and 2017, respectively
Additional paid-in capital
Treasury stock at cost- 23,366,490 and 27,115,952 shares at December 31, 2016 and 2017, respectively
Accumulated other comprehensive loss
Accumulated deficit
Total shareholders' equity
Total liabilities and shareholders' equity
The accompanying notes are an integral part of the consolidated financial statements.
- 5 -
AUDIOCODES LTD.
December 31,
2016
2017
$
3,451 $
7,710
18,618
14,951
2,519
5,639
20,786
16,417
44,730
45,361
18,941
8,493
6,153
21,228
6,237
5,731
33,587
33,196
101
243,082
(89,923)
(203)
(44,398)
93
248,176
(115,476)
(44)
(40,368)
108,659
92,381
$
186,976 $
170,938
CONSOLIDATED STATEMENTS OF OPERATIONS
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
Selling and marketing
General and administrative
Total operating expenses
Operating income
Financial income (expenses), net
Income before taxes on income
Tax benefit (taxes on income)
Net income
Earnings per share
Basic
Diluted
AUDIOCODES LTD.
Year Ended December 31,
2016
2015
2017
$
101,990 $
37,769
102,279 $
43,292
107,482
49,257
139,759
145,571
156,739
47,227
9,744
46,935
10,295
47,445
11,449
56,971
57,230
58,894
82,788
88,341
97,845
27,996
43,360
8,726
29,139
45,084
6,364
30,348
48,954
8,893
80,082
80,587
88,195
2,706
442
3,148
(2,782)
7,754
(160)
7,594
8,644
9,650
(10)
9,640
(5,610)
366 $
16,238 $
4,030
0.01 $
0.01 $
0.46 $
0.45 $
0.13
0.13
$
$
$
Weighted average number of shares used in computations of earnings per share:
Basic
Diluted
40,178,292
40,564,945
35,173,562
35,778,854
31,103,703
32,168,362
The accompanying notes are an integral part of the consolidated financial statements.
- 6 -
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
U.S. dollars in thousands
AUDIOCODES LTD.
Year Ended December 31,
2016
2015
2017
Net income
$
366 $
16,238 $
4,030
Other comprehensive income (loss) ("OCI") related to:
Change in unrealized gains (losses) on marketable securities, net of tax:
Gain (loss) on marketable securities recognized in OCI
Loss (gain) on marketable securities recognized in income
Other comprehensive income (loss), related to unrealized loss on marketable securities
available-for-sale
Change in unrealized gains (losses) on cash flow hedges:
Gain on derivatives recognized in OCI
Loss on derivatives (effective portion) recognized in income
Other comprehensive income (loss), related to unrealized gains (loss) on cash flow hedges
Other comprehensive income (loss)
Total comprehensive income
The accompanying notes are an integral part of the consolidated financial statements.
- 7 -
(35)
13
(22)
374
(228)
146
124
376
(27)
349
608
(1,023)
(415)
(66)
17
-
17
1,739
(1,597)
142
159
$
490 $
16,172 $
4,189
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. dollars in thousands
AUDIOCODES LTD.
Additional
paid-in
capital
Accumulated
other
Treasury comprehensive Accumulated
loss
deficit
stock
Share
capital
Total
equity
Balance as of January 1, 2015
$
125 $
235,760 $
(41,032) $
(261) $
(60,871) $
133,721
Purchase of treasury stock
Issuance of shares upon exercise of options and
warrants
Share-based compensation related to options and
RSUs granted to employees and non-employees
Other comprehensive income
Net income
(13)
-
(19,510)
*)
392
-
-
-
2,373
-
-
-
-
-
-
-
-
-
124
-
-
(19,523)
-
392
-
-
366
2,373
124
366
Balance as of December 31, 2015
112
238,525
(60,542)
(137)
(60,505)
117,453
Purchase of treasury stock
Issuance of shares upon exercise of options and
warrants
Cumulative effect adjustment resulting from adoption
of ASU 2016-09 (Note 2s)
Share-based compensation related to options and
RSUs granted to employees and non-employees
Other comprehensive loss
Net income
(13)
-
(29,381)
2
2,012
-
-
-
-
131
2,414
-
-
-
-
-
-
-
-
-
-
-
(29,394)
-
2,014
(131)
-
-
(66)
-
-
-
16,238
2,414
(66)
16,238
Balance as of December 31, 2016
101
243,082
(89,923)
(203)
(44,398)
108,659
Purchase of treasury stock
Issuance of shares upon exercise of options and
warrants
Share-based compensation related to options and
RSUs granted to employees and non-employees
Other comprehensive income
Net income
(10)
-
(25,553)
2
2,787
-
-
-
2,307
-
-
-
-
-
-
-
-
-
159
-
-
(25,563)
-
2,789
-
-
4,030
2,307
159
4,030
Balance as of December 31, 2017
$
93 $
248,176 $
(115,476) $
(44) $
(40,368) $
92,381
*) Representing amount lower than $1.
The accompanying notes are an integral part of the consolidated financial statements.
- 8 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
AUDIOCODES LTD.
Year Ended December 31,
2016
2015
2017
Cash flows from operating activities:
Net income
Adjustments required to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization of marketable securities premiums and accretion of discounts, net
Realized loss (gain) on sale of marketable securities, net
Share-based compensation related to options and RSUs granted to employees and non-
employees
Decrease in accrued interest on loans, marketable securities, convertible notes, and bank
deposits
Decrease (increase) in deferred income tax assets
Decrease in trade receivables, net
Decrease (increase) in other receivables and prepaid expenses
Decrease (increase) in inventories
Increase (decrease) in trade payables
Increase (decrease) in other payables and accrued expenses and other liabilities
Increase in deferred revenues
Increase (decrease) in accrued severance pay, net
$
366 $
16,238 $
2,963
1,094
13
2,892
1,000
(27)
2,373
2,414
56
1,976
5,575
1,777
(2,013)
(2,987)
2,394
3,758
218
114
(9,475)
174
732
445
406
(596)
3,195
830
4,030
2,438
570
-
2,307
403
4,922
3,389
(1,316)
(230)
(2,071)
1,714
1,640
(31)
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of property and equipment
Proceeds from sale of marketable securities
Decrease in short-term and restricted bank deposits
Proceeds from redemption of marketable securities upon maturity
Decrease (increase) in long-term bank deposits
Net cash paid for acquisition of a subsidiary
Net cash provided by investing activities
The accompanying notes are an integral part of the consolidated financial statements.
- 9 -
17,563
18,342
17,765
(1,976)
2,557
1,969
2,711
1,032
(1,960)
(1,477)
12,429
2,260
3,215
(2,367)
-
(1,574)
-
662
8,116
1,200
-
4,333
14,060
8,404
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
U.S. dollars in thousands
Cash flows from financing activities:
Purchase of treasury stock
Repayment of long-term bank loans
Proceeds from bank loans
Payment related to the acquisition of Mailvision
Proceeds from issuance of shares upon exercise of options and warrants
Net cash used in financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
AUDIOCODES LTD.
Year Ended December 31,
2016
2015
2017
(19,523)
(4,685)
6,264
(233)
392
(29,394)
(5,353)
6,000
(233)
2,014
(25,563)
(3,504)
-
-
2,789
(17,785)
(26,966)
(26,278)
4,111
14,797
5,436
18,908
(109)
24,344
Cash and cash equivalents at the end of the year
$
18,908 $
24,344 $
24,235
Supplemental disclosure of cash flow activities:
Cash paid during the year for income taxes
Cash paid during the year for interest
The accompanying notes are an integral part of the consolidated financial statements.
- 10 -
$
$
301 $
329 $
612 $
363 $
741
297
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:- GENERAL
a.
Business overview:
AUDIOCODES LTD.
AudioCodes Ltd. (the "Company") and its subsidiaries (together the "Group") design, develop and market products and services for
advanced voice networking and media processing solutions for the digital workplace. The Company enables enterprises and service
providers to build and operate all-IP voice networks for unified communications, contact centers, and hosted business services. The
Company offers a broad range of innovative products, solutions and services that are used by large multi-national enterprises and leading
tier-1 operators around the world.
The Company operates through its wholly-owned subsidiaries in the United States, Europe, Asia, Latin America, Australia and Israel.
b.
Asset Purchase Agreement with Mailvision Ltd ("Mailvision"):
In May 2013, the Company acquired Mailvision, in which the Company held 29.2% of the outstanding share capital prior to the
acquisition.
Pursuant to the acquisition agreement, the Company acquired certain assets and assumed certain liabilities of Mailvision. The acquisition
was accounted for using the purchase method. The $3,434 in consideration for the acquisition was composed of the following amounts:
(i) $221, which represented the present value of a payment of $233 payable on the first anniversary date of the acquisition, which
amount was paid in May 2014; (ii) $432, which represented the fair value of the estimated earn-out consideration, that was payable in
the second and third anniversary in May 2015 and 2016, if certain milestones of revenues from the sale of Mailvision's product were met
during the three annual periods following the closing of the acquisition (the "MV Earn-Out"); an amount of $233 was paid in May 2015
and May 2016 with respect to the MV Earn-Out; (iii) the waiver of $1,472 of debt owed by Mailvision to the Company; and (iv) $376,
which represented the fair value of the right, since expired, of the sellers to receive certain amounts if the Company sold Mailvision prior
to May 2014.
The MV Earn-Out liability was marked to market at fair value at each reporting date with subsequent changes in the value of the liability
recorded in "financial income (expenses), net" in the statement of operations, while changes due to changes in estimates are recorded
within "operating income or expenses" in the statement of operations.
As of December 31, 2016 and 2017, there is no outstanding amount of MV Earn-Out liability.
- 11 -
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 1:- GENERAL (Cont.)
c.
Acquisition of Active Communications Europe. ("ACS"):
On December 31, 2015 the Company acquired 100% of the outstanding shares of ACS, a Dutch company which provides unified
communications solutions. (See also Note 3).
d.
e.
The Group is dependent upon sole source suppliers for certain key components used in its products, including certain digital signal
processing chips. Although there are a limited number of manufacturers of these particular components, management believes that other
suppliers could provide similar components at comparable terms. A change in suppliers, however, could cause a delay in manufacturing
and a possible loss of sales, which could adversely affect the operating results of the Group and its financial position.
The Group had a major customer in the years ended December 31, 2015, 2016 and 2017, which accounted for 15.0%, 16.7% and 17.5%,
respectively, of the total revenues in those years. In addition, during the years ended December 31, 2015, 2016 and 2017, the Company
had an additional major customer which accounted for 12.6%, 11.9% and 12.7%, respectively, of the total revenues in those years. No
other customer accounted for more than 10% of the Group's revenues in those periods.
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of
America ("U.S. GAAP").
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. 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.
b.
Financial statements in U.S. dollars ("dollars"):
A majority of the Group's revenues is generated in dollars. In addition, most of the Group's costs are denominated and determined in
dollars and in new Israeli shekels. Management believes that the dollar is the currency in the primary economic environment in which
the Group operates. Thus, the functional and reporting currency of the Group is the dollar.
Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with
Accounting Standards Codification (ASC) 830, "Foreign Currency Matters". All transaction gains and losses of the remeasured
- 12 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
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 wholly-owned subsidiaries. Intercompany
transactions and balances, including profits from intercompany sales not yet realized outside the Group, have been eliminated upon
consolidation.
d.
Cash equivalents:
Cash equivalents represent short-term highly liquid investments that are readily convertible into cash with original maturities of three
months or less, at the date acquired.
e.
Short-term and restricted bank deposits:
Short-term and restricted bank deposits are deposits with maturities of more than three months, but less than one year. The deposits are
mainly in dollars and bear interest at an average rate of 0.72% and 0.95%, for the years ended December 31, 2016 and 2017,
respectively. Short-term and restricted deposits are presented at cost. Any accrued interest on these deposits is included in other
receivables and prepaid expenses.
In connection with long-term bank loans and their related covenants, the Company is required to maintain compensating balances with
the banks and to maintain deposits in the same banks that provided the loans to the Company (see Note 10). In addition, the Company
maintains restricted deposits in connection with foreign exchange derivatives and an office lease agreement (see also Note 11a). Out of
the short-term and restricted bank deposits, a total of $3,401 and $2,739, are restricted short-term deposits as of December 31, 2016 and
2017, respectively.
f.
Marketable securities:
The Group accounts for investments in debt securities in accordance with ASC 320, "Investments-Debt and Equity Securities".
Management determines the appropriate classification of its investments in marketable debt securities at the time of purchase and
reevaluates such determinations at each balance sheet date.
As of December 31, 2016 and 2017, the Group classified all of its marketable securities as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in “accumulated other comprehensive loss”
in shareholders’ equity. Realized gains and losses on sale of investments are included in “financial income (expenses), net” and are
derived using the specific identification method for determining the cost of securities.
- 13 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization
together with interest on securities is included in "financial income (expenses), net".
The Group recognizes an impairment charge when a decline in the fair value of its investments in debt securities below the cost basis of
such securities is considered to be other-than-temporary. Factors considered in making such a determination include the duration and
severity of the impairment, the reason for the decline in value, the potential recovery period and the Group's intent to sell, including
whether it is more-likely-than-not that the Group will be required to sell the investment before recovery of cost basis. For securities that
are deemed other-than-temporarily impaired, the amount of impairment is recognized in the statements of operations and is limited to the
amount related to credit losses, while impairment related to other factors is recognized in other comprehensive loss.
For the years ended December 31, 2015, 2016 and 2017, no other-than-temporary impairment losses have been identified.
g.
Inventories:
Inventories are stated at the lower of cost or net realizable value. Cost is determined as follows:
Raw materials - using the "weighted average cost" method; finished products - using the "weighted average cost" method with the
addition of direct manufacturing costs.
The Group periodically evaluates the quantities on hand relative to current and historical selling prices, historical and projected sales
volume and technological obsolescence. Based on these evaluations, inventory write-offs are taken based on slow moving items,
technological obsolescence, excess inventories, discontinuation of products lines, and for market prices lower than cost.
h.
Long-term restricted bank deposits:
Bank deposits and the related accrued interest with maturities of more than one year are included in long-term investments and presented
at their cost. Accrued interest that is payable within a one-year period is included in other receivables and prepaid expenses. The
deposits are denominated in dollars and bear interest at an average rate of 1.50% and 2.05%, for the years ended December 31, 2016 and
2017, respectively. Out of the total long-term bank deposits, a total of $5,407 and $4,207, are restricted long-term deposits as of
December 31, 2016 and 2017, respectively.
- 14 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
i.
Property and equipment:
AUDIOCODES LTD.
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over
the estimated useful lives of the assets, at the following annual rates:
Computers and peripheral equipment
Office furniture and equipment
Leasehold improvements
33%
6% – 20% (mainly 15%)
Over the shorter of the term of the lease or
the useful life of the asset
The Group's long-lived assets are reviewed for impairment in accordance with ASC 360-10-35, "Property, Plant and Equipment -
Subsequent Measurement", whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group)
may not be recoverable. Recoverability of assets (asset group) to be held and used is measured by a comparison of the carrying amount
of an asset (asset group) to the future undiscounted cash flows expected to be generated by the asset if such assets are considered to be
impaired. The impairment to be recognized is measured by the amount by which the carrying amount of the assets (asset groups)
exceeds the fair value of the assets (asset groups). During the years ended December 31, 2015, 2016 and 2017, no impairment losses had
been identified for property and equipment.
j.
Intangible assets:
Intangible assets are comprised of acquired technology, customer relations and licenses. Intangible assets that are not considered to have
an indefinite useful life are amortized using the straight-line basis over their estimated useful lives, which range from 4.5 to 10 years.
Recoverability of these assets is measured by a comparison of the carrying amount of the asset to the undiscounted future cash flows
expected to be generated by the assets. If the assets are considered to be impaired, the amount of any impairment is measured as the
difference between the carrying value and the fair value of the impaired assets.
During the years ended December 31, 2015, 2016 and 2017, no impairment losses have been identified with respect to intangible assets.
k.
Goodwill:
Goodwill and certain other purchased intangible assets have been recorded as a result of acquisitions. Goodwill represents the excess of
the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Goodwill is not
amortized, but rather is subject to an impairment test.
The Group performs an annual impairment test during the fourth quarter of each fiscal year, or more frequently if impairment indicators
are present. The Group operates in one operating segment, and this segment comprises its only reporting unit.
- 15 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
ASC 350, "Intangibles – Goodwill and Other", prescribes a two-phase process for impairment testing of goodwill. The first phase
screens for impairment, while the second phase (if necessary) measures impairment. Goodwill impairment is deemed to exist if the net
book value of a reporting unit exceeds its estimated fair value. In such case, the second phase is then performed, and the Group measures
impairment by comparing the carrying amount of the reporting unit's goodwill to the implied fair value of that goodwill. An impairment
loss is recognized in an amount equal to the excess. The Group has an option to perform a qualitative assessment to determine whether it
is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step goodwill
impairment test. If this is the case, the two-step goodwill impairment test is required. If it is more-likely-than-not that the fair value of a
reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required.
For each of the three years in the period ended December 31, 2017, the Group performed an annual impairment analysis, using market
capitalization, and no impairment losses have been identified.
l.
Revenue recognition:
The Group generates its revenues primarily from the sale of products through a direct sales force and sales representatives. The Group's
products are delivered to its customers, which include original equipment manufacturers, network equipment providers, systems
integrators and distributors in the telecommunications and networking industries, all of whom are considered end-users.
Revenues from products and services are recognized in accordance with ASC 605, "Revenue Recognition" ("ASC 605"), when the
following criteria are met: persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed or
determinable, and collectability is reasonably assured. The Group has no remaining obligation to customers after the date on which
products are delivered other than pursuant to warranty obligations and right of return.
In a multiple element arrangement, Accounting Standards Update ("ASU") 2009-13, Topic 605, "Multiple-Deliverable Revenue
Arrangements" requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price.
The selling price for a deliverable is based on its vendor-specific objective evidence ("VSOE") if available, third-party evidence ("TPE")
if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available. The Group then recognizes revenue
on each deliverable in accordance with its policies for product and service revenue recognition. VSOE of selling price is based on the
price charged when the element is sold separately. In determining VSOE, the Group requires that a substantial majority of the selling
prices fall within a narrow range based on stand-alone rates. TPE of selling price is established by evaluating largely interchangeable
competitor products or services in stand-alone sales to similarly situated customers.
- 16 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
However, as the Group's products contain a significant element of proprietary technology and its solutions offer substantially different
features and functionality, the comparable pricing of products with similar functionality typically cannot be obtained. Additionally, as
the Group is unable to reliably determine what competitor's products' selling prices are on a stand-alone basis, the Group is not typically
able to determine TPE. The ESP is established considering multiple factors including, but not limited to, pricing practices in different
geographical areas and through different sales channels, gross margin objectives, internal costs, competitors' pricing strategies, and
industry technology lifecycles. The selling price of the products was based on ESP. Maintenance and professional services selling prices
were based on either VSOE or ESP.
The Group limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of
products or services or subject to customer- specific return or refund privileges. The Group evaluates each deliverable in an arrangement
to determine whether they represent separate units of accounting.
The Group grants to certain customers a right of return or the ability to exchange a specific percentage of the total price paid for products
they have purchased over a limited period for other products. The Group maintains a provision for product returns and exchanges and
other incentives based on its experience with historical sales returns, analysis of credit memo data and other known factors, in
accordance with ASC 605. The provision was deducted from revenues and amounted to $1,948 and $2,174, as of December 31, 2016
and 2017, respectively.
Revenues from the sale of products which were not yet determined to be final sales due to acceptance provisions are deferred and
included in deferred revenues. In cases where collectability is not probable, revenues are deferred and recognized upon collection.
Deferred revenues include amounts invoiced to customers for which revenue has not yet been recognized.
m. Warranty costs:
The Group usually provides a warranty period of 12 months at no extra charge. The Group estimates the costs that may be incurred
under its basic limited warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that
affect the Group's warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost
per claim. The Group periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. As of
December 31, 2016 and 2017, the provision for warranty amounted to $349 and $339, respectively.
- 17 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
n.
Research and development costs:
AUDIOCODES LTD.
ASC 985-20, "Costs of Software to Be Sold, Leased, or Marketed", 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 operations as incurred.
Participation grants from the Israel National Authority for Technology and Innovation (formerly known as the Office of the Chief
Scientist) of the Israeli Ministry of Economy and Industry ("NATI") for research and development activity are recognized at the time the
Company is entitled to such grants on the basis of the costs incurred and included as a deduction of research and development costs.
Research and development grants recognized during the years ended December 31, 2015, 2016 and 2017 were $5,448, $7,335 and
$8,290, respectively.
o.
Income taxes:
The Group accounts for income taxes in accordance with ASC 740, "Income Taxes" ("ASC 740"). ASC 740 prescribes the use of the
liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial
reporting and tax bases of assets and liabilities and for carry forward tax losses. Deferred taxes are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse. The Group records a valuation allowance, if necessary, to
reduce deferred tax assets to their estimated realizable value if it is more-likely-than-not that some portion of or the entire amount of the
deferred tax asset will not be realized.
In addition, ASC 740 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. The first step is to evaluate the tax position taken or expected to be taken
in a tax return. This is done by determining if the weight of available evidence indicates that it is more-likely-than-not that, on an
evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation
processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate
settlement.
The Group accounts for deferred income taxes in accordance with ASU 2015-17 which require that all deferred tax liabilities and assets
be classified as noncurrent in the consolidated balance sheet.
Interest and penalties assessed by taxing authorities on an underpayment of income taxes are included as a component of income tax
expense in the consolidated statements of operations.
- 18 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
p.
Accumulated other comprehensive income (loss) ("AOCI"):
AUDIOCODES LTD.
The Company accounts for comprehensive income (loss) in accordance with ASC topic 220, "Comprehensive Income". This statement
establishes standards for the reporting and display of comprehensive income (loss) and its components in a full set of general purpose
financial statements. Comprehensive income (loss) generally represents all changes in shareholders' equity during the period except
those resulting from investments by, or distributions to, shareholders.
The components of AOCI were as follows:
Unrealized
gains (losses)
on available-
for-sale
marketable
securities
Unrealized
gains (losses)
on cash flow
hedges
Total
Balance as of January 1, 2017
Other comprehensive income before
reclassifications
Amounts reclassified from AOCI
Other comprehensive income (loss)
Balance as of December 31, 2017
$
$
(61) $
(142) $
(203)
17
-
17
(44) $
1,739
(1,597)
142
- $
1,756
(1,597)
159
(44)
The effects on net income of amounts reclassified from AOCI for the year ended December 31, 2017 derive from realized gains on cash
flow hedges recorded in operating expenses and from realized gains on available-for-sale marketable securities recorded in financial
expenses (income).
q.
Concentrations of credit risk:
Financial instruments that potentially subject the Group to concentrations of credit risk consist principally of cash and cash equivalents,
bank deposits, trade receivables, marketable securities and foreign currency derivative contracts.
The majority of the Group's cash and cash equivalents, bank deposits and foreign currency derivative contracts are invested in dollar
instruments with major banks in Israel and the United States. Such investments in the United States may be in excess of insured limits
and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Group's investments are
corporations with high credit standing.
Accordingly, management believes that low credit risk exists with respect to these financial investments.
- 19 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
Marketable securities include investments in dollar-linked corporate bonds. Marketable securities consist of highly liquid debt
instruments with high credit standing. The Company’s investment policy, approved by the Board of Directors, limits the amount the
Group may invest in any one type of investment or issuer, thereby reducing credit risk concentrations. Management believes that the
portfolio is well diversified and, accordingly, minimal credit risk exists with respect to these marketable debt securities.
The trade receivables of the Group are derived from sales to customers located primarily in the Americas, the Far East, Israel and
Europe. Under certain circumstances, the Group may require letters of credit, other collateral, additional guarantees or advance
payments.
Regarding certain credit balances, the Group is covered by foreign trade risk insurance. The Group performs ongoing credit evaluations
of its customers and establishes an allowance for doubtful accounts based upon a specific review.
r.
Basic and diluted earnings per share:
Basic earnings per share are computed based on the weighted average number of ordinary shares outstanding during each year. Diluted
earnings per share are computed based on the weighted average number of ordinary shares outstanding during each year, plus potential
dilutive ordinary shares considered outstanding during the year, in accordance with ASC 260, "Earnings per Share".
Certain outstanding share options, restricted share units ("RSUs") and warrants have been excluded from the calculation of the diluted
earnings per share since such securities are anti-dilutive for all years presented. The total weighted average number of shares related to
the outstanding options, RSUs and warrants that have been excluded from the calculation of diluted earnings (loss) per share was
2,250,433, 1,927,281 and 317,186 for the years ended December 31, 2015, 2016 and 2017, respectively.
s.
Accounting for share-based compensation:
The Company accounts for share-based compensation in accordance with ASC 718, "Compensation-Stock Compensation" ("ASC 718").
ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing
model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service
periods in the Company's consolidated statement of operations.
The Company recognizes compensation expenses for the value of its awards based on the accelerated method over the requisite service
period of each of the awards. Prior to January 1, 2016, share-based compensation expense was recorded net of estimated forfeitures in
the Company’s consolidated statements of operations and, accordingly, was recorded for only those share-based awards that the
Company expected to vest.
- 20 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
The Company applies ASC 718 and ASC 505-50, "Equity-Based Payments to Non-Employees" ("ASC 505-50") with respect to options
and warrants issued to non-employees. Accordingly, the Company uses option valuation models to measure the fair value of the options
and warrants at the measurement date as defined in ASC 505-50.
The Company recognizes compensation expenses for the value of awards granted based on the accelerated method for performance-
based awards.
The weighted-average estimated fair value of employee stock options granted during the years ended December 31, 2015, 2016 and
2017, was $2.04, $2.01 and $3.05 per share, respectively, using the Black-Scholes option pricing formula. Fair values were estimated
using the following weighted-average assumptions (annualized percentages):
Dividend yield
Expected volatility
Risk-free interest
Expected life
2015
Year Ended December 31,
2016
2017
0%
53.32%-55.86%
1.14%-1.74%
4.75-5.43 years
0%
47.64%-52.95%
1.11%-1.86%
4.76-5.30 years
0%
41.78%-47.25%
1.81%-2.14%
4.77-5.28 years
The Company used its historical volatility in accordance with ASC 718. The computation of volatility uses historical volatility derived
from the Company's exchange traded shares. The expected term of options granted is estimated based on historical experience and
represents the period of time that options granted are expected to be outstanding. The risk free interest rate assumption is the implied
yield currently available on United States treasury zero-coupon issues with a remaining term equal to the expected life of the Company's
options. The dividend yield assumption is based on the Company's historical experience and expectation of no future dividend payouts
and may be subject to substantial change in the future. The Company has historically not paid cash dividends and has no foreseeable
plans to pay cash dividends in the future.
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 revised its estimated forfeiture rate if actual forfeitures differed from its initial estimates.
Effective as of January 1, 2016, the Company adopted a change in accounting policy in accordance with Accounting Standards Update
2016-09, "Compensation Stock Compensation (Topic 718)" (“ASU 2016-09”) to account for forfeitures as they occur. The change was
applied on a modified retrospective basis with a cumulative effect adjustment to retained earnings of $131 (which increased the
accumulated deficit) as of January 1, 2016. No prior periods were recast as a result of this change in accounting policy.
- 21 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
The total share-based compensation expenses relating to all of the Company's share-based awards recognized for the years ended
December 31, 2015, 2016 and 2017 were included in items of the consolidated statements of operations, as follows:
2015
Year Ended December 31,
2016
2017
Cost of revenues
Research and development expenses, net
Selling and marketing expenses
General and administrative expenses
Total share-based compensation expenses
$
$
101 $
429
1,061
782
2,373 $
118 $
459
1,101
736
2,414 $
84
383
1,024
816
2,307
t.
Treasury stock:
The Company has repurchased its ordinary shares from time to time in the open market or, in 2016, pursuant to a self-tender offer in
Israel and in the U.S., and holds such repurchased shares as treasury stock. The Company presents the cost to repurchase treasury stock
as a reduction of shareholders' equity. See also Note 12a.
u.
Severance pay:
The liability for severance pay for Israeli employees is calculated pursuant to Israel's Severance Pay Law, 1963 (the "Severance Pay
Law"), based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date
for all employees in Israel. Employees who have been employed for more than a one-year period are entitled to one month's salary for
each year of employment or a portion thereof. The Group's liability for all of its Israeli employees is fully provided for by monthly
deposits with severance pay funds, pension funds, insurance policies and by an accrual. The value of these deposits is recorded as an
asset in the Company's consolidated balance sheet.
The deposited funds include profits accumulated up to the consolidated balance sheets date. The deposited funds may be withdrawn only
upon the fulfillment of the obligation pursuant to the Severance Pay Law or labor agreements.
Since March 2011, the Group's agreements with new Israeli employees are under Section 14 of the Severance Pay Law. The Group's
contributions for severance pay have replaced its severance pay obligation. Upon contribution of the full amount of the employee's
monthly salary for each year of service, no additional calculations are conducted between the parties regarding the matter of severance
pay and no additional payments are made by the Group to the employee upon termination. The Group is legally released from the
obligations to employees once the deposit amounts have been paid, and therefore the severance pay liability is not reflected in the
balance sheet.
Severance pay expenses for the years ended December 31, 2015, 2016 and 2017, amounted to $2,153, $3,217 and $2,631, respectively.
- 22 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
v.
Employee benefit plan:
AUDIOCODES LTD.
The Group has 401(k) defined contribution plans covering employees in the U.S. All eligible employees may elect to contribute a
portion of their annual compensation to the plan through salary deferrals, subject to the IRS limit of $18 during the years ended
December 31, 2016 and 2017, plus a catch-up contribution of $6 for participants age 50 or over. The Group matches 50% of employees’
contributions, up to a maximum of 6% of the employees' annual pay. In the years ended December 31, 2015, 2016 and 2017, the Group
matched contributions in the amount of $287, $286 and $287, respectively.
w.
Advertising expenses:
Advertising expenses are charged to the statements of operations as incurred. Advertising expenses for the years ended December 31,
2015, 2016 and 2017 amounted to $604, $687 and $442, respectively.
x.
Fair value of financial instruments:
The estimated fair value of financial instruments has been determined by the Group using available market information and valuation
methodologies. Considerable judgment is required in estimating fair values. Accordingly, the estimates may not be indicative of the
amounts the Group could realize in a current market exchange.
The following methods and assumptions were used by the Group in estimating its fair value disclosures for financial instruments:
The carrying amounts of cash and cash equivalents, short-term and restricted bank deposits, trade receivables, trade payables, other
receivables and prepaid expenses and other payables and accrued expenses approximate their fair value due to the short-term maturity of
such instruments. The fair value of long-term bank loans also approximates their carrying value, since they bear interest at rates close to
the prevailing market rates.
The fair value of foreign currency contracts is estimated by obtaining current quotes from banks and market observable data of similar
instruments.
The fair value of marketable securities is estimated by obtaining the fair value of the marketable securities from the bank, which is based
on current quotes and market value provided by external service providers.
- 23 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820,
"Fair Value Measurements and Disclosures" ("ASC 820") establishes a three-tier value hierarchy, which prioritizes the inputs used in the
valuation methodologies in measuring fair value:
Level 1
- Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2
Level 3
- Observable inputs, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in
active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs
that are observable or can be corroborated by observable market data
- Unobservable inputs which are supported by little or no market activity and that are significant to the fair value of the
assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques
that use significant unobservable inputs
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. See also Note 8.
y.
Derivatives and hedging:
The Group accounts for derivatives and hedging based on ASC 815, "Derivatives and Hedging".
The Group accounts for its derivative instruments as either assets or liabilities and carries them at fair value. Derivative instruments that
are not designated and qualified as hedging instruments must be adjusted to fair value through earnings. The changes in fair value of
such instruments are included as gain or loss in "financial income (expenses), net" at each reporting period.
For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges,
the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive loss
in equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is
classified as payroll and rent expenses. The ineffective portion of the gain or loss on the derivative instrument is recognized in current
earnings and included in "financial income (expenses), net". To receive hedge accounting treatment, cash flow hedges must be highly
effective in offsetting changes to expected future cash flows on hedged transactions.
- 24 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
z.
Impact of recently issued accounting pronouncements:
AUDIOCODES LTD.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”
(“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. The core principle of the ASU is that an
entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those
goods or services. ASU 2014-09 requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash
flows arising from customer contracts, including significant judgments and changes in judgments. The Company plans to adopt ASU
2014-09 on January 1, 2018, using the modified retrospective method of adoption. The Company is substantially complete with its
evaluation of the impact of adopting ASU 2014-09 on its consolidated financial statements and does not expect significant changes in
the timing or method of its revenue recognition. The Company has identified and implemented changes to its accounting processes and
controls to support the new revenue recognition and disclosure requirements. In connection with adopting ASU 2014-09, the Company
expects to record a cumulative-effect adjustment to retained earnings of $180 on January 1, 2018. This adjustment primarily relates to
the deferral of costs to obtain a contract that were previously expensed at the beginning of the contract period.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), whereby, lessees will be required to
recognize for all leases at the commencement date a lease liability, which is a lessee‘s obligation to make lease payments arising from a
lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the
use of, a specified asset for the lease term. Under ASU 2016-02, lessor accounting is largely unchanged. A modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial
statements must be applied. The modified retrospective approach would not require any transition accounting for leases that expired
before the earliest comparative period presented. Companies may not apply a full retrospective transition approach. ASU 2016-02 is
effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the
potential impact of ASU 2016-02 on its consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326)" ("ASU 2016-13"). ASU 2016-13
requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The allowance for
credit losses is a valuation account that is deducted from the amortized cost basis. The measurement of expected credit losses is based
upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported
amount. ASU 2016-13 will become effective for annual and interim periods beginning after December 15, 2019, including interim
periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial
statements and related disclosures.
- 25 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments" ("ASU 2016-15"). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are
presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017.
ASU 2016-15 will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to
apply the amendments prospectively as of the earliest date practicable. The Company does not expect the adoption of ASU 2016-15 to
have a material impact on its consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows: Amendment to Restricted Cash" ("ASU 2016-18"), on
the classification and presentation of changes in restricted cash on the statement of cash flows. Amounts generally described as restricted
cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning-of-period and end-
of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15,
2017. The Company is currently evaluating the effect of ASU 2016-18 on its financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment" ("ASU 2017-04"). ASU 2017-04 eliminates the requirement to measure the implied fair value of goodwill by assigning the
fair value of a reporting unit to all assets and liabilities within that unit (the "Step 2 test") from the goodwill impairment test. Instead, if
the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited
by the amount of goodwill in that reporting unit. ASU 2017-04 will become effective for the Company beginning January 1, 2020 and
must be applied to any annual or interim goodwill impairment assessments after that date. Early adoption is permitted. The Company is
currently evaluating the effect of ASU 2017-04 on its consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, "Stock Compensation – Scope of Modification Accounting" ("ASU 2017-09"), guidance
that clarifies that all changes to share-based payment awards are not necessarily accounted for as a modification. Under ASU 2017-09,
modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of
the change in terms or conditions. ASU 2017-09 is effective prospectively beginning January 1, 2018. ASU 2017-09 will apply to any
future modifications. The Company does not expect ASU 2017-09 to have a material impact on its consolidated financial statements and
related disclosures.
- 26 -
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for
Hedging Activities" ("ASU 2017-12"). The objectives of ASU 2017-12 are to improve the financial reporting of hedging relationships to
better portray the economic results of an entity's risk management activities in its financial statements and to make certain targeted
improvements to simplify the application of the hedge accounting guidance in current GAAP. ASU 2017-12 is effective for fiscal years
beginning after December 15, 2018 and interim periods within those fiscal years. The Company is currently evaluating the effect of the
adoption of ASU 2017-12 on its consolidated financial statements and related disclosures.
NOTE 3:-
ACQUISITION OF ACS
On December 31, 2015 (the "Closing Date"), the Company entered into a share purchase agreement, according to which the Company acquired
100% of the outstanding shares of ACS. Following the transaction, ACS became a wholly-owned subsidiary of the Company.
As part of the share purchase agreement, the Company agreed to pay an earn-out amount based on the sales of the Company’s products related
to ACS technology (the “ACS Products”). The earn-out amount is calculated based on: (a) 20% of the net revenues from ACS Products (the
"ACS Revenues") after the first $2,000 of ACS Revenues up to an earn-out payment of $2,000, plus (b) an additional amount of 10% of ACS
Revenues after the first $20,000 of ACS Revenues (the "ACS Earn-Out").
The acquisition was accounted for using the purchase method. The $4,109 purchase price for the acquisition was composed of the following
amounts: (i) a $2,000 payment in cash payable on the Closing Date, and (ii) $2,109, which represented the fair value of the ACS Earn-Out.
In addition, the Company agreed to pay $500 after 12 months and an additional $500 after 24 months following the Closing Date upon meeting
cumulative conditions (including service conditions) for each of these two periods (the "Deferred Payments"). The Deferred Payments were
recorded as payroll expenses during the periods for which the deferred payments remain contingent. The Company recorded $750 and $198
expenses related to the Deferred Payments during the years ended December 31, 2016 and 2017 respectively. In February 2017 and in March
2018, the Company paid $448 and $500, respectively in relation to the deferred payments. In addition, in March 2018, the Company paid $151
in relation to the ACS Earn-Out.
- 27 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:-
ACQUISITION OF ACS (Cont.)
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
AUDIOCODES LTD.
Current assets
Property and equipment
Technology
Customer relationships
Total identifiable assets acquired
Current liabilities
Deferred tax liability
Total identifiable liabilities assumed
Net identifiable assets acquired
Goodwill
Net assets acquired
$
$
305
20
1,917
312
2,554
(361)
(557)
(918)
1,636
2,473
4,109
The Company allocated the acquired assets and liabilities assumed based on a purchase price allocation.
The fair values of the acquired technology and customer relationships were valued using the income approach. This method utilized a forecast
of expected cash inflows, cash outflows and contributory charges for economic returns on tangible and intangible assets employed.
The excess of the purchase price over the preliminary assessment of the net tangible and intangible assets acquired resulted in goodwill of
$2,473. The goodwill is primarily attributable to expected synergies resulting from the acquisition. The acquired technology and customer
relationships are being amortized on a straight-line basis over a period of 7 and 5-7 years, respectively.
The fair value of the Earn-Out was estimated by utilizing the income approach, taking into account the potential cash payments discounted to
arrive at a present value amount, based on the Company's expectation as to future revenues of ACS products in the three subsequent annual
periods following the Closing Date. The discount rate was based on the market interest rate and estimated operational capitalization rate.
Since the actual revenues from ACS products in the years ended December 31, 2016 and 2017 and the expected revenues of ACS products in
2017 and 2018 were lower than the Company’s expectation, the Company recorded income of $1,674 and $118 in the years ended December
31, 2016 and 2017, respectively, as a reversal of the previously recorded Earn-Out liability. Such income is included as an offset to general and
administrative expenses in the consolidated statements of operations for the years ended December 31, 2016 and 2017.
As of December 31, 2016 and 2017, the estimated fair value of the Earn-Out amounted to $487 and $378, respectively.
- 28 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 4:- MARKETABLE SECURITIES AND ACCRUED INTEREST
The following is a summary of available-for-sale marketable securities:
AUDIOCODES LTD.
Corporate bonds:
Maturing within one year
Maturing between one to three years
Accrued interest
Corporate bonds:
Maturing within one year
Maturing between one to two years
Accrued interest
Amortized
cost
December 31, 2016
Unrealized
gains
Unrealized
losses
Fair
Value
$
6,479 $
29,602
300
$
36,381 $
4 $
32
-
36 $
(5) $
(94)
-
(99) $
6,478
29,540
300
36,318
Amortized
cost
December 31, 2017
Unrealized
gains
Unrealized
losses
Fair
Value
$
6,883 $
20,510
213
$
27,606 $
- $
10
-
10 $
(9) $
(45)
-
(54) $
6,874
20,475
213
27,562
These investments were issued by highly rated corporations. Accordingly, it is expected that the securities would not be settled at a price less
than the amortized cost of the Group's investment. As of December 31, 2016 and 2017, the Group did not have any investment in marketable
securities that were in an unrealized loss position for a period of twelve months or greater. Since the Group had the ability and intent to hold
these investments until an anticipated recovery of fair value, which may be until maturity, the Group did not consider these investments to be
other-than-temporarily impaired as of December 31, 2016 and 2017. Unrealized gains (losses) are valued using alternative pricing sources and
models utilizing observable market inputs.
- 29 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 5:-
INVENTORIES
Raw materials
Finished products
AUDIOCODES LTD.
December 31,
2016
2017
$
$
5,779 $
10,554
16,333 $
5,146
11,417
16,563
In the years ended December 31, 2015, 2016 and 2017, the Group wrote-off inventories in a total amount of $724, $2,173 and $1,946,
respectively.
NOTE 6:-
PROPERTY AND EQUIPMENT, NET
Cost:
Computers and peripheral equipment
Office furniture and equipment
Leasehold improvements
Accumulated depreciation:
Computers and peripheral equipment
Office furniture and equipment
Leasehold improvements
December 31,
2016
2017
$
28,799 $
11,707
3,395
43,901
27,104
10,501
2,429
40,034
Depreciated cost
$
3,867 $
Depreciation expenses amounted to $1,761, $1,700 and $1,606 for the years ended December 31, 2015, 2016 and 2017, respectively.
- 30 -
29,806
12,099
3,553
45,458
28,295
10,723
2,605
41,623
3,835
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 7:-
INTANGIBLE ASSETS, NET
a.
Impaired cost:
Acquired technology and license
Customer relationship
Accumulated amortization:
Acquired technology and license
Customer relationship
AUDIOCODES LTD.
Useful life
(years)
December 31,
2016
2017
5 - 10
4.5 - 9
$
19,857 $
4,750
24,607
17,292
4,483
21,775
19,857
4,750
24,607
18,008
4,599
22,607
2,000
Amortized cost
$
2,832 $
b.
c.
Amortization expenses related to intangible assets amounted to $1,202, $1,192 and $832 for the years ended December 31, 2015, 2016
and 2017, respectively.
Expected amortization expenses are as follows:
Year ending December 31,
2018
2019
2020
2021
Thereafter
$
749
354
334
282
281
$
2,000
NOTE 8:-
FAIR VALUE MEASUREMENTS
In accordance with ASC 820, the Group measures its foreign currency derivative instruments, marketable securities and Earn-Out liability
related to the acquisition of ACS, at fair value. Investments in foreign currency derivative instruments and marketable securities are classified
within Level 2 of the fair value hierarchy. This is because these assets are valued using alternative pricing sources and models utilizing market
observable inputs. The Earn-Out liability related to the acquisition of ACS is classified within Level 3 of the fair value hierarchy because this
liability is based on present value calculations and an external valuation model whose inputs include market interest rates, estimated operational
capitalization rates and volatilities. Unobservable inputs used in this model are significant.
- 31 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 8:-
FAIR VALUE MEASUREMENTS (Cont.)
The Group's financial assets and liabilities measured at fair value on a recurring basis, consisted of the following types of instruments as of the
following dates:
AUDIOCODES LTD.
December 31, 2016
Fair value measurements using input type
Level 3
Total
Level 2
Financial liabilities related to foreign currency derivative hedging
contracts
Marketable securities
Earn-Out liability related to the acquisition of ACS
$
(142) $
36,318
-
- $
-
(487)
(142)
36,318
(487)
Total financial net assets (liabilities)
$
36,176 $
(487) $
35,689
December 31, 2017
Fair value measurements using input type
Level 3
Total
Level 2
Marketable securities
Earn-Out liability related to the acquisition of ACS
27,562
-
-
(378)
27,562
(378)
Total financial net assets (liabilities)
$
27,562 $
(378) $
27,184
Fair value measurements using significant unobservable inputs (Level 3):
Balance at January 1, 2017
Adjustment due to change in the forecast of earn-out consideration
Adjustment due to time change value
Balance at December 31, 2017
$
$
(487)
118
(9)
(378)
- 32 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:-
OTHER PAYABLES AND ACCRUED EXPENSES
Payroll and other employee related accruals
Vacation accrual
Royalties provision
Government authorities
Accrued expenses
Others
NOTE 10:- LONG-TERM BANK LOANS
AUDIOCODES LTD.
December 31,
2016
2017
$
4,214 $
3,096
1,170
979
8,517
642
4,346
3,680
1,620
1,105
9,373
662
$
18,618 $
20,786
In September and December 2011, the Company entered into loan agreements with Israeli commercial banks that provided loans in the total
principal amount of $23,750 (the "2011 Loans"). Certain amounts of the 2011 Loans were required to be maintained as compensating bank
deposits that decrease as the loans are repaid. The 2011 Loans bear interest at LIBOR plus 2.1%-4.35% with respect to $19,850 of the original
principal amount. The remaining $3,900 of original principal amount bear interest at 0.5% above the interest rate paid on the bank deposit. Of
these 2011 Loans, $19,850 of the principal amount was repayable in 20 equal quarterly installments and the remaining $3,900 of principal
amount was repayable in 10 equal semiannual payments through September 2017.
In December 2015, the Company entered into loan agreements with an Israeli commercial bank that provided loans in the total principal amount
of $3,000 and Euro 3,000 (the "2015 Loans"). Certain amounts of the 2015 Loans are required to be maintained as a compensating bank deposit
that decreases as the loans are repaid. The loans bear interest at LIBOR plus 1%-2.5% and are repayable in 20 equal quarterly installments
through December 2020.
In December 2016, the Company entered into loan agreements with an Israeli commercial bank that provided loans in the total principal amount
of $6,000 (the "2016 Loans"). Certain amounts of the 2016 Loans are required to be maintained as a compensating bank deposit that decreases
over the repayment period of the loans. The loans bear interest at LIBOR plus 1.1%-2.5% and are repayable in 20 equal quarterly installments
through December 2021.
As of December 31, 2016 and 2017, the banks have a lien on the Company's assets that secures the 2011 Loans, the 2015 Loans and the 2016
Loans. As of December 31, 2016 and 2017, the Company is required to maintain a total of $5,910 and $4,200, respectively, in compensating
balances with the banks, to secure the 2011 Loans, the 2015 Loans and the 2016 Loans.
- 33 -
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 10:- LONG-TERM BANK LOANS (Cont.)
As of December 31, 2016 and 2017, the compensating balances are included in $1,710 and $1,200 of short-term and restricted bank deposits
and $4,200 and $3,000 of long-term and restricted bank deposits, respectively. The amount of the compensating balances that is required
decreases as the loans are repaid. The agreements with respect to the 2011 Loans, the 2015 Loans and the 2016 Loans require the Company,
among other things, to meet certain financial covenants such as maintaining shareholders' equity, cash balances, and liabilities to banks at
specified levels, as well as achieving certain levels of operating income (the "Covenants").
As of December 31, 2016 and 2017, the Company was in compliance with all of the Covenants.
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES
a.
Lease commitments:
The Group's facilities are leased under several lease agreements in Israel, Europe, Asia and the Americas for periods ending in 2024.
In addition, the Company has various operating lease agreements with respect to motor vehicles. The terms of the lease agreements are
for 36 months, which expire on various dates, the latest of which is in 2020.
Future minimum rental commitments under non-cancelable operating leases are as follows:
Year ending December 31,
2018
2019
2020
2021
2022 and thereafter
Total minimum lease payments *)
$
$
6,717
6,075
5,889
5,643
12,448
36,772
*)
Minimum payments have been reduced by minimum sublease rental of $2,410 due in the future under non-cancelable subleases.
In connection with the Company's facilities lease agreement in Israel, the lessor has a lien of approximately $1,644 on certain bank
deposits as of December 31, 2017. These deposits are included in short-term and restricted bank deposits.
Lease expenses for the years ended December 31, 2015, 2016 and 2017, were approximately $5,930, $5,784 and $6,027, respectively.
Lease expenses for the years ended December 31, 2015, 2016 and 2017, include an offset for sublease rental of $960, $801 and $1,183,
respectively.
- 34 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
b.
Inventory purchase commitments:
AUDIOCODES LTD.
The Group is obligated under certain agreements with its suppliers to purchase specified items of excess inventory which are expected to
be utilized in 2018. As of December 31, 2017, non-cancelable purchase obligations were approximately $18,516.
c.
Royalty commitment to the NATI:
Under the research and development agreements of the Company and its Israeli subsidiaries with the NATI and pursuant to applicable
laws, the Company and its Israeli subsidiaries are required to pay royalties at the rate of 1.3%-4.5% on sales to end customers of
products developed with funds provided by the NATI, up to an amount equal to 100% of the NATI research and development grants
received, linked to the dollar plus interest on the unpaid amount received based on the 12-month LIBOR rate (from the year the grant
was approved) applicable to dollar deposits. The Company and its Israeli subsidiaries are obligated to repay the NATI for the grants
received only to the extent that there are sales of the funded products.
The place of manufacturing of a product that was developed with the support of the NATI, or based on know-how developed with the
support of the NATI, shall be in accordance with the Company's declaration in the application for support (including manufacturing
abroad). In case the Company or any of its Israeli subsidiaries wish to transfer their manufacturing activities abroad, in addition to their
statement in the application for support, they will be required to receive approval from the NATI research committee. The committee is
entitled to increase both the royalty liability and the rate of the royalty payments. The increased repayment is calculated according to the
percentage of the manufacturing activities that are intended to be carried out outside Israel, and can reach up to 300% of the original
amount. When the manufacturing of the product is being done outside of Israel, the Company or any of its Israeli subsidiaries are
required to pay an increased royalty rate of an additional 1%.
As of December 31, 2016 and 2017, the Company and its Israeli subsidiaries have a contingent obligation to pay royalties in the amount
of approximately $52,717 and $58,155, respectively.
As of December 31, 2016 and 2017, the Company and its Israeli subsidiaries have paid or accrued royalties to the NATI in the amount of
$6,186 and $8,350, respectively, which were recorded in cost of revenues.
On March 27, 2016, the Company received a notification from the NATI that, according to an audit conducted on their behalf, the
Company is alleged to owe the NATI an amount of $999 for underpaid royalties. The Company has reviewed the findings and presented
an appeal of the audit claims. In December 2017, the Company received a confirmation from NATI that the amount should be reduced
by $720. The remaining amount is still under examination. The Company believes that it has paid the correct amount of royalties and has
valid defenses to this claim.
- 35 -
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
d.
Royalty commitments to third parties:
The Group has entered into technology licensing fee agreements with third parties. Under the agreements, the Group agreed to pay the
third parties royalties, based on sales of relevant products.
e.
Legal proceedings:
1.
2.
3.
4.
In January 2015, the Manufacturers Association of Israel ("MAI") filed a claim against the Company with the Israeli Labor
Court, for unpaid handling charges, allegedly due for the years 2008 - 2013. In March 2017, the parties settled this claim.
In January 2017, a complaint for patent infringement was filed against the Company’s subsidiary in the U.S. and against a
customer of the Company. The parties settled this claim in June 2017.
In July 2017, a complaint for patent infringement was filed against the Company’s subsidiary in the U.S. The complaint was
settled in October 2017.
In February 2018, a former employee filed a claim against the Company’s subsidiary in Brazil alleging that he is entitled to
approximately $100 as a result of the termination of his employment by the subsidiary. The Company has denied all of his
allegations and believes that it has valid defenses to this claim. At this early stage, the Company cannot predict the outcome of
this claim.
NOTE 12:- SHAREHOLDERS' EQUITY
a.
Treasury stock:
During the year ended December 31, 2014, the Company's Board of Directors approved a program to repurchase up to $3,000 of its
ordinary shares (the "share repurchase program") which is the amount that the Company could repurchase according to Israeli law
without further approval from an Israeli court. During the years ended December 31, 2016, 2015 and 2014, the Company received court
approvals to purchase up to an additional $75,000 of its ordinary shares. In addition, in each of May and November 2017, the Company
received court approval to purchase up to an additional $15,000 and $20,000, respectively, of its ordinary shares. The November 2017
court approval for share repurchases will expire on May 27, 2018.
- 36 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- SHAREHOLDERS' EQUITY (Cont.)
AUDIOCODES LTD.
As part of the share repurchase program, on June 16, 2016, the Company commenced an offer in the U.S. and Israel to purchase up to
3,000,000 of its ordinary shares for $4.35 per share (the "Offer"). The Offer expired on July 20, 2016 and the Company purchased
3,000,000 of its ordinary shares, the maximum amount of shares subject to the Offer, at a price of $4.35 per share. The Company had
$150 of legal and other expenses related to the Offer.
As of December 31, 2017, pursuant to the share repurchase program, the Company had repurchased a total of 27,115,952 of its ordinary
shares at a total cost of $115,545 (of which 3,749,462 of its ordinary shares were repurchased during the year ended December 31, 2017
for aggregate consideration of $25,564).
b.
Employee and Non-employee Share Option Plan:
In 2008, the Company's Board of Directors approved the 2008 Equity Incentive Plan (the "Plan") that became effective in January
2009. Under the Plan, options and RSUs may be granted to employees, officers, non-employee consultants and directors of the
Company. As of December 31, 2017, the total number of shares authorized for future grant under the Plan is 1,221,941.
Share options granted under the Plan are generally exercisable at the fair market value of the ordinary shares at the date of grant and
usually expire seven or ten years from the date of grant. The options generally vest over four years from the date of grant. Any options
that are forfeited or cancelled before expiration become available for future grants.
- 37 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- SHAREHOLDERS' EQUITY (Cont.)
AUDIOCODES LTD.
The following is a summary of the Company's stock option activity and related information for the year ended December 31, 2017:
Amount
of options
Weighted
average
exercise
price
Options outstanding at beginning of year
3,353,457 $
Changes during the year:
Granted
Exercised
Forfeited
Options outstanding at end of year
Options exercisable at end of year
264,543 $
(636,067) $
(105,291) $
2,876,642 $
1,850,677 $
4.50
6.36
4.38
4.86
4.68
4.58
Weighted
average
remaining
contractual
term (in
years)
Aggregate
intrinsic
value
4.1
$
6,346
3.7
2.9
$
$
7,703
5,151
The weighted-average grant-date fair value of options granted during the years ended December 31, 2015, 2016 and 2017 was $2.04,
$2.01 and $3.05, per option, respectively. The aggregate intrinsic value in the table above represents the total intrinsic value (the
difference between the Company's closing share price on the last trading day of the fiscal year and the exercise price, multiplied by the
number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on
the last trading day of the fiscal year. This amount changes based on the fair market value of the Company's ordinary shares.
Total intrinsic value of options exercised for the years ended December 31, 2015, 2016 and 2017 was $219, $1,583 and $1,562,
respectively.
- 38 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- SHAREHOLDERS' EQUITY (Cont.)
The following is a summary of the Company's RSU activity and related information for the year ended December 31, 2017:
AUDIOCODES LTD.
RSUs outstanding at beginning of year
Changes during the year:
Granted
Vested
Forfeited
RSUs outstanding at end of year
Number of
shares
Weighted
average grant
date fair value
393,534 $
333,962 $
(145,099) $
(7,000) $
575,397 $
4.38
7.12
4.61
5.75
5.90
The following is a summary of warrants issued to non-employees for the year ended December 31, 2017:
Warrants outstanding at beginning and end of year
Warrants exercisable at end of year
Number of
shares
Weighted
average
exercise price
5,000 $
3,750 $
5.00
5.00
The Group recorded immaterial compensation expenses with respect to the grants of these warrants in accordance with ASC 505-50.
As of December 31, 2017, there was $3,293 of total unrecognized compensation cost related to non-vested share-based compensation
arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 1.09 years.
- 39 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- SHAREHOLDERS' EQUITY (Cont.)
AUDIOCODES LTD.
The options and warrants outstanding as of December 31, 2017, have been separated into ranges of exercise prices, as follows:
Range of
exercise
price
$
$
$
$
$
0.00-1.10
1.50-2.51
2.57-4.00
4.03-6.49
6.51-8.23
Number of
options
outstanding
as of
December 31,
2017
Weighted
average
remaining
contractual
life
(Years)
Weighted
average
exercise
price
Number of
options
exercisable
as of
December 31,
2017
Weighted
average
exercise price of
exercisable
options
5,875
43,250
980,805
1,400,388
451,324
2,881,642
0.54
1.69
3.00
4.10
3.95
3.66
$
$
$
$
$
$
0.00
2.04
3.51
4.90
6.87
4.69
5,500 $
43,250 $
714,430 $
821,671 $
269,576 $
1,854,427 $
0.00
2.04
3.43
4.99
6.88
4.58
NOTE 13:- TAXES ON INCOME
a.
Israeli taxation:
1.
Measurement of taxable income in U.S. dollars:
The Company has elected to measure its taxable income and file its tax return under the Israeli Income Tax Regulations
(Principles Regarding the Management of Books of Account of Foreign Invested Companies and Certain Partnerships and the
Determination of Their Taxable Income), 1986. Accordingly, results for tax purposes are measured in terms of earnings in dollars.
2.
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (the "Investment Law"):
The Company's production facilities in Israel have been granted the status of an "Approved Enterprise" in accordance with the
Investment Law under four separate investment programs. According to the provisions of the Investment Law, the Company has
been granted the "Alternative Benefit Plan", under which the main benefits are tax exemptions and reduced tax rates.
Therefore, the Company's income derived from the "Approved Enterprise" will be entitled to a tax exemption for a period of two
years and to an additional period of five to eight years of reduced tax rates of 10% - 25% (based on the percentage of foreign
ownership). The duration of tax benefits of reduced tax rates is subject to a limitation of the earlier of 12 years from
commencement of production, or 14 years from the approval date. The Company utilized tax benefits from the first program in
1998 and has not been eligible for benefits since 2007.
- 40 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
AUDIOCODES LTD.
As of December 31, 2017, retained earnings included approximately $540 in tax-exempt income earned by the Company's
"Approved Enterprise". The Company's Board of Directors has decided not to declare dividends out of such tax-exempt income.
Accordingly, no deferred income taxes have been provided on income attributable to the Company's "Approved Enterprise". Tax-
exempt income attributable to the "Approved Enterprise" cannot be distributed to shareholders without subjecting the Company
to taxes except upon complete liquidation of the Company. If such retained tax-exempt income is distributed in a manner other
than upon the complete liquidation of the Company, it would be taxed at the corporate tax rate between 10% and 25%, applicable
to such profits as if the Company had not elected the alternative tax benefits and an income tax liability would be incurred by the
Company up to a maximum amount of $180.
The entitlement to the above benefits is conditional upon the Company fulfilling the conditions stipulated by the Investment Law,
regulations published thereunder and the certificate of approval for the specific investments in "Approved Enterprises". In the
event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the
amount of the benefits, in whole or in part, including interest. As of December 31, 2017, management believes that the Company
is in compliance with all of the aforementioned conditions.
However, the Investment Law provides that terms and benefits included in any certificate of approval already granted will remain
subject to the provisions of the Investment Law as they were on the date of such approval. Therefore, the Company's existing
"Approved Enterprises" are generally not subject to the provisions of the 2005 Amendment (see below). As a result of the 2005
Amendment, tax-exempt income generated under the provisions of the Investment Law, as amended, will subject the Company to
taxes upon distribution or liquidation and the Company may be required to record a deferred tax liability with respect to such tax-
exempt income.
Income from sources other than the "Approved Enterprise" during the benefit period will be subject to tax at the regular tax rate
prevailing at that time.
On April 1, 2005, an amendment to the Investment Law came into effect (the "2005 Amendment") that significantly changed the
provisions of the Investment Law. The 2005 Amendment limits the scope of enterprises that may be approved by the Investment
Center by setting criteria for the approval of a facility as a "Beneficiary Enterprise" including a provision generally requiring that
at least 25% of the Beneficiary Enterprise's income will be derived from export. Additionally, the 2005 Amendment enacted
major changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require
Investment Center approval in order to qualify for tax benefits. However, the Investment Law provides that terms and benefits
included in any certificate of approval already granted will remain subject to the provisions of the Investment Law as they were
on the date of such approval.
- 41 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
AUDIOCODES LTD.
As of December 31, 2017, there was no taxable income attributable to the Beneficiary Enterprise.
In January 2011, another amendment to the Investment Law came into effect ("the 2011 Amendment"). According to the 2011
Amendment, the benefit tracks in the Investment Law were modified and a flat tax rate applies to the Company's entire income
subject to this amendment (the "Preferred Income"). Once an election is made, the Company's income will be subject to the
amended tax rate of 16% from 2015 and thereafter (or 9% a preferred enterprise located in development area A).
The Company does not currently intend to adopt the 2011 Amendment and intends to continue to comply with the Investment
Law as in effect prior to enactment of the 2011 Amendment.
In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2016 and
2017 Budget Years), 2016 which includes Amendment 73 to the Investment Law ("Amendment 73") was published. According to
Amendment 73, a preferred enterprise located in development area A will be subject to a tax rate of 7.5% instead of 9% effective
from January 1, 2016 and thereafter (the tax rate applicable to preferred enterprises located in other areas remains at 16%).
The Amendment also prescribes special tax tracks for technological enterprises, which are subject to regulations that were issued
by the Minister of Finance in May 2017. The new tax tracks under the Amendment are as follows: Technological Preferred
Enterprise ("TPE") - an enterprise for which total consolidated revenues of its parent company and all subsidiaries are less than
NIS 10 billion. A TPE, as defined in the Investment Law, which is located in the center of Israel will be subject to tax at a rate of
12% on profits deriving from intellectual property (in development area A - a tax rate of 7.5%).
The Company has evaluated the effect on its financial statements of the transition to the preferred enterprise tax track, and as of
the date of the approval of the financial statements, the Company believes that it will not transition to the preferred enterprise tax
track. Accordingly, the Company did not adjust its deferred tax balances as of December 31, 2017. The Company's position may
change in the future.
- 42 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
AUDIOCODES LTD.
3.
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, is entitled to 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, that 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.
4.
Tax rates:
Taxable income of the Company is subject to a corporate tax rate as follow: in 2015 - 26.5%, in 2016 - 25% and in 2017 - 24%.
In December 2016, the Israeli Parliament approved the Economic Efficiency Law (Legislative Amendments for Applying the
Economic Policy for the 2017 and 2018 Budget Years), 2016 which reduces the corporate income tax rate to 24% (instead of
25%) effective from January 1, 2017 and to 23% effective from January 1, 2018.
The deferred tax balances as of December 31, 2017 have been calculated based on the revised tax rates.
The effective tax rate payable by a company which is taxed under the Investment Law may be considerably lower (see also Note
13.a2).
- 43 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
b.
Tax Reform:
AUDIOCODES LTD.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act
(the “TCJA”). The TCJA makes broad and complex changes to the Code. The changes include, but are not limited to:
·
·
·
·
A corporate income tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017;
The transition of U.S. international taxation from a worldwide tax system to a territorial system by providing a 100 percent
deduction to an eligible U.S. shareholder on foreign sourced dividends received from a foreign subsidiary;
A one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as November 2, 2017 or of
December 31, 2017 (based on the higher foreign earnings balance on the measurement dates); and
Taxation of Global Intangible Low-Taxed Income (“GILTI”) earned by foreign subsidiaries beginning after December 31, 2017.
The GILTI tax imposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations.
The TCJA makes certain changes to the depreciation rules and implements new limits on the deductibility of certain executive
compensation paid by the Company’s U.S. subsidiary.
ACS 740 requires companies to account for the tax effects of changes in income tax rates and laws in the period in which legislation is
enacted (December 22, 2017). ASC 740 does not specifically address accounting and disclosure guidance in connection with the income
tax effects of the TCJA. Consequently, on December 22, 2017, the Securities and Exchange Commission staff issued Staff Accounting
Bulletin No. 118 (“SAB 118”), to address the application of ASC 740 in the reporting period that includes the date the TCJA was
enacted. SAB 118 allows companies a reasonable period of time to complete the accounting for the income tax effects of the TCJA.
The deferred tax balances as of December 31, 2017 have been calculated based on the revised tax rates.
At December 31, 2017, the Company had not completed the accounting for the income tax effects of the TCJA. However, pursuant to
SAB 118, the Company has made provisional estimates of the effects of existing deferred tax assets and liabilities and the one-time
transition tax. The Company believes the accounting for the tax effects will be completed upon the filing of the 2017 federal and state
tax returns in 2018. The Company does not expect that the TCJA will have a material impact on its consolidated financial statements and
related disclosures.
The Company has not yet adopted an accounting policy related to GILTI and will continue to perform further analysis during the SAB
118 measurement period to evaluate the GILTI provisions and the effects to the Company’s financial statements.
- 44 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
c.
Net operating loss carry-forward:
AUDIOCODES LTD.
As of December 31, 2017, the Company had cumulative losses for tax purposes in the amount of approximately $11,500 which can be
carried forward and offset against taxable income in the future for an indefinite period. As of December 31, 2017, the Company recorded
a net deferred tax asset of $5,013 in respect of such carry-forward tax losses and other temporary differences.
As of December 31, 2017, the Company's Israeli subsidiaries have estimated total available carry-forward tax losses of approximately
$75,500. The net operating losses may be claimed and offset against taxable income in the future for an indefinite period.
The Company's U.S. subsidiary has estimated total available carry-forward tax losses of approximately $67,800 to offset against future
U.S federal taxable income and $1,600 to offset against state taxable income in the U.S. These carry-forward tax losses expire between
2022 and 2032. As of December 31, 2017, the Company's U.S subsidiary recorded a deferred tax asset of $1,673 relating to the available
net carry forward tax losses.
Utilization of U.S. net operating losses may be subject to substantial annual limitations due to the "change in ownership" provisions of
the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses
before utilization.
d.
Income before taxes on income is comprised as follows:
Domestic
Foreign
Year Ended December 31,
2016
2015
2017
$
$
1,007 $
2,141
4,151 $
3,443
3,148 $
7,594 $
5,948
3,692
9,640
- 45 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
e.
Taxes on income are comprised as follows:
Current taxes
Deferred tax expense (income)
Domestic
Foreign
f.
Deferred income taxes:
AUDIOCODES LTD.
Year Ended December 31,
2016
2015
2017
$
$
$
$
806 $
1,976
831 $
(9,475)
2,782 $
(8,644) $
1,458 $
1,324
(6,576) $
(2,068)
2,782 $
(8,644) $
688
4,922
5,610
2,979
2,631
5,610
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Significant components of the Group's deferred tax
liabilities and assets are as follows:
Deferred tax assets:
Net operating loss carry-forward
Reserves and allowances
Net deferred tax assets before valuation allowance
Less - Valuation allowance
Deferred tax asset
Deferred tax liability
Deferred tax asset
Domestic:
Foreign:
Deferred tax liability
Foreign:
- 46 -
December 31,
2016
2017
41,781 $
8,916
50,697
(39,090)
11,607 $
(473) $
7,849
3,758
11,607 $
34,708
4,195
38,903
(32,217)
6,686
(389)
5,013
1,673
6,686
(473) $
(389)
$
$
$
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- TAXES ON INCOME (Cont.)
g.
Reconciliation of the theoretical tax expenses:
AUDIOCODES LTD.
A reconciliation between the theoretical tax expense, assuming all income is taxed at the Israeli statutory corporate tax rate applicable to
the income of the Company, and the actual tax expense (benefit) as reported in the statement of operations is as follows:
Year Ended December 31,
2016
2015
2017
Income before taxes, as reported in the consolidated statements of
operations
$
3,148 $
7,594 $
9,640
Israeli statutory corporate tax rate
26.5%
25.0%
24.0%
Theoretical tax expense on the above amount at the Israeli statutory
corporate tax rate
Income tax at rate other than the Israeli statutory corporate tax rate
Non-deductible expenses, including share-based compensation
expenses
Losses for which valuation allowance was provided (utilized)
Impact of rate change
Other
$
834 $
361
1,898 $
(749)
1,338
209
-
40
744
(11,373)
679
157
2,314
429
629
975
943
320
Actual tax expense (benefit)
$
2,782 $
(8,644) $
5,610
h.
Unrecognized tax benefits:
The Company's unrecognized tax benefits as of December 31, 2016 and 2017 are $158.
The Company recognized interest and penalties related to unrecognized tax benefits in tax expenses in the amount of $7, $9 and $10 for
the years ended December 31, 2015, 2016 and 2017, respectively. The liability for unrecognized tax benefits does not include the
liability recorded for accrued interest and penalties of $228 and $238 at December 31, 2016 and 2017, respectively.
i.
Tax assessments:
The Company has received a final tax assessment through the tax year 2015.
The Company’s U.S. subsidiary is currently undergoing an income tax examination by the Internal Revenue Service for the 2015 tax
year.
- 47 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 14:- BASIC AND DILUTED EARNINGS PER SHARE
Numerator:
Net income
Denominator:
AUDIOCODES LTD.
2015
Year Ended December 31,
2016
2017
$
366 $
16,238 $
4,030
Denominator for basic earnings per share - weighted average number
of ordinary shares, net of treasury stock
Effect of dilutive securities:
Employee stock options, warrants and RSUs
40,178,292
35,173,562
31,103,703
386,653
605,292
1,064,659
Denominator for diluted earnings per share - adjusted weighted average
number of shares
40,564,945
35,778,854
32,168,362
NOTE 15:- FINANCIAL INCOME (EXPENSES), NET
2015
Year Ended December 31,
2016
2017
Financial expenses:
Loss related to non-hedging derivative instruments
Interest
Amortization of marketable securities premiums and accretion of
$
(230) $
(278)
discounts, net
Exchange rate differences
Other
Financial income:
Interest and other
Exchange rate differences
(1,094)
-
(286)
(1,888)
2,302
28
2,330
(90) $
(262)
(853)
(519)
(283)
(9)
(294)
(570)
(73)
(273)
(2,007)
(1,219)
1,847
-
1,847
1,209
-
1,209
(10)
$
442 $
(160) $
- 48 -
AUDIOCODES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16:- GEOGRAPHIC INFORMATION
a.
Summary information about geographic areas:
The Group manages its business on a basis of one reportable segment (see Note 1 for a brief description of the Group's business). The
data is presented in accordance with ASC 280, "Segment Reporting". Revenues in the table below are attributed to geographical areas
based on the location of the end customers.
The following presents total revenues for the years ended December 31, 2015, 2016 and 2017 and long-lived assets as of December 31,
2015, 2016 and 2017.
2015
2016
2017
Total
revenues
Long-
lived
assets
Total
revenues
Long-
lived
assets
Total
revenues
Long-
lived
assets
Israel
Americas, principally the U.S.
Europe
Far East
$
6,414 $
72,079
38,873
22,393
3,836 $
96
79
79
6,061 $
74,161
39,134
26,215
3,625 $
95
68
79
2,221 $
81,051
49,229
24,238
3,569
96
106
64
$
139,759 $
4,090 $
145,571 $
3,867 $
156,739 $
3,835
b.
Product lines:
Total revenues from external customers divided on the basis of the Company's product lines are as follows:
Technology
Networking
NOTE 17:- DERIVATIVE INSTRUMENTS
Year Ended December 31,
2016
2015
2017
$
15,965 $
123,794
13,649 $
131,922
13,603
143,136
$
139,759 $
145,571 $
156,739
The Group 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 rent expenses) in currencies other than the dollar. The Group currently hedges such future exposures for a maximum period of one
year. However, the Group may choose not to hedge certain foreign currency exchange exposures for a variety of reasons, including but not
limited to immateriality, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no
assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange rates.
- 49 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 17:- DERIVATIVE INSTRUMENTS (Cont.)
AUDIOCODES LTD.
The Group records all derivatives in the consolidated balance sheet at fair value. The effective portions of cash flow hedges are recorded in
other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portions of cash flow hedges are adjusted to
fair value through earnings in "financial income (expense), net". As of December 31, 2016, the Group had accumulated unrealized loss of $142
associated with cash flow hedges that was recorded in other comprehensive income (loss). As of December 31, 2017, the Group did not have
accumulated unrealized loss associated with cash flow hedges.
The Group entered into forward and options contracts that did not meet the requirement for hedge accounting. The Group measured the fair
value of the contracts in accordance with ASC 820, at Level 2. The net losses recognized in "financial expenses (income), net" during the years
ended December 31, 2015, 2016 and 2017 were $230, $90 and $9, respectively.
As of December 31, 2016 the Group had outstanding forward and options collar (cylinder) contracts in the amount of $27,000 which were
designated as payroll and rent hedging contracts. As of December 31, 2017, the Group did not have outstanding forward and options collar
(cylinder) contracts which were designated as payroll and rent hedging contracts. In addition, as of December 31, 2017 the Group had $2,500 of
outstanding forward contracts which were not designated as hedging contracts. As of December 31, 2016, the Group had no outstanding
forward contracts which were not designated as hedging contracts.
The fair value of the Group's outstanding derivative instruments and the effect of derivative instruments in cash flow hedging relationship on
other comprehensive income for the years ended December 31, 2016 and 2017 are summarized below:
Foreign exchange forward
and options contracts
Balance sheet
December 31,
2016
2017
Fair value of foreign exchange forward and
options collar (cylinder) contracts
Gains (losses) recognized in other
comprehensive income (loss) (effective
portion)
"Other payables and accrued expenses"
$
(142) $
-
"Other comprehensive income (loss)"
$
(415) $
142
The effect of derivative instruments in cash flow hedging relationship on income for the years ended December 31, 2016 and 2017 is
summarized below:
Foreign exchange forward
and options contracts
Comprehensive
Income (loss)
Year Ended
December 31,
2016
2017
Comprehensive income from derivatives before
reclassifications
"Other comprehensive income (loss)"
Income reclassified from accumulated other
comprehensive income (effective portion)
"Operating expenses"
$
$
608 $
1,739
1,023 $
1,597
- - - - - - - - - - -
- 50 -
LIST OF SUBSIDIARIES OF AUDIOCODES LTD.
Name of Subsidiary
AudioCodes Inc.
AudioCodes Development Ltd
Place of Incorporation
Delaware, USA
Beer Sheva, Israel
Exhibit 8.1
I, Shabtai Adlersberg, certify that:
CERTIFICATION PURSUANT TO
SECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 12.1
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of AudioCodes Ltd.;
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) 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 annual report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the 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
(d) 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 company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal
control over financial reporting.
Date: March 26, 2018
/s/ SHABTAI ADLERSBERG
Shabtai Adlersberg
Chief Executive Officer
I, Niran Baruch, certify that:
CERTIFICATION PURSUANT TO
SECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 12.2
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of AudioCodes Ltd.;
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) 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 annual report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the 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
(d) 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 company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal
control over financial reporting.
Date: March 26, 2018
/s/ NIRAN BARUCH
Niran Baruch
Vice President Finance and Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.1
In connection with the Annual Report of AudioCodes Ltd. (the “Company”) on Form 20-F for the period ending December 31, 2017 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Shabtai Adlersberg, Chief Executive Officer of the Company, 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:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: March 26, 2018
/s/ SHABTAI ADLERSBERG
Shabtai Adlersberg
Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.2
In connection with the Annual Report of AudioCodes Ltd. (the “Company”) on Form 20-F for the period ending December 31, 2017 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Niran Baruch, Vice President Finance and Chief Financial Officer of the Company,
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:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: March 26, 2018
/s/ NIRAN BARUCH
Niran Baruch
Vice President Finance and Chief Financial Officer
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-11894, 333-13268, 333-105473, 333-144825, 333-
160330, 333-170676, 333-190437 and 333-210438) of our reports dated March 26, 2018 with respect to the consolidated financial statements of AudioCodes
Ltd., and the effectiveness of internal control over financial reporting of AudioCodes Ltd. included in this Annual Report on Form 20-F for the year ended
December 31, 2017.
Exhibit 15.1
Tel Aviv, Israel
March 26, 2018
/s/ KOST, FORER, GABBAY AND KASIERER
KOST, FORER, GABBAY AND KASIERER
A member of Ernst & Young Global