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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
☐
☒
☐
☐
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
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, President and Chief Executive Officer, 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
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Trading Symbol(s)
AUDC
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Name of each exchange on which registered
Nasdaq Global Select Market
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, 2023, the Registrant had outstanding 30,506,753 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.
Yes ☒ No ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
Yes ☐ No ☒
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large
accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.☐
† 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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of
an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒
International Financial Reporting Standards as issued by the
International Accounting Standards Board ☐
Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Item 17 ☐ Item 18 ☐
Yes ☐ No ☒
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Table of Contents
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 4A.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16.
ITEM 16A.
ITEM 16B.
ITEM 16C.
ITEM 16D.
ITEM 16E.
ITEM 16F.
ITEM 16G.
ITEM 16H.
ITEM 16I.
ITEM 16J.
ITEM 16K.
ITEM 17.
ITEM 18.
ITEM 19.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
OFFER STATISTICS AND EXPECTED TIMETABLE
KEY INFORMATION
INFORMATION ON THE COMPANY
UNRESOLVED STAFF COMMENTS
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
FINANCIAL INFORMATION
THE OFFER AND LISTING
ADDITIONAL INFORMATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
CONTROLS AND PROCEDURES
[RESERVED]
AUDIT COMMITTEE FINANCIAL EXPERT
CODE OF ETHICS
PRINCIPAL ACCOUNTANT FEES AND SERVICES
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
CHANGE IN REGISTRANT’S CERTIFIED ACCOUNTANT
CORPORATE GOVERNANCE
MINE SAFETY DISCLOSURE
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
INSIDER TRADING POLICIES
CYBERSECURITY
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
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, as amended, or the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, 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. Unless otherwise indicated
in this Annual Report, all currency references are to U.S. dollars, or dollars.
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.
B.
[RESERVED]
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. Many of the risks summarized and then discussed in greater detail below relate principally to our
business, strategy and the industry in which we operate. Other risks relate principally to financial and economic concerns, our operations in Israel, legal,
regulatory and tax considerations and ownership of our ordinary shares. We believe that the occurrence of any one, or some combination, of the following
factors could have a material and adverse effect on our business, financial condition, cash flows and results of operations.
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Summary of Risk Factors
The following is a summary of some of the principal risks we face. The list below is not exhaustive and, therefore, investors should read this “Risk
Factors” section in its entirety:
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Adverse macroeconomic conditions, including inflationary pressures and potential recessionary conditions, as well as actions taken by
central banks and regulators across the world in an attempt to reduce, curtail and address such pressures and conditions;
Our quarterly results of operations have fluctuated in the past and we expect these fluctuations to continue, any actual or anticipated
fluctuations in our results of operations could require that we issue revised guidance, and the failure to meet the expectations of our
investors or analysts could have a material and adverse impact on our share price;
Our business will be harmed if Microsoft or our other contact center, unified communications and ALL-IP project partners abandon or fail
to achieve the expected growth of solutions compatible with our products or if we are unable or unwilling to change our products when and
as may be required in order to remain a certified partner;
If our new products fail to generate anticipated demand, we will realize a lower-than-expected return from our investment in research and
development;
Rapid technological development in the communications equipment market necessitates that we effectively manage transition to the next
generation of our products;
The ongoing transition to the use of cloud-based software creates challenges for us because some of our products are intended for on-
premises use;
The increased adoption of IP networks may adversely affect the demand for media gateway products;
Our results of operations could be materially and adversely affected if we cannot keep pace with technological changes impacting the
development of our products and implementation of our business needs, including with respect to automation and the use of artificial
intelligence, or AI;
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;
Because we sell most of our products and services to customers who function as intermediaries, such as original equipment manufacturers,
or OEMs, network equipment providers, or NEPs, system integrators, carriers/service providers, resellers and distributors, rather than
directly to end-users, we are heavily reliant on such intermediaries and have less control over the ultimate selection of products by end-
users;
The markets we serve are highly competitive and several of our competitors have competitive advantages over us, which may make it
difficult for us to maintain profitability;
We rely on (i) third-party subcontractors to assemble, and original design manufacturers, or ODMs, to design and manufacture, some of our
products, and (ii) third-party suppliers to provide us with key components on a timely basis;
We may need additional financing to operate or grow our business;
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Uncertain economic conditions, macroeconomic changes and trade wars (such as the trade war between the U.S. and China) may adversely
affect our business;
The attack on Israel in October 2023 and the ensuing war with the Hamas terror organization, along with related conflicts with their
supporters in Lebanon (with the Hezbollah terror organization), Yemen (with the Houthi movement), Syria and Iran, have led to an
emergency call up of reserve army soldiers and caused disruption and uncertainty in Israel, including in terms of personal safety, damage to
property, economic outlook, geopolitical tensions, the war effort and toll more generally;
Political, economic and military conditions in Israel directly affect our operations and we are subject to specific risks, such as (i)
fluctuations in the value of the dollar against the NIS, and (ii) labor disputes and strikes;
We are subject to ongoing costs and risks associated with complying with rapidly changing laws and regulations in multiple jurisdictions,
including with respect to protection of our intellectual property, privacy, AI, the use of environmentally friendly materials in our products,
electronic equipment waste disposal and encryption technology;
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;
There are significant shortages of critical components that we utilize and therefore, we may not be able to manufacture sufficient quantities
to keep up with market demand; and
Our wage-related expenses in Israel have increased exponentially as a result of the ongoing shortage of skilled research and development, or
R&D, employees in Israel, which is causing heightened competition to recruit new employees.
Risks Related to Our Business, Strategy and Industry
The attack on Israel in October 2023, and the ensuing war with the Hamas terror organization and related conflicts with their supporters, could have
a material adverse effect on our business, financial position, operating results and cash flows.
On October 7, 2023, terrorists from Hamas and other terrorist organizations infiltrated Israel’s southern border from the Gaza Strip and conducted a
series of attacks on civilian and military targets, including widespread killings and kidnappings. Shortly following the attack, Israel declared war against
Hamas. In addition, since the commencement of these events, there have been continued hostilities along Israel’s northern border with Hamas supporters,
including Lebanon (with the Hezbollah terror organization) and Syria. The aggressors have utilized, and could continue to use, terror, rocket and drone attacks,
which target locations throughout Israel and cause substantial disruption and damage. Israel may not be able to defend effectively against such attacks and
such attacks could have a material and adverse impact on our business, operations and financial condition. Additionally, the Houthi movement, which controls
parts of Yemen, launched a number of rocket attacks targeting Israel’s southern border and attacks on marine vessels traversing the Red Sea, which marine
vessels were thought to either be in route towards Israel or to be partly owned by Israeli businessmen. It is possible that these hostilities will escalate, and that
other terrorist organizations, including the Palestinian military organizations in the West Bank as well as other hostile countries, such as Iran, will join the
hostilities.
To date, none of our facilities or infrastructure have been damaged nor have our supply chains been significantly impacted since the war commenced
in October 2023. However, we cannot predict the ultimate effect that the ongoing war and hostilities will have on us, including our supply chain and our ability
to ship products from Israel, and any 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. For example, in connection with the war with Hamas and conflicts with its supporters described above, some of our employees
were called up to serve in the army. Some of our employees live within conflict area territories and may be forced to stay at home instead of reporting to work.
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 materially and adversely
affected.
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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. The war with Hamas and conflicts with its supporters have also led to a
reduction in the number of airlines and flights to Israel as well as a threat to shipping lines. 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. Moreover, any deterioration in the capital markets resulting directly or indirectly from the ongoing conflict
could limit our ability to obtain external financing.
We cannot predict the full impact of the war with Hamas and the related conditions on us in the future, particularly if emergency circumstances or
geopolitical tensions continue, any aspect of which could have a material adverse effect on our business, financial position, operating results and cash flows.
To the extent that the ongoing war with Hamas and conflicts with its supporters materially and adversely affects our business and financial results, such may
also have the effect of heightening many of the other risks described in this Item 3.D, “Risk Factors.”
Epidemics, pandemics, global health crises, or other public health events, threats and concerns, including, but not limited to, any resurgence of
COVID-19, could have a material adverse effect on our business, financial position, operating results and cash flows.
Epidemics, pandemics, global health crises, or other public health events, threats and concerns, including, but not limited to, the global spread of
COVID-19, Ebola, the H1N1 flu virus, the Zika virus, Severe Acute Respiratory Syndrome and other highly communicable diseases, outbreaks of which have
occurred fairly recently in various parts of the world in which we operate, could adversely impact our operations, the operations of our clients and the global
economy, including the level of demand for our services.
In particular, a resurgence of COVID-19, including its highly contagious variants and sub-lineages, could present significant and additional
challenges and risks to businesses around the world. Governmental authorities of many countries, including Israel and the United States, previously
implemented, and could elect to re-implement, significant measures to control any resurgence of COVID-19, including temporary closure of businesses,
severe restrictions on travel and the movement of people, and other material limitations on the conduct of businesses.
In response to the COVID-19 pandemic, we previously implemented remote working and workplace protocols for our employees in Israel in
accordance with Israeli Ministry of Health requirements and similar arrangements in other countries in which we operate. Similarly, to ensure business
continuity, other companies and contact centers were compelled to transition their employees quickly from a physical office to a Work from Home, or WFH
environment. This in turn led to increased demand for UCaaS (UC as a Service) and video conferencing solutions, such as Microsoft Teams and Zoom, as well
as WFH agent solutions for contact centers. As a result of these recent trends, we have experienced an increased demand for our related products and
solutions.
In response to such increased demand, we previously launched WFH promotions and solutions aimed at helping companies offer reliable and high-
quality voice communications for WFH employees and contact center agents. Businesses that previously were unable to transition to WFH, or faced
challenges in their implementation of WFH arrangements due to aging or inappropriate communications solutions, have begun, and will likely continue, to
adopt policies and technologies to better prepare them for future foreseeable and unforeseeable events that prevent employees from working in a physical on-
site office, a trend which has provided a direct benefit to our business. While we believe that more businesses may ultimately decide to transition to WFH,
either fully or partially, as a continuing alternative to the manner in which they conducted their operations before the COVID-19 pandemic, any material
decreases to the use of WFH could have a material and adverse effect on our business, operations and financial condition.
The resurgence or discovery of any new strains of COVID-19, the development, availability and effectiveness of treatments or vaccines for COVID-
19 or any other global health crisis could materially impact our business and operations. Therefore, we can give no assurances that any resurgence of COVID-
19 or any other global health crisis will not have a material adverse effect on our financial position or results of operations in 2024 and beyond.
To the extent a resurgence of COVID-19 or any other global health crisis adversely affects our business and financial results, it may also have the
effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our ability to comply with the covenants
contained in the agreements that govern our indebtedness or our ability to access additional capital should the need arise.
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We have invested significant resources in developing products compatible with Microsoft Skype for Business, Microsoft Teams and related solutions
of our other partners. If Microsoft or our other contact center, unified communications and ALL-IP project partners, such as Genesys, Zoom, Avaya
or the BroadSoft division of Cisco, abandon their solutions compatible with our products, decide to promote products of our competitors instead of
our own products (including as a result of acquiring one of our competitors), become 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 (formerly known as Microsoft Lync) and
Microsoft Teams. 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 Skype for Business and Teams environments. We believe that recognition as a Microsoft partner and
having our products certified by Microsoft, when such a certification program exists, enhances our access to and visibility in markets relevant to our products.
We depend on users of Skype for Business and Teams selecting our compatible products and purchasing them. If Microsoft abandons or significantly changes
Skype for Business and Teams, decides to promote our competitors’ products instead of ours (including as a result of an acquisition of one of our competitors),
becomes unwilling to continue to recognize AudioCodes as a Skype for Business and Teams partner or fails to achieve the expected growth of Skype for
Business or Teams, 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, Zoom phone 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.
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 (i) expanded offering of
cloud session border controller products, (ii) multi-service business routers, or MSBRs, (iii) IP phones and meeting room solutions, (iv) management, (v)
analytics and Voice.AI software solutions and value-added application products, (vi) services or (vii) expected future products. We continually evaluate and
assess 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 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.
The communications equipment market is characterized by rapid technological innovation and intense competition. Accordingly, our success depends
in part on our ability to enhance our existing products and develop next generation products and product features 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
and address the increasingly sophisticated needs of our customers, 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 new products, our financial results could be negatively
affected by write-offs as a result of high levels of obsolete inventory. If any of the foregoing were to occur, our operating results would be harmed.
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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. This transition is ongoing and has resulted in a decline in
our revenues from such products. Various regulators and service providers have announced planned deadlines for transition to all-IP networks. While this
transition could result in new sales opportunities, we believe the overall trend is a decline in revenues in the media gateway business.
The ongoing transition to the use of cloud-based software creates challenges for us.
Recently, our partners have started adopting cloud-based architecture or cloud-based software as a service, or SaaS, models. For example, Microsoft
offers a cloud-based alternative to Skype for Business and Teams and has encouraged business customers to use that model instead of an on-premise
alternative. Moreover, the successor for Skype for Business is Teams, which by definition is cloud-based only. Many of our products are intended for on-
premise use with cloud architecture, but in some scenarios, cloud architecture introduces an alternative to on-premise use. Currently, our revenue is generated
primarily from on-premise 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 cloud-based 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.
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, potential customers or partners may develop or prefer to develop their own technical solutions, use their own internal
resources as an alternative to our technical services, or purchase third-party technology or services as an alternative to our technical services, and as
a result, may not buy our products.
We sell our products as components or building blocks to some potential customers, such as large OEMs, NEPs, enterprises and carriers. These
customers incorporate our products into their product offerings, usually in conjunction with value-added services of their own or of third parties. These
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, as a
result, may reduce our revenues.
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We generally sell to OEMs, NEPs, system integrators, carriers/service providers and distributors who function as intermediaries between us as an
equipment supplier and the ultimate end-users of our products. 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.
Generally, our customers are OEMs, NEPs, system integrators, carriers/service providers and distributors, rather than the end-users of equipment that
we supply. These customers usually purchase equipment from several suppliers and may be trying to fulfill their end-user customers’ specific technical
specifications. We rely heavily on these customers for sales of our products and to inform us about market trends and the needs of their end-user 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 sell most of our products to customers who function as intermediaries rather
than directly to end-users, we are heavily reliant on such intermediaries and have less control over the ultimate selection of products by end-users.
The markets we serve are highly competitive and several 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 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 competitors in the area of enterprise session border controllers include, among others, Oracle, Ribbon Communications, Metaswitch (acquired by
Microsoft Azure for Operators), TE-Systems and Ingate.
Our competitors in the area of low and mid-density digital gateways include, among others, Ribbon Communications, Cisco, Dialogic, NewRock,
Patton, Ferrari and Sangoma.
Our competitors in the area of multi-service business routers include, among others, Cisco, Juniper, Adtran, One-Access (acquired by Ekinops),
Patton, Huawei, HP/3COM and Alcatel-Lucent.
Our competitors in the area of call recording, Compliance recording and Convenient include, among others, Verint, NICE, ACS, Red Box (acquired
by Uniphore), Teleware and Dubber.
Our competitors in the area of applications leveraging speech recognition and conversational AI technology include, among others, Twilio, Nuance
(acquired by Microsoft) and IBM, as well as Contact Center vendors (including Genesys, NICE and Five9s). Some public cloud providers offer technology
and services that partially overlap with ours and several smaller start-up companies are also developing competing solutions.
Our competitors in the area of Conversational IVR and Speech Attendants include companies such as Nuance, Parlance, and other contact center
vendors IVR solutions.
Our competitors in the area of contact center include, but are not limited to, Anywhere365, Luware, Landis, ComputerTalk and other contact center
vendors, primarily focused on the Microsoft Teams product.
Our competitors in the area of SmartTAP360 live which focuses mainly on compliance and quality recording in conjunction with Microsoft Teams
are listed in the certified list of Microsoft vendors although we mainly see in the mid-market projects ASC, Red Box (acquired by Uniphore), NICE, Dybber,
CallCabinet and Verint.
Our competitors in the area of Meeting Insights, which is focused on productivity enhancement, organization repository and sharing for meetings in
the Microsoft Teams environment, include, but are not limited to, Avoma, Otter and Fireflies.AI.
Our principal competitors in the area of IP phones and meeting room devices are device-focused vendors that also certified on MSFT or ZOOM.
These competitors include Poly (acquired by HP Inc.), Yealink, Logitech, Crestron and many others.
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Our competitors for AudioCodes Live for Microsoft Teams are companies that offer a variety managed services for business customers. These
companies include systems integrators, service providers and some cloud-based solution providers. In certain cases, some companies buy AudioCodes
products and/or services, and use them to offer managed services to their customers. AudioCodes sometimes works in partnership with such companies to
complement their offering or even leverage some of their capabilities to offer managed services.
Our main competitor in the area of Live is the in-house implementation of projects (after buying products either directly or through an integrator).
Competition is also in the form of system integrators such as Converge One in USA, NTT or BT and numerous others in various sizes and locations and
specialties.
Some of our competitors have the ability to offer vendor-sponsored financing programs to customers. Those 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 constantly being introduced.
Our competitors in Content delivery and connectivity platform, as well as Operator Connect Accelerate, Zoom exchange providers and WebEx
enablement, are SIPIO, DSTNY Group and Nuwave. Some of our competitors are also customers of our products and technologies.
In the future, we may also develop and introduce other products or services with new or additional telecommunications capabilities or services. As a
result, we may compete directly with voice over-IP, or VoIP, companies, system integrators, value-added resellers, or VARs, 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.
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 expect to
continue to rely for a significant portion of our sales. The 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 ODMs 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 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, DSPG and Rockchip, collectively, supply 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, DSPG, Rockchip 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.
We have depended, and expect to continue to depend, on a small number of large customers. The loss of one of our large customers or the reduction
in purchases by a significant customer or failure of such customer to pay for the products it purchases from us could have a material adverse effect
on our revenues.
In 2023, 2022 and 2021, sales to Westcon Group, our largest customer in 2023, accounted for approximately 16.3%, 15.1% and 15.4%, respectively,
of our total revenues, and sales to ScanSource Communications Group accounted for approximately 10.3%, 10.0% and 10.9%, respectively, of our total
revenues. Both ScanSource and Westcon act as distributors or perform order fulfillment for smaller orders from other customers and do not purchase products
for internal use. If we lose a large customer, or if purchases made by such customers are significantly reduced, or if a large customer fails to pay for the
products it purchases from us, our revenues and results of operations could be adversely affected.
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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, decision making 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 six 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 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.
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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.
Our results of operations could be materially and adversely affected if we cannot keep pace with technological changes impacting the development of
our products and implementation of our business needs, including with respect to automation and the use of AI.
We use internally developed and third-party developed machine learning and AI technologies in our offerings and business, and we are making
investments in expanding our AI-related capabilities in our products, services, and tools, including ongoing deployment and improvement of existing machine
learning and AI technologies. Over the last decade, AudioCodes has developed a range of software-based voice productivity solutions through our Voice.AI
business line. These include the Voca range of conversational AI-related solutions that incorporate voice recognition, AI and machine learning technologies,
SmartTAP 360° Live, an intelligent, secure enterprise compliance recording solution, Meeting Insights, an innovative tool for easily capturing and organizing
all meeting-generated content and Voice.AI Connect a cloud-based solution that simplifies the integration of any cognitive voice service and bot framework
with any voice or telephony channel to deliver an enhanced customer service experience.
Our success depends on our ability to keep pace with rapid technological changes affecting the development of our products and implementation of
our business needs. Emerging technological trends such as AI, machine learning and automation are impacting industries and business operations. If we do not
sufficiently invest in new technology and industry developments, appropriately implement new technologies or evolve our business at sufficient speed and
scale in response to such developments, or if we do not make the right strategic investments to respond to these developments, our products, results of
operations and ability to develop and maintain our business could be negatively affected. Our competitors or other third parties may incorporate AI
technologies into their services, products and business more quickly or more successfully than us, which could impair our ability to compete effectively and
materially and adversely affect our results of operations and financial condition.
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As part of our go to market strategy, we have become certified solution partners of technological leaders such as Microsoft, Genesys and BroadSoft
(acquired by Cisco). 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 and Microsoft
Teams ecosystems. The nature of this Microsoft solution is undergoing major change and, as part of this change, we are 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. In 2018, Cisco completed the acquisition of BroadSoft. This acquisition has impacted
BroadSoft’s directions and future developments, and, as a result, our investment in compatibility with the BroadSoft BroadWorks and BroadCloud solutions.
These changes have affected, and may continue to affect, the revenues we derive from selling into BroadSoft/Cisco solutions. Genesys, a long-term partner of
ours, is also in the process of shifting from on-premises solutions to cloud-based or hybrid on-premises and cloud-based solutions, with potential impact on the
suitability and demand of our products in Genesys contact center deployments. We have little control and influence over the third parties with whom we
engage, and therefore, any alterations or changes made by such third-party partners can negatively impact the results of our operations on reasonably short
notice. We may be unable to recover or adapt to such changes.
Growing emphasis by the investment community, regulators and other stakeholders on environmental, social and governance-related matters could
impact our business and operations.
As members of the investment community have started to heavily factor in a company’s commitment to environmental, social and governance, or
ESG related initiatives and sustainability performance as part of their overall investment thesis and strategy, such investors could elect to eventually forego
their investment in us to the extent we fail to satisfy such metrics. Moreover, the increased focus by investors, regulators and other stakeholders on ESG
related practices and disclosures has created, and will likely create for the foreseeable future, increased pressure regarding the enhancement of, and
modification to, our disclosure and governance practices. Recently, there has been a growing concern and emphasis by governmental agencies regarding the
effects of climate change on the environment and the need to make disclosures to investors regarding a company’s environmental footprint. For example, on
March 6, 2024, the SEC adopted a final rule requiring public companies to include certain climate-related disclosures in their respective registration statements
and annual reports filed with the SEC, including climate-related financial statement metrics, greenhouse gas emissions and climate-related targets and goals,
and management’s role in managing material climate-related risks. A number of state legislators and regulators, including California laws S.B. 253, S.B. 261
and A.B. 1305 in the State of California, as well as non-U.S. governmental agencies (such as the EU’s Corporate Sustainability Reporting Directive), have
adopted or are currently considering proposing or adopting other rules, regulations, directives, initiatives and laws requiring ESG-related disclosures or
limiting (or affirmatively requiring) certain ESG-related conduct. In the event that we were to become subject to any of the newly adopted climate change
and/or ESG-related disclosure regimes, including in the United States and elsewhere, it could require us to, among other things, (i) restrict or limit our
operating activities or other conduct, (ii) make material capital improvements and expend material capital resources in connection with such compliance
efforts, and (iii) alter our business and operational strategy more generally. Furthermore, there continues to be a lack of consistent proposed climate change
and ESG-related legislation, which creates regulatory and economic uncertainty. Separately, enhanced climate-related disclosure requirements and obligations
could lead to reputational or other harm with customers, regulators, investors or other stakeholders and could also increase our litigation risks relating to
statements alleged to have been made by us or others in our industry regarding climate change risks, or in connection with any future disclosures we may
make regarding reported emissions, particularly given the inherent approximations, estimations and uncertainties with respect to calculating, determining and
reporting greenhouse gas emissions. Additionally, governmental regulators, including the SEC, have also from time to time applied additional scrutiny to
existing climate change-related assertions in public disclosures, increasing the potential for enforcement if any such governmental regulator were to allege that
our climate change-related disclosures are misleading or deficient. As a result of the foregoing, we currently face, and are likely to continue to face, increasing
pressure regarding our ESG-related disclosures, practices, initiatives and sustainability performance in the near- and long-term. We continue to monitor for
these changes and their potential impact on our business, financial condition and industry at large, and seek to implement measures to comply with all such
newly implemented requirements; however, given the rapidly changing nature of these rules, regulations, directives, initiatives and laws, and the heightened
regulatory scrutiny being applied by governmental agencies across numerous jurisdictions, it is not possible to predict how such matters will ultimately impact
our business or that of our critical counterparties at this time.
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Financial and Economic Risks
High rates of global inflation and the occurrence of a recession could have a material and adverse impact on our business, results of operations and
financial condition.
During 2022 and 2023, the global markets experienced, and continue to experience, higher rates of inflation as a result of several market factors,
including in the form of increased costs pertaining to labor, materials, shipping and overhead. As a result of these inflationary pressures, governments in many
countries implemented tighter monetary policies (including in the form of higher interest rates), which could slow the growth rate of local economies and
restrict the availability of credit and financing. Interest rates may increase further, or they may remain at current levels for the near-term, and this new interest
rate environment could materially and adversely affect our business, the counterparties with which we interact and the global economy at large. We believe
that our financial condition and results of operations have thus far not been materially impacted by inflationary pressures; however, as a result of inflationary
pressures, more organizations have sought to deploy technology on a “pay per use” subscription model, leveraging advances in cloud-based technologies (such
as Unified Communications as a Service and Contact Center as a Service). To the extent the current rates of inflation and shifts in fiscal and monetary policy
result in prolonged and slower growth or a recession, it could have a material and adverse effect on the demand for our products and services and, in the
process, our business, results of operations and financial condition as a whole, including with respect to general and administrative expenses as a percentage of
total revenue. Moreover, in the event that a global recession were to occur, it could adversely impact the critical counterparties that we engage, including in the
form of a decrease in the products and services they seek to obtain from us. We continue to monitor our operations and will seek to take appropriate actions to
mitigate the potential impact of heightened inflation on our business. Nevertheless, there can be no assurances that we will be successful in doing so, if at all.
Material and adverse developments impacting the financial services industry at large, including the occurrence of actual (or widespread concerns
regarding the potential occurrence of) defaults, illiquidity, operational failures and non-performance by financial institutions and critical
counterparties, could have a material and adverse effect on our business, financial condition and results of operations.
The occurrence of actual (or widespread concerns regarding the potential occurrence of) illiquidity, operational failures, defaults, non-performance or
other material and adverse developments that impact financial institutions and transactional counterparties, or other entities within the financial services
industry at large, have previously caused, and could continue to cause, market-wide liquidity issues, bank-runs and general contagion across the global
financial industry. For example, on March 10, 2023, Silicon Valley Bank, or SVB, was closed by the California Department of Financial Protection and
Innovation and the Federal Deposit Insurance Corporation, or the FDIC, was subsequently appointed as a receiver. Similarly, on March 12, 2023, Signature
Bank and Silvergate Capital Corp. were each placed into receivership. We did not maintain accounts with either bank.
Furthermore, we and other parties with whom we conduct business and engage commercially may be unable to access critical funds in deposit
accounts or other accounts held with a closed or failing financial institution or pursuant to lending arrangements with such financial institutions. Accordingly,
in such instance, our ability to pay our obligations, and any of our counterparties’ ability to pay their respective obligations, or enter into new commercial
arrangements requiring additional payments, could be materially and adversely affected. Counterparties to SVB credit agreements and arrangements, and third
parties such as beneficiaries of letters of credit, among others, could experience direct and indirect impacts from financial institutions in the future and
uncertainty remains over liquidity concerns in the broader financial services industry. Any material and adverse effects from the foregoing could additionally
impact the broader capital markets and, in turn, our ability to access those markets.
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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 in place for the specific 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 held in inventory, we will need to write-off all or a part of the inventory value of these products. Write-offs
and obsolescence could materially and adversely affect our operating results and financial condition. During the year ended December 31, 2023, we wrote off
inventory in the aggregate amount of approximately $1.1 million, during the year ended December 31, 2022, our inventory write off was immaterial, and
during the year ended December 31, 2021, we wrote off inventory in the aggregate amount of approximately $1.7 million. We have incurred, and are likely to
continue to incur in the near- and long-term, 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 our results of 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 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.
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 expand and to continue our long-term expansion plans.
We may need additional financing to operate our business, continue our longer-term expansion plans or acquire other businesses. 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 financing. 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 have a limited order backlog and, therefore, 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. Our expense levels are relatively fixed and 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.
Our gross margin could be negatively impacted by amortization expenses in connection with acquisitions, increased manufacturing costs and other
factors, any of which could adversely affect our results of operations.
Our gross margin has fluctuated and been negatively affected in the past, and could continue to be negatively affected, by amortization expenses in
connection with acquisitions, expenses related to share-based compensation, increases in manufacturing costs, a shift in our sales mix towards our less
profitable products and services, increased customer demand for longer product warranties, fixed expenses that are applied to a lower revenue base, exchange
rate fluctuations 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.
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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 credit
losses and write-offs of accounts receivable could increase.
The ongoing trade war between China and the United States and its potential escalation may have an adverse effect on our business operations and
revenues.
Starting in April 2018, the United States imposed a 25% tariff on steel and a 10% tariff on aluminum imports from other countries. On July 6, 2018,
the United States imposed 25% tariffs on $34 billion worth of Chinese goods. China instituted retaliatory tariffs on certain United States goods. In 2019, the
United States and China implemented several rounds of tariff increases and retaliations. On January 15, 2020, the United States and China signed a Phase One
trade deal pursuant to which, among other things, the United States will modify existing tariffs. In October 2022, the Biden administration issued a new set of
export controls which (i) banned Chinese companies from buying advanced chips and chip-making equipment in the United States without a license, and (ii)
restricted the ability of U.S. persons from providing support for the development or production of chips at certain manufacturing facilities in China. Moreover,
in December 2022, the United States imposed new duties on imports from certain major solar panel makers in China after an investigation determined that
such manufacturers were avoiding tariffs by finishing their products in Southeast Asian countries. More recently, President Biden signed an executive order
that will make it more difficult for U.S. firms to invest in certain Chinese companies—citing national security concerns, the executive order prohibits
investments in AI and quantum computing. In response to the foregoing, China implemented its own export controls on two rare elements, germanium and
gallium, which the United States relies on to produce chips, fiber optics and solar panels.
Since we operate in the United States and deliver products and services to customers in the United States, the trade war could materially and
adversely affect us, and especially if, when and to the extent escalated, may cause global economic turmoil and adversely impact the supply chain for our
products, the cost of our products and the demand for our products and, thus, may have a material adverse effect on our business and results of operations.
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 2023 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 2023 (including our cost
of revenues) were incurred in NIS. During 2023, the NIS depreciated against the dollar, which resulted in a decrease in the dollar costs 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 or fluctuation in our expenses, we may be required to increase the price of our products, which could make our
products and services less competitive in the markets in which we operate. 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.
Our sales to European customers denominated in Euros are increasing. Sales denominated in Euros could make our revenues subject to fluctuation in
the Euro/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 2023, the Euro depreciated against the dollar, which resulted in an increase in the prices of our products that are denominated in Euros.
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The ongoing conflict in Ukraine, including the actual (or perceived threat of an) expansion or exacerbation of such conflict, and the actions
undertaken by western nations (and their allies) in response to Russia’s actions, has resulted, and could continue to result in, significant impacts on
the global markets for the foreseeable future.
In February 2022, Russia launched a large-scale invasion of Ukraine, and Russia and Ukraine continue to engage in active and armed conflict. Such
conflict has resulted, and will likely continue to result in, significant destruction of Ukraine’s infrastructure and substantial casualties amongst military
personnel and civilians. As a result of Russia’s invasion of Ukraine, the governments of several nations have implemented commercial and economic sanctions
against Russia (as well as certain banks, companies, government officials, and other individuals in Russia and Belarus). In addition to governmental entities,
actors in the private sector, including, among others, tech firms, consumer brands and major manufacturers, have stopped, or previously announced that they
intend to stop, operations in Russia and cease their partnerships with Russian firms, and shippers, insurance companies and refiners have similarly indicated
that they will no longer purchase or ship crude oil from Russia.
In March 2022, Israel’s then Foreign Minister Mr. Yair Lapid indicated that Israel would not function as a route to bypass sanctions imposed on
Russia by the United States and other western countries, and Israeli banks have elected to sever relationships with sanctioned Russian banks. Israel has not, as
of the date of this Annual Report, imposed explicit sanctions on Russia or Belarus; however, it has publicly rejected Russia’s annexation of the four occupied
regions of Ukraine and voiced support for Ukraine’s sovereignty and territorial integrity. Moreover, Israeli companies that have ties to the United States, the
United Kingdom and the European Union could be indirectly subject to the measures imposed by such nations.
In May 2023, in coordination with the G7, Australia, and other partners, the United States imposed new sanctions on Russia. As part of these actions,
the U.S. Department of State imposed sanctions on over 200 entities, individuals, vessels, and aircraft, as well as designated certain entities and individuals (i)
across Russia’s defense and related materiel, technology, and metals and mining sectors and (ii) involved in expanding Russia’s future energy production and
capacity.
In December 2023, President Biden signed an executive order which seeks to strengthen U.S. sanctions authorities against financial facilitators of
Russia’s war efforts, and additionally provided authority to broaden U.S. import bans on certain Russian goods. Likewise, in February 2024, the United States’
Treasury Department, State Department and Department of Commerce, collectively, imposed an extensive set of new sanctions on Russia, which specifically
target Russia’s financial sector and military-industrial operations. Such sanctions seek to restrict Russia’s energy industry and limit the evasion of sanctions
outside the United States, including by encompassing 500 additional persons associated with the ongoing Russo-Ukrainian conflict.
While it is not possible to predict or determine the ultimate consequences and impact of the conflict in Ukraine, such conflict could result in, among
other things, significant regional instability and geopolitical shifts, and material and adverse effects on global macroeconomic conditions, financial markets,
exchange rates and supply chains. To the extent negotiations between Russia and Ukraine are ultimately unsuccessful, the conflict in Ukraine could have a
lasting impact in the near- and long-term on the financial condition, business and operations of our business (and the businesses of the counterparties with
whom we engage), and the global economy at large.
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Macroeconomic changes, including political disturbances, geopolitical instability, and trade wars, may adversely impact our business and operations.
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, including mass strikes, wars, escalating or outbreak of armed hostilities, including the
ongoing Russo-Ukraine war and Israel-Hamas conflict, and other crises, 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. Our business and operations are subject to uncertain macroeconomic changes, any of which could result in suspended
operations, business interruptions, and impediments to our business. Moreover, we are subject to risks of hostilities, confiscation, deprivation of assets or
military action that may directly or indirectly impact our operations, assets or financial performance in the areas where we operate. Most recently, for example,
the conflict in Ukraine has resulted in, among other things, significant regional instability and geopolitical shifts, and material and adverse effects on global
macroeconomic conditions, financial markets, exchange rates and supply chains. Likewise, the assaults launched by Hamas and its supporters against Israeli
citizens, and the related Israeli military action taken in response, has caused substantial regional instability and extreme volatility in the global markets at
large. It is not possible at this time to predict or determine the ultimate consequences of the conflict in Ukraine, which could include, among other things,
greater regional instability, geopolitical shifts and other material and adverse effects on macroeconomic conditions, currency exchange rates, supply chains and
financial markets.
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, both domestically and 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.
Any shortages in, or increased costs of, semiconductors (and other components) could adversely impact our business and financial condition,
including in the form of reduced revenues and increased costs and expenses.
Since the onset of COVID-19, the semiconductor industry has experienced, and continues to experience, significant shortages in capacity, which has
resulted in the elongation of the lead time required to produce semiconductors. Given that semiconductors are a key component in our business, the inability to
receive sufficient amounts of semiconductors on an expedited basis could impact our ability to deliver our products and services to third parties on a timely
basis or could lead to an increase in the costs of inventory and overall purchase price of components. In the event that the capacity shortage in the
semiconductor industry (and other components) continues for an extended period of time in the future, it could, among other things, have a material and
adverse impact on (i) our manufacturing capabilities, (ii) our customer relationships, (iii) demand for our products and services and (iv) revenue and results of
operations more generally. In the event that the semiconductor shortage improves in the near-term, such industry is historically cyclical and is characterized by
rapid and recurring changes in technology, price erosion, short product life cycles, fluctuations in supply and demand, and product obsolescence. Therefore,
another material shortage could occur in the future. In 2023, the United States sought to tighten export control rules designed to limit the flow of artificial
intelligence semiconductors to China, and the Netherlands intended to curb sales of certain ASML equipment from being sold to China’s chipmakers. While
the third quarter of 2023 generally exhibited improvements in the lead times of component supply, there are families of components which have not yet
reached their pre COVID-19 supply lead times. Given the current uncertainty of the global markets, we are not able at this time to estimate the ultimate long-
term impact that the shortage of semiconductors (or other components) will have on our business.
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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 or raise finance 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 the Gaza Strip, and the northern border with Lebanon, as well as in the
Golan Heights. The future effect of these conflicts 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.
Political events in various countries in the Middle East, such as Syria, Iraq, Iran, Lebanon and Egypt, have weakened the stability of those countries,
and have allowed extreme terrorists organizations, such as ISIS and Hamas, 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. Any events that affect the State of Israel may impact us in unpredictable ways. For example, the global movement for a
campaign of Boycott, Divestment and Sanctions (BDS) against Israel may adversely affect our sales in certain countries. We have contingency plans for
alternative manufacturing and supply sources, but these plans may prove to be insufficient. Should our operations be impacted in a significant way, this may
materially and adversely affect the results of our operations.
On October 7, 2023, terrorists from Hamas and other terrorist organizations infiltrated Israel’s southern border from the Gaza Strip and conducted a
series of attacks on civilian and military targets, including widespread killings and kidnappings. Shortly following the attack, Israel declared war against
Hamas. In addition, since the commencement of these events, there have been continued hostilities along Israel’s northern border with Hamas supporters,
including Lebanon (with the Hezbollah terror organization) and Syria. The aggressors have utilized, and could continue to use, terror, rocket and drone attacks,
which target locations throughout Israel and cause substantial disruption and damage. Israel may not be able to defend effectively against such attacks and
such attacks could have a material and adverse impact on our business, operations and financial condition. Additionally, the Houthi movement, which controls
parts of Yemen, launched a number of rocket attacks targeting Israel’s southern border and attacks on marine vessels traversing the Red Sea, which marine
vessels were thought to either be in route towards Israel or to be partly owned by Israeli businessmen. It is possible that these hostilities will escalate, and that
other terrorist organizations, including the Palestinian military organizations in the West Bank as well as other hostile countries, such as Iran, will join the
hostilities.
To date, none of our facilities or infrastructure have been damaged nor have our supply chains been significantly impacted since the war commenced
in October 2023. However, we cannot predict the ultimate effect that the ongoing war and hostilities will have on us, including our supply chain and our ability
to ship products from Israel, and any 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. For example, in connection with the war with Hamas and conflicts with its supporters described above, some of our employees
were called up to serve in the army. Some of our employees live within conflict area territories and may be forced to stay at home instead of reporting to work.
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 materially and adversely
affected.
Our commercial insurance does not cover losses that may occur as a result of events associated with war and terrorism. Although the Israeli
government currently covers the reinstatement value of property damage and certain direct and indirect damages that are caused by terrorist attacks or acts of
war, such coverage would likely be limited, may not be applicable to our business (either due to the geographic location of our offices or the type of business
that we operate) and may not reinstate our loss of revenue or economic losses more generally. Furthermore, we cannot assure you that this government
coverage will be maintained or that it will sufficiently cover our potential damages, or whether such coverage would be timely provided. Any losses or
damages incurred by us as a result of the current conflict in Israel, or any similar conflicts in the future, could have a material adverse effect on our business,
financial conditions and results of operations.
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Additionally, 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. The war with Hamas and conflicts with its supporters
have also led to a reduction in the number of airlines and flights to Israel as well as a threat to shipping lines. 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. Moreover, any deterioration in the capital markets resulting directly or indirectly from the
ongoing conflict could limit our ability to obtain external financing.
We cannot predict the full impact of the war with Hamas and the related conditions on us in the future, particularly if emergency circumstances or
geopolitical tensions continue, any aspect of which could have a material adverse effect on our business, financial position, operating results and cash flows.
We are adversely affected by the changes in the value of the dollar against the NIS and could be adversely affected by the rate of inflation in Israel,
and we may incur losses as a result of our forward contracts and other hedging activities.
We generate most of our revenues in dollars and, in 2023, 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 dollars, are influenced by the exchange rate between the dollar and the NIS. During 2023 and 2022, the NIS
depreciated against the dollar, which resulted in a decrease in the dollars cost of our operations in Israel and during 2021, the NIS appreciated against the
dollar, which resulted in an increase in the dollar cost of our operations in Israel. To the extent the dollar weakens against the NIS, we could experience an
increase in the cost of our operations, which are measured in dollars in our financial statements, which could adversely affect our results of operations. In
addition, in periods in which the 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 dollar or that the timing of such devaluations lags considerably behind inflation, which will increase our costs as expressed in
dollars.
A decrease in value of the dollar in relation to the NIS could have the effect of increasing the cost in dollars of these expenses. Our dollar-measured
results of operations were adversely affected in 2021 and 2020 when the NIS appreciated substantially against the dollar. This could happen again if the 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. While we have sought to hedge certain exposures to changes in foreign currency
exchange rates through the use of such instruments, we cannot assure that foreign currency fluctuations will not have a material and adverse effect on our
financial condition, results of operations and business. Our use of derivative transactions, including forward contracts, could additionally expose us to the risk
of financial loss upon unexpected or unusual variations in the macroeconomy. Likewise, if we wish to maintain the dollar-denominated value of our products
in non-U.S. markets, devaluation in the local currencies of our customers relative to the dollar may cause our customers to cancel or decrease orders or default
on payment. We can provide no assurance that our hedging arrangements will be effective nor that the strategies underlying these arrangements will be
successful, if at all. If any of the strategies we utilize to manage our exposure to various types of currency exchange risk is not effective, we may incur
additional losses.
Because exchange rates between the NIS and the dollar continually fluctuate, exchange rate fluctuations have an impact on our profitability and
period-to-period comparisons of our results of operations. For example, in 2023, the value of the dollar increased in relation to the NIS by 3.1% and the
inflation rate in Israel was 3.0%. In 2022, the value of the dollar increased in relation to the NIS by 13.2% and the inflation rate in Israel was 5.3%. In 2021,
the value of the dollar decreased in relation to the NIS by 3.3% and the inflation rate in Israel was 2.8%. Our results of operations may be materially and
adversely affected in case of a decrease in the value of the dollar to the NIS.
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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 comply with or satisfy these conditions, we may be required to
refund grants previously received together with interest and penalties and/or be charged with a criminal offense.
In connection with research and development grants we received from the Israel Innovation Authority, or the IIA, we must pay royalties to the IIA on
the revenue derived from the sale of products, technologies and services developed with the grants from the IIA. The terms of the IIA grants and the law
pursuant to which grants are made restrict our ability to manufacture products or transfer technologies outside of Israel if the IIA grants funded the
development of the products or technology, without special approvals from the IIA. Furthermore, the consideration available to our shareholders in a
transaction involving the transfer outside of Israel of technology or know-how developed with the IIA funding (such as a merger or similar transaction) may be
reduced by an amount of up to six times of the amounts of grants that we received from the IIA the plus interest, less any royalties that we already paid. These
restrictions may limit our ability to enter into agreements for such transactions without the IIA approval. We cannot be certain that any approval of the IIA will
be obtained on terms that are acceptable to us, or at all.
As of December 31, 2023, we have a contingent obligation to pay royalties in the amount of approximately $21.3 million, related to historical grants
received by two of our subsidiaries.
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, Israeli tax considerations may make potential transactions undesirable to us or to some of
our shareholders.
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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.
Regulatory, Legal and Tax Risks
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
or similar regulations in other countries 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 ensure 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.
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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. 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.
Moreover, a number of aspects of intellectual property protection in the field of AI are currently under development, and there is uncertainty and
ongoing litigation in different jurisdictions as to the degree and extent of protection warranted for AI and machine learning systems, as well as relevant system
input and outputs. If we fail to obtain protection for the intellectual property rights concerning our AI technologies, or later have our intellectual property
rights invalidated or otherwise diminished, our competitors may be able to take advantage of our research and development efforts to develop competing
products, and our business, financial condition and operations could be materially and adversely impacted.
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 a product so that it becomes non-infringing,
which may have an adverse impact on our 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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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 business and 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 incur 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 has 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 European Union, or 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.
Our use of open source software could materially and adversely affect our ability to offer our products, subject us to actual and threatened litigation,
and cause substantial harm to our financial condition and operations, generally.
We have used, and could continue to use, open source software in connection with the development and deployment of our software products. To the
extent we continue to utilize open source software in the future, it could in some instances subject us to certain unfavorable conditions, including requirements
that we offer our products that incorporate the open source software for no cost, that we make publicly available all or part of the source code for any
modifications or derivative works we create based upon, incorporating or using any such open source software, or that we license such modifications or
derivative works under the terms of the particular open source license. Companies that have elected to incorporate open source software into their products
have, from time to time, been subject to claims challenging the use of such open source software and compliance with the terms of such use. Accordingly, we
could be made party to a lawsuit by a third party claiming ownership of what we believe to constitute open source software or otherwise asserting
noncompliance with the terms of such use. While we seek to monitor and track our use of open source software in an attempt to mitigate the risk of needing to
disclose any proprietary source code, or that would otherwise breach the terms of any open source agreement, we cannot guarantee that our efforts will be
successful and that all open source software has been, or will be, reviewed prior to its incorporation into our products.
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Given the lack of judicial precedent and guidance regarding each specific open software license type, there is a risk that open source software licenses
that we utilize could be interpreted in a manner that imposes unanticipated conditions and restrictions on our ability to offer, provide and market our products
and services. If we are ultimately found to have breached or failed to comply with any of the terms and conditions associated with any open source software
license, we could be subject to, among other things, infringement claims and others forms of liability, or be required to obtain costly licenses from third parties
to continue to provide our products and services on terms that are not economically advantageous or feasible, if at all. Additionally, use of open source
software generally carries greater legal risks than does the use of third-party commercial software, and therefore, any open source software utilized will
generally be provided without any contractual protections, warranties or other support. Any of the foregoing risks could materially and adversely affect our
financial condition, results of operations and business.
We must comply with continually evolving privacy-related laws regulations in multiple jurisdictions, including with respect to AI.
Our use and handling of personally identifiable data is regulated at the international, federal and state levels, and we are subject to a variety of local
and international privacy laws and regulations that govern the collection, use, retention, sharing, processing, export and security of personal information. The
regulatory environment surrounding information security and privacy is increasingly demanding. For example, the General Data Protection Regulation, or
GDPR, which came into effect on May 25, 2018, implemented stringent operational requirements for companies that are established in the EU or, where not
established in the EU, offer goods or services to individuals in the EU or monitor the behavior of individuals in the EU. Failure to comply with the GDPR can
result in fines of up to EUR 20 million or up to 4% of the total worldwide annual turnover of the preceding financial year, whichever is higher. The related UK
GDPR and the UK Data Protection Act of 2018, which ensures that the United Kingdom has in effect the same high standards for data protection in place as
under the GDPR, impose stringent operational requirements in the United Kingdom (including through restrictions on processing of personal data and cross-
border transfers of personal data, and mandatory breach reporting to regulators and, under certain circumstances, to the individuals whose personal data was
compromised in the breach).
The requirements of the GDPR include, for example, expanded disclosures about how personal data is processed, mandatory data breach notification
requirements, a strengthened data subject rights regime and higher standards for obtaining consent from individuals to process their personal data (including in
certain circumstances for marketing), all of which involve significant ongoing expenditure. The principle of accountability likewise requires us to put
significant documentation in place to demonstrate compliance. While the GDPR in large part harmonizes data protection requirements across EU countries,
some provisions allow EU Member States to adopt additional or different requirements, which could limit our ability to use and share personal data or could
require localized changes. We may also be affected by legal challenges to the validity of EU mechanisms for transfers of personal data outside the EU, and our
business could be impacted by changes in law as a result of future review of these mechanisms by European regulators under the GDPR, as well as current
challenges to these mechanisms in the European courts.
Other new laws and regulations are rapidly coming into effect while existing legislation is quickly evolving. In the United States, the SEC adopted
new rules requiring public companies to disclose information about a material cybersecurity incident, including any breach of personal data, within four
business days of determining that it has experienced a material cybersecurity incident. The final rule applicable to the cybersecurity disclosure to be included
in our (i) Current Reports on Form 6-K became effective on December 18, 2023 and (ii) Annual Report on Form 20-F became effective for any fiscal year
ending on or after December 15, 2023. Likewise, several privacy laws in the United States came into effect in 2023, including in California, Virginia,
Colorado, Connecticut and Utah, and new state privacy laws will come into effect in 2024, including in Montana, Oregon and Texas, all of which give new
data privacy rights to their respective residents and impose significant obligations on controllers and processors of consumer data.
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There is additionally increasing U.S. and foreign activity in the regulation of AI, and other similar uses of technology. For example, in Europe, there
is a proposed regulation (the Artificial Intelligence Act) that, if adopted and approved, could impose onerous and substantial obligations related to the use of
AI-related systems. Additionally, several states and localities in the United States have enacted measures related to the use of AI and machine learning in
products and services. In October 2023, the President of the United States issued an executive order on the Safe, Secure and Trustworthy Development and
Use of AI, emphasizing the need for transparency, accountability and fairness in the development and use of AI tools, and AI is the subject of evolving review
by various governmental and regulatory agencies, including the SEC and the Federal Trade Commission. Depending on how these AI laws and regulations are
interpreted, and to the extent that our business practices, products and services utilize AI, we could be subject to, and need to comply with, such obligations.
Moreover, our development and use of AI, and the uncertain regulatory environment, could result in reputational harm, liability or other material and adverse
consequences to our financial condition and business operations. The introduction of AI technologies into new or existing products may also result in new or
enhanced governmental or regulatory scrutiny, litigation, confidentiality or security risks, ethical concerns, or other complications that could adversely affect
our business, reputation, or financial results. The intellectual property ownership and license rights, including copyright, surrounding AI technologies has not
been fully addressed by courts or national or local laws or regulations, and the use or adoption of third-party AI technologies into our products and services
may result in exposure to claims of copyright infringement or other intellectual property misappropriation. Uncertainty around new and emerging AI
technologies, such as generative AI, may require additional investment in the development and maintenance of proprietary datasets and machine learning
models, development of new approaches and processes to provide attribution or remuneration to creators of training data, and development of appropriate
protections and safeguards for handling the use of customer data with AI technologies, which may be costly and could impact our expenses if we decide to
expand generative AI into our product offerings. AI technologies, including generative AI, may create content that appears correct but is factually inaccurate
or flawed. Our customers or others may rely on or use this flawed content to their detriment, which may expose us to brand or reputational harm, competitive
harm, and/or legal liability. The use of AI technologies presents emerging ethical and social issues, and if we enable or offer solutions that draw scrutiny or
controversy due to their perceived or actual impact on customers or on society as a whole, we may experience brand or reputational harm, competitive harm,
and/or legal liability.
Existing privacy-related laws and regulations in the United States and other countries are evolving and are subject to potentially differing
interpretations, and various U.S. federal and state or other international legislative and regulatory bodies may expand or enact laws regarding privacy and data
security-related matters. Due to the fact that privacy and information security laws and regulations are subject to change from time to time, our compliance
with them may result in cost increases due to necessary systems changes and the development of new processes. Any new or modified laws and regulations
may require that we modify our data processing practices and policies, and incur substantial costs and expenses in an effort to comply with such laws and
regulations. These laws are complex and there is no ubiquitous approach to maintaining compliance. Requirements may be interpreted and applied in a manner
that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices. If we fail to comply with any of these laws and
regulations, we could be subjected to legal risk and other adverse effects to our business and operations.
We are subject to taxation in several countries. Tax matters, including changes in tax laws or rates, adverse determinations by taxing authorities and
imposition of new taxes could adversely affect our results of operations and financial condition.
Because we operate in several countries, we are subject to taxation in multiple jurisdictions, including Israel, the United States and certain other
countries where we have operations. 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 carryforward tax losses and other tax planning benefits, such as Israeli Technological Preferred Enterprise and 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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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 2005 through 2023, 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. 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, “Additional Information—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.
If a United States person is treated as owning at least 10% of our ordinary shares, such holder may be subject to adverse U.S. federal income tax
consequences.
If a United States person is treated as owning (directly, indirectly, or constructively) at least 10% of the value or voting power of our ordinary shares,
such person may be treated as a “United States shareholder” with respect to us and each “controlled foreign corporation” in our group (if any). Because our
group includes one or more U.S. subsidiaries, certain of our non-U.S. subsidiaries could be treated as controlled foreign corporations (regardless of whether or
not we are treated as a controlled foreign corporation). A United States shareholder of a controlled foreign corporation may be required to report annually and
include in its U.S. taxable income its pro rata share of “Subpart F income,” “global intangible low-taxed income,” and investments in U.S. property by
controlled foreign corporations, regardless of whether we make any distributions. An individual that is a United States shareholder with respect to a controlled
foreign corporation generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a United States shareholder that is a
U.S. corporation. Failure to comply with these reporting obligations may subject a United States shareholder to significant monetary penalties and may
prevent the statute of limitations with respect to such shareholder’s U.S. federal income tax return for the year for which reporting was due from starting. We
cannot provide any assurances that we will assist investors in determining whether we or any of our non-U.S. subsidiaries is treated as a controlled foreign
corporation or whether any investor is treated as a United States shareholder with respect to us or any such controlled foreign corporation or furnish to any
United States shareholders information that may be necessary to comply with the aforementioned reporting and tax paying obligations. A United States
investor should consult its advisors regarding the potential application of these rules to an investment in our ordinary shares.
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, as amended, or the
Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, regulations promulgated by the
United States Securities and Exchange Commission, or the SEC, and Nasdaq listing 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.
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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.
Other new laws and regulations are rapidly coming into effect or are being contemplated, which create further corporate governance and disclosure
requirements. For example, the SEC recently adopted new rules on Cybersecurity Risk Management, Strategy, Governance and Incident Disclosure, which
will require reporting companies, including us, to report information relating to certain cyber-attacks or other information security breaches in disclosures
required to be made under the federal securities laws and may increase our costs of doing business, expose us to potential compliance risk, including the
ability to make timely disclosures to the public, and impact the manner in which we operate. Any such cyber incidents involving our computer systems and
networks, or those of third parties important to our business, could have a material adverse effect on our business, financial condition, results of operations and
prospect. Additionally, the rapid evolution and increased adoption of AI technologies and our obligations to comply with emerging laws and regulations may
require us to develop additional AI-specific governance programs and comply with related disclosure regimes.
There remains increased focus from lawmakers and regulators on corporate ESG practices, including climate change and related ESG disclosure
requirements. Expectations regarding voluntary ESG initiatives and disclosures may result in increased costs (including but not limited to increased costs
related to compliance, stakeholder engagement, contracting and insurance), changes in demand for certain products, enhanced compliance or disclosure
obligations, or other adverse impacts to our business, financial condition or results of operations. In addition, standards for tracking and reporting ESG matters
continue to evolve, and our business may be impacted by new laws, regulations or investor criteria in the United States, Europe and around the world related
to ESG. In March 2024, the SEC adopted new rules that will require registrants to provide certain climate-related information in their registration statements
and annual reports. The rules require information about a registrant's climate-related risks that are reasonably likely to have a material impact on its business,
results of operations, or financial condition. The required information about climate-related risks will also include disclosure of a registrant's greenhouse gas
emissions. In addition, the rules will require registrants to present certain climate-related financial metrics in their audited financial statements. The SEC’s
newly adopted climate-related disclosure rules may require us to incur significant additional costs to comply, including the implementation of significant
additional internal controls processes and procedures regarding matters that have not been subject to such controls in the past and expanded data collection,
analysis and certification with respect to greenhouse gas emissions reporting that may not be complete or accurate, and impose increased oversight obligations
on our management and board of directors. These and other regulations, disclosure-related and otherwise, including California laws S.B. 253, S.B. 261 and
A.B. 1305 and the EU’s Corporate Sustainability Reporting Directive, may increase our costs as well as increase scrutiny regarding our ESG efforts, which
may enhance the risks discussed in this risk factor. These legal and regulatory requirements, as well as investor expectations related to ESG practices and
disclosures are subject to change, can be unpredictable, and may be difficult and expensive for us to comply with. If we fail to adapt to or comply with all
laws, regulations, policies and related interpretations, our business and reputation could be negatively impacted, and our share price and access to/cost of
capital could be materially and adversely affected. Additionally, many of our customers and suppliers may be subject to similar expectations, which may
augment or create additional risks, including risks that may not be known to us.
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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, 2018
and March 20, 2024, the trading price of our shares on Nasdaq has fluctuated from a low of $6.62 to a high of $44.94. The following factors may cause
significant fluctuations in the market price of our ordinary shares:
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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;
the introduction of new products;
changes in product price policies involving us or our competitors;
market conditions in the industry;
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. Any actual or anticipated fluctuations in
our results of operations could require that we issue revised guidance, and the failure to meet the expectations of our investors or analysts could have
a material and adverse impact on 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 significantly 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 be materially and adversely impacted. Accordingly,
comparisons of our revenues and operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an
indication of our future performance.
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The following factors, among others, have affected our quarterly results of operations in the past and are likely to affect our quarterly results of
operations in the near- and long-term:
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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, including macroeconomic factors not within our control.
Accordingly, our operating results have been and may continue to be difficult to predict, even in the near term, and consequently, the results of any
past periods should 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.
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.
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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 share-based compensation plans. Instead, we follow Israeli law and practice
which permits the establishment or amendment of certain share-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 Ltd., or the Tel Aviv Stock Exchange, or the TASE, under
the Israeli regulatory “dual listing” regime that provides companies whose securities are listed both on Nasdaq and the TASE certain reporting leniencies.
Trading in our ordinary shares on these markets is made in different currencies (dollars on Nasdaq and NIS 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.
While our ordinary shares are currently listed on the TASE, there is no guarantee as to how long such listing will be maintained.
We plan to continuously examine the advisability of maintaining our listing on the TASE. We may in the future voluntarily delist our securities from
the TASE, provided we furnish notice thereof at least 90 days in advance of such delisting. If our ordinary shares are delisted, some holders of our ordinary
shares that are traded on the TASE may be required or will choose to sell their shares, which could result in a decrease in the trading price of our ordinary
shares.
There can be no assurance that we will continue to declare cash dividends or continue repurchases of our ordinary shares.
Since July 2018, our Board of Directors have elected to declare cash dividends on our ordinary shares each year. Prior to the declaration of these
dividends, we had never declared a cash dividend. Under the Israeli Companies Law, 1999, or the Companies Law, we may pay dividends only out of our
profits as determined for statutory purposes, unless court approval is granted for the payment of dividends despite the lack of statutory profits. Accordingly,
the declaration and payment of future dividends is subject to the Board’s discretion and will be dependent upon future earnings, cash flows, the requirements
of the Companies Law, the receipt of court approval, if required, and other factors. There can be no assurance that we will continue to declare cash dividends
on our ordinary shares.
In addition, since 2014, we have received court approvals each year for share repurchases up to specified amounts. Our share repurchases 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. There can be no assurance that we will continue to seek court approval of, or that we will complete, additional share repurchases.
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General Risk Factors
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;
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, or the 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 of 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.
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We depend on a limited number of key personnel who would be difficult to replace.
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 President and Chief Executive Officer, and Lior Aldema, our Chief Business Officer. Mr. Adlersberg is also
a director. If our President and 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 require 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.
In 2023, Israel faced a shortage of qualified technical personnel with the requisite experience in the industry in which we operate. Specifically, there was a
notable shortage of engineers who were familiar with the intricacies and bespoke aspects of our products and services. To the extent that such trends continue
in 2024 (and beyond) and we fail to hire and retain skilled employees, our business may be adversely affected, including our ability to deliver products and
services on a timely basis. Moreover, to the extent we are able to successfully recruit and retain additional technical personnel, we may be required to incur
significant costs due to steep salary increases. Given the substantial demand for such services, we may be unsuccessful in attracting and retaining an adequate
number of technical personnel to support our current operations and the potential expansion of our business.
Rising wages and other labor-related costs could materially and adversely affect our business.
The ability to execute our strategic plans is highly dependent on our ability to promote, retain and recruit a sufficient number of qualified personnel.
Given the competition for qualified talent and rising wages in the technology industry in Israel, we face significant challenges in finding, hiring and retaining
qualified and highly-trained personnel. The tight labor market has resulted in higher labor-related costs, increased attrition rates and fundamental changes in
the labor market and expectations of employees. In particular, our desire to hire superior talent may require us to pay higher wages and provide enhanced
benefits, which could cause us to incur higher labor-related costs as compared to our competitors. We expect wages to continue to rise in Israel in the near-
term, which will continue to impact our overall financial condition, cash flows and operations. We cannot be assured that we will be successful in hiring,
retaining, training and promoting our personnel at current wage rates given that we are currently operating in a highly competitive labor market and further
increases in market compensation could adversely impact our business.
A data security or privacy breach could adversely affect our business and services.
The protection of customer, employee and company data is critical to our business and operations. Customers and other stakeholders have a high
expectation that we will adequately protect and safeguard their personal data or other information from cyberattack or other security breaches. We rely on the
information technology system that we manage, and those that are managed by third parties with whom we engage, to conduct our business and operations,
and these systems are subject to cybersecurity risks, potential attacks and breaches due to human error. We are additionally increasingly incorporating open
source software into our products and there may be vulnerabilities in open source software that may make our products susceptible to cyberattacks. Moreover,
given the nature of cyberattacks, breaches and infiltration of our internal systems (or the systems of the third parties with whom we engage) could go
unnoticed for extended periods of time and materially disrupt our operations, which could result in a material loss of revenue, substantial downtime and loss of
critical information and data. We may incur higher costs in order to remediate or correct the effects of any such incidents. Likewise, 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 therefore 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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Furthermore, a breach of customer, employee, or company data could also significantly damage our reputation and result in lost sales, fines, or
lawsuits. Despite our security measures, our information technology and infrastructure and/or our products 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, or customer networks in whole
or in part, and the information stored there could be accessed, publicly disclosed, lost or stolen.
Certain macroeconomic and geopolitical conditions, which are outside of our control, as well as the evolution of methods and techniques used by bad
actors, may also make us more susceptible to a cybersecurity attack. For example, growing tensions between Russia and several western nations (and their
respective allies) in connection with Russia’s invasion of Ukraine in February 2022, could result in retaliatory actions being undertaken by supporters of
Russia, including in the form of espionage, phishing campaigns and other forms of cyber-attacks. Moreover, pro-Russian ransomware cybercriminals and
gangs have previously publicly threatened to augment their hacking efforts in response to the implementation of sanctions and other responsive actions taken
by western countries (and their allies). 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.
The methods and techniques used by cyber threat actors to gain entry into our network and access our computer systems, software and data will
become more advanced with the use of AI and may become increasingly difficult or impossible to detect and prevent. As these threats continue to evolve, we
may be required to invest significant additional resources to modify and enhance our information security and controls or to investigate and remediate any
security vulnerabilities. While our technology infrastructure is designed to safeguard and protect personal and business information, we have limited ability to
monitor the implementation of similar safeguards by our vendors.
Any cyberattack, unauthorized intrusion, malicious software infiltration, network disruption, corruption of data, misuse or theft of private or other
sensitive information, or inadvertent acts by our own employees, could result in the disclosure or misuse of confidential or proprietary information, which
could have a material adverse effect on our business operations or that of our clients. If we experience a significant data security breach, fail to detect and
appropriately respond to a significant data security breach, or fail to comply with the various cybersecurity regulations, including the California Consumer
Privacy Act and the California Privacy Rights Act in the United States, we could be exposed to government enforcement actions and private litigation. These
losses may exceed our insurance coverage for such incidents. In addition, our employees and clients could lose confidence in our ability to protect their
personal and proprietary information, which could cause them to terminate their relationships with us. Any loss of confidence arising from a significant data
security breach could hurt our reputation, further damaging our business.
We may desire 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;
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●
●
●
●
●
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;
increased expenditures on human resources and related costs; and
decreased growth of our professional services.
If acquisitions disrupt our sales or marketing efforts or operations, our business may suffer.
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 our 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.
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. We initially concentrated on low-bit-rate speech compression
technology, later moving into voice over packet, or VoP, chips, VoIP communication modules, blades and boards. In 2001, we released an analog media
gateway based on blade and chip technologies. This was followed by a family of VoIP media gateways combining analog and digital telephony interfaces. We
then began developing high density VoIP media gateways and media servers. As the decade progressed, we expanded our product portfolio with session border
controllers (2006), multi-service business routers and gateways (2008) and IP phones (2011).
Over the last decade, AudioCodes has developed a range of software-based voice productivity solutions through our Voice.AI business line. These
include the Voca range of conversational AI-related solutions and Microsoft Teams contact center that incorporate voice recognition, AI and machine learning
technologies, SmartTAP 360° Live, an intelligent, secure enterprise compliance recording solution, Meeting Insights, an innovative tool for easily capturing
and organizing all meeting-generated content and Voice.AI Connect, a cloud-based solution that simplifies the integration of any cognitive voice service and
bot framework with any voice or telephony channel to deliver an enhanced customer service experience. See Item 3.D, “Key Information – Risk Factors – Our
results of operations could be materially and adversely affected if we cannot keep pace with technological changes impacting the development of our products
and implementation of our business needs, including with respect to automation and the use of AI.”
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The advent of communications products running as software in virtualized environments or in the cloud required us to adapt our VoIP and digital
signal processing, or DSP, technologies – including media processing, call signaling and management suite – to run on COTS servers and become cloud-
friendly and elastic, while maintaining the real-time characteristics needed for voice communications. In line with this trend, we adapted many of our products
to the virtualized datacenters and cloud, including Mediant session border controllers, or SBCs, and management applications, allowing for rapid deployment
and true elasticity in private and public clouds.
In addition to SBCs and Voice.AI solutions, our varied software offerings include the One Voice Operations Center, or OVOC, for network and
device configuration, monitoring and management, the Device Manager for administering business phones and meeting room solutions, and the AudioCodes
Routing Manager, or ARM, for handling call routing in complex VoIP networks. In addition, the User Management Pack™ 365 simplifies user lifecycle and
identity management across Microsoft Teams and Skype for Business deployments.
Today, we supply end-to-end solutions for the enterprise, contact center and service provider markets, with a strong focus on accelerating the voice-
enablement of Microsoft Teams. These solutions include AudioCodes Live for Microsoft Teams, a flexible portfolio of fully managed services for simplifying
Teams adoption.
Acquisitions have played a key role in our development and growth strategy. For example, in 2004 we entered the field of call recording when we
acquired Ai-Logix, a leading provider of advanced voice recording technology and integration cards for the call recording and voice/data logging industries. In
2015, we acquired Active Communications Europe to further strengthen our ability to provide advanced software solutions for the then emerging Microsoft
Skype for Business online application, including CloudBond 365 and User Management Pack™ 365. In 2021, we acquired Callverso Ltd., a company with
conversational AI solutions. Callverso was subsequently merged into AudioCodes.
Our principal executive offices are located at 1 Hayarden Street, Airport City, Lod, 7019900 Israel. Our registration number with the Israeli Registrar
of Companies is 520044132. Our telephone number is +972-3-976-4099. Our U.S. subsidiary, AudioCodes Inc., 80 Kingsbridge Road, Piscataway, New
Jersey 08854, serves as our agent in the United States.
Our website address is www.audiocodes.com. The information contained on or available through our website is not incorporated by reference into
and should not be considered a part of this Annual Report on Form 20-F. The SEC also maintains an Internet website that contains reports, proxy and
information statements, and other information regarding issuers that file electronically with the SEC. Our filings with the SEC are also available to the public
through the SEC’s website at www.sec.gov.
MAJOR DEVELOPMENTS SINCE JANUARY 1, 2023
AudioCodes Live Offerings for Microsoft Teams
During 2023, we continued to expand and enhance our AudioCodes Live for Microsoft Teams portfolio of managed services aimed at removing the
complexity involved in integrating Microsoft Teams collaboration, unified communications, or UC, and enterprise telephony. We offer AudioCodes Live
services on a monthly subscription basis with minimal upfront costs, enabling customers to benefit from Teams collaboration and voice services without
having to make significant capital investments.
The AudioCodes Live for Microsoft Teams portfolio includes three offerings for enterprise customers:
●
●
●
Live Teams Essentials: Teams Direct Routing connectivity delivered as a service.
Live Teams Pro: extended the Live Team Essentials offering to include tenant onboarding and management with periodic reporting and a
self-service portal to easily manage on-boarding, user moves/adds/changes/deletions, or MACD, and device management.
Live Teams Premium: a fully managed service that covers both cloud and on-premise aspects of Microsoft Teams integration and
management.
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Enterprise customers can complement AudioCodes Live for Microsoft Teams with our monitoring and management tools, and service-enhancing
applications. AudioCodes Live for Microsoft Teams is delivered by AudioCodes global professional services teams and is also available through our global
network of telecom and Microsoft 365 partners.
For the service provider market, we offer AudioCodes Live Platform for Microsoft Teams, a managed service which simplifies the creation and
operation of multi-tenant Teams offerings, including enterprise telephony. With AudioCodes Live Platform for Microsoft Teams, service providers can reduce
time-to-market for offering hosted Teams services to small and medium sized businesses, or SMBs, without the need for investing in building costly
infrastructure or for specialist technical knowledge. AudioCodes Live Platform for Microsoft Teams is delivered as a white-label service on a monthly
subscription basis and is available in two variants:
●
●
●
Hosted Essentials: Microsoft Teams Direct Routing SBC as a service with automated SBC configuration and ongoing management.
Hosted Essentials+: PSTN connectivity configuration and automation for both Microsoft Operator Connect and Direct Routing, and
comprehensive cloud-based management tools and portals that enable the service provider to simplify Microsoft Teams tenant onboarding
and management, user MACD and device management.
Hosted Pro: Hosted Essential+ enhanced with Advanced lifecycle management’ user policy and automation management, monitoring and
Teams Quality or Experience, or QoE, reporting with powerful AudioCodes applications.
In 2022 our Live Cloud solution was certified for the Microsoft Operator Connect Accelerator, providing a suite of capabilities, including managed
SBC as a service, API bridging that uses the Operator Connect APIs, integration into operator OSS and BSS platforms, and more, for connectivity into the
Microsoft Teams cloud. These offerings allow eligible operators to onboard faster to Operator Connect and provide services to their customers.
In 2022 we also introduced Live Express – a new SaaS solution that enables partners to onboard and manage their business customers’ Microsoft
Teams connectivity to the PSTN. The new solution includes Direct Routing for PSTN connectivity and management automation to simplify daily operations
for partners and their customers. Partners can swiftly onboard new customers using the solution’s portal and automation capabilities, thus providing
connectivity of the customer’s trunks to Microsoft Teams, control of dial plans and advanced call policies management. The service also provides a customer
portal enabling moves, adds, changes, and deletes by the end customer.
Solutions for Work-from-Home Agents and Contact Centers
In 2022, many of our developments for the contact center market were focused on expanding the functionality of our WebRTC solutions to overcome
the challenges posed by the COVID-19 pandemic and the rise of the Work-from-Home model.
Voice.AI Business Line
Our Voice.AI business line is focusing on content gathering and providing insights and predictions based on the content by using AI and machine
learning.
SmartTAP 360° Live
SmartTAP 360° Live is an intelligent, secure enterprise compliance recording solution for automatically capturing and indexing all types of internal
and customer organizational interactions, including voice, video and instant messaging (IM). SmartTAP is available for deployment in customers’ datacenters
and private clouds, or from the AudioCodes cloud.
SmartTAP 360° Live integrates seamlessly with Microsoft Teams to record all voice, video and IM interactions, and offers Analytics, such as STT,
Sentiment Analysis, key words detection and Categorization.
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In 2023, our team was building, and will continue to build, until in around May 2024, a new pure SaaS, multitenant application, including new GUI
and platform that offers seamless updates, scalable architecture, and tailored feature deployment per tenant. It ensures data segregation and localization, with
options for customers to bring their own media storage. Developed with Data privacy and Security by Design, including adherence to GDPR compliance and
encryption.
As a result of the shift to Teams and the Work-from-Home model, we see many more customers wanting to record video to meet their compliance
requirements and to share the recorded content internally to drive collaboration and productivity improvements.
Voca CIC
AudioCodes Voca CIC is a one-screen contact center with built-in conversational AI that is also a certified Microsoft Teams contact center solution.
With Voca as a Native Microsoft Teams application, one can consolidate the unified communications and contact center into one screen, allowing
every Microsoft Teams user to become a potential agent enabling real-time access to back-office experts to help improve responsiveness, remove department
silos, and improve connection among employees, while offering a unique mix of contact center and voice expertise.
Voca CIC’s conversational capabilities include a drag-and-drop flow designer, dedicated worker (agent) and supervisor user interface, CRM
integration, skill-based routing, behavioral routing, real-time dashboards and historical analytics.
Voca CIC can integrate (i.e., when connected via a VoIP gateway or SBC) with any PBX, contact center, or unified communications platform,
enabling customers to access the contact center, IVR, auto-attendant and call queues in one centralized system, whether for single or multi organizations or
multi-tenant application, serving both providers and multi-site organizations having multiple voice platforms in parallel.
During 2023, Voca CIC added multiple capabilities, including: agent and supervisor experience, CRM integration, enhanced reporting functionality,
real-time back-office phonebook and UX improvements.
Voice.AI Connect
The AudioCodes Voice.AI Connect Enterprise Edition extends chat and voice bot functionality to telephony communications, by connecting the bots
to any type of telephony channel and thus allowing customers to talk naturally with bots for a voice-centric user experience. Voice.AI Connect supports
multiple bot use cases, including conversational IVR (replacing DTMF-based legacy IVR systems), Virtual agent (offloading live agents), Agent assist (virtual
assistant for live agents) and outbound campaign (calls initiated by the bot).
During 2022, we enhanced the integration with leading bot frameworks, including Microsoft PVA, Google Dialogflow and Amazon Lex and exposed
APIs for voice streaming and fetching information such as call transcription.
The AudioCodes Live Hub is a self-service portal in which the bot developer can immediately connect the bot to Telephony Systems (e.g., SIP
Trunks and Contact Centers), to be able to call and speak with a bot in just a few clicks.
During 2023, we further expanded the capabilities of Live Hub to non-bot use cases. A notable development included support for Teams Direct Route
connectivity and user management. We also added support for Microsoft Dynamics 365 and Genesys Cloud Contact Centers. With respect to bot connectivity,
we additionally added support for Microsoft Co-Pilot Studio and Amazon Lex. Live Hub customers can now also connect to their own Speech providers (TTS
and STT). These new capabilities enhance Live Hub as a connectivity and orchestration cloud solution for enterprise voice communication services.
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VICA
VICA is an Intelligent Virtual agent for contact centers that enhances customer experience while reducing operating costs.
Meeting Insights
Meeting Insights is an AI-powered enterprise solution that enables users to record any meeting generated content (audio and video), and
automatically creates meeting minutes for Microsoft Teams meetings. It provides a centralized company platform for all meeting recordings, webinars and
conference calls, making them readily shareable across the organization.
Meeting Insights was integrated with Azure Open AI GPT model to automatically analyze meeting recordings and to generate, among other things,
summaries, list of action items, Issues & Solutions, Questions & Answers and Meeting outlines. In addition, a new pure SaaS, multi-tenant, platform was built
in 2023 to host the Meeting Insights application that offers seamless updates, scalable architecture, and tailored feature deployment per tenant. It ensures data
segregation and localization, with options for customers to bring their own media storage. Meeting Insights has been developed with data privacy and Security
by Design, including adherence to GDPR compliance and encryption.
Product and Technology Developments
SBC Developments
During 2023, we continued to enhance our SBCs’ security, capacity and resiliency in virtual and public cloud environments. We also added video
support for our WebRTC Gateway for Click-to-Call use case.
IP Phones and Meeting Room Solutions
During 2022 and 2023, we continued developing our range of IP phone devices and Room Experience, or RX, meeting room suite offering for
Microsoft Teams environments. The advent of COVID-19 and the resulting global switch to working from home, or WFH, played a significant role in
adapting our strategy to suit the “new normal”, leading to the introduction of high-quality video solutions for Teams meetings.
With increasing demand for video support in Teams meetings, we launched a new video collaboration bar designed for Microsoft Teams, enabling
customers to add high-quality video in huddle rooms and small meeting spaces. We introduced a broad set of RX video devices and solutions enabling us to
offer video solutions suitable for all room sizes from huddle rooms up to large conference rooms.
As WFH and remote meetings became more prevalent, we also introduced a range of attractively priced personal audio and video solution bundles
comprising a high-quality personal camera and one of our native Teams phones. Our native Teams phones include a low-cost device, a touch-screen phone
with a reduced footprint and an executive model complete with expansion module.
Management Solutions
During 2022, we focused on developing functionalities for AudioCodes Live and Live Cloud. In particular, we developed onboarding, reporting and
tools for our professional services to be able to provide managed services.
We also began developing a microservices holistic architecture to be used by OVOCaaS and our managed service platforms (live and Live Cloud).
Moreover, we developed a generic analytics platform based on Azure synapse capabilities. The new generic analytics platform can provide insights
and predications based on MS teams call information integrated w/ SBC and MGW quality of services information. Moreover, the system analyzes the alarms
to be used for fault predictions.
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To combat the growing issue of spamming and robocalls, which constitutes a growing problem in public networks, ARM now offers security-based
routing as part of the integration with SecureLogix’s Orchestra One™ CAS (Call Authentication Service). In addition to the already-supported basic
authentication with Orchestra One server, ARM now has an advanced mode which verifies calls with Verizon Call Verification Service. This service is
available for markets in the United States. In addition, ARM supports Emergency Call Users in Microsoft Teams. During 2022, we established a joint cloud
service with SecureLogix to provide voice firewall, robocall prevention and branded call verification services.
During 2023, we developed new uCaaS end-customer onboarding automation, and User management tools, for Telco and customers, focusing on a
self-service portal. We also developed our Operator Connect Accelerator platform for Microsoft OC partners and added support for additional SIP phone
devices for the Microsoft SIP Gateway solution, and analog device support.
Multi-Service Business Routers and Universal CPE
During 2022 and 2023, we developed a new product to support 5G access to our MSBR platforms. This product enables us to promote our routers
and gateways to new installations, where physical access (such as xDSL or fiber) are not possible or very costly.
In parallel, we saw our universal CPE (uCPE) gain further market traction, due in part to our ability to provide a unique combination of voice
application and various access methods. In particular, we experienced a notable enterprise win, utilizing our global presence and support to provide a
complete, global solution.
Cloud and Managed Services Infrastructure
In 2022 and 2023, we continued to enhance our cloud and managed services delivery platform in North America, Europe and Asia Pacific. The
platform support multi uCaaS solution including Microsoft Teams (Direct Route and Operator connect), Zoom Phone, WebEx calling and more and is certified
for Microsoft operator Connect Accelerate.
The platform comprises AudioCodes products such as our virtualized SBC, AudioCodes Routing Manager, network management and monitoring,
and Teams user management. It also includes self-developed and third-party solutions that together enable network connectivity, service automation, service
monitoring, CPE management, high availability and much more for seamless service delivery.
The platform allows Operators and other hosting partners to onboard customers with minimal investment and time. On top it offers add-on services
such as Meeting Room monitor, user device management and monitor, Compliance recording, Interaction Center, and more.
PRINCIPAL CAPITAL EXPENDITURES
We have made and expect to continue to make capital expenditures in connection with the expansion of our operation and production capacity. In
2023 we also made capital expenditures in connection with our new production facility. The table below sets forth our principal capital expenditures incurred
for the periods indicated (amounts in thousands):
Computers and peripheral equipment
Office furniture and equipment
Leasehold improvements
Total
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2023
Year Ended December 31,
2022
2021
$
2,462
$
1,015
$
737
5,572
281
191
592
546
36
$
8,771
$
1,487
$
1,174
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B.
BUSINESS OVERVIEW
INDUSTRY BACKGROUND AND MARKET TRENDS
Impact of Macroeconomic and Geopolitical Trends on Our Markets
As global economies emerged from the COVID-19 pandemic and endeavored to return to normality, the markets in which we operate were impacted
by other macroeconomic and geopolitical matters, including the following:
Change in Working Practices – during the COVID-19 pandemic, the desire for a remote working environment accelerated and expanded rapidly,
fueling the need for technologies to facilitate effective home-working and to help organizations maintain employee productivity. As economies gradually
returned to a form of normality, more organizations adopted Hybrid Working practices, with a blend of office and remote working. This saw an increase in
global demand for room collaboration technologies to effectively and securely connect office and remote workers for more productive meetings.
Inflationary Pressures Impacting Technology Consumption Models – in many global markets, inflationary pressures resulted in rising interest
rates, impacting demand for borrowing to fund capital expense projects. As a result, more organizations sought to deploy technology on a “pay per use”
subscription model, leveraging advances in cloud-based technologies (such as Unified Communications as a Service and Contact Center as a Service). See
Item 3.D, “Key Information – Risk Factors – High rates of global inflation and the occurrence of a recession could have a material and adverse impact on our
business, results of operations and financial condition.”
Increased Geopolitical Uncertainty and Tensions – there was an increase in global geopolitical uncertainty during 2023. The ongoing conflict
between Russia and Ukraine continued to cause economic challenges and inertia, especially in Europe. On October 7, 2023 the Hamas terror attack on Israel
led to a subsequent and ongoing conflict, impacting AudioCodes’ resources (such as R&D) and the economy in Israel more broadly, and resulting in supply
chain challenges in the Red Sea, a key global shipping route. See Item 3.D, “Key Information – Risk Factors – The attack on Israel in October 2023, and the
ensuing war with the Hamas terror organization and related conflicts with their supporters, could have a material adverse effect on our business, financial
position, operating results and cash flows.”
The Emergence of AI – AI evolved from a potential and theoretical future technology to a requirement now being demanded by many organizations
in order to help them improve employee productivity and enhance their customer engagement experience, including through intelligent automation, natural
language understanding and integration with other IT frameworks. Applications emerged for the practical use of AI, including recording meetings as a key
source of business intelligence, connecting chatbots to voice and simplifying the automation of customer journeys through a contact center. This rapidly
growing and evolving trend to adopt AI as a core business communications tool is likely to continue in the near-term. See Item 3.D, “Key Information – Risk
Factors – Our results of operations could be materially and adversely affected if we cannot keep pace with technological changes impacting the development
of our products and implementation of our business needs, including with respect to automation and the use of AI.”
Enterprise Unified Communications
In 2023, the demand for cloud UC services continued to grow, albeit at slower rates as compared to during the COVID-19 pandemic, while
businesses continue to migrate their communications to the cloud, and continued slowdown of on-premises UC and the PBX market. UC functions are easily
deployed through cloud services, along with access to continual updates and improvements and with native support for work-from-anywhere.
The shift to cloud-based UC or uCaaS has been driven by companies like Microsoft, Zoom and Cisco.
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Contact Centers and Customer Service
The contact center is rapidly evolving into the interaction hub of the digital enterprise, covering sales, support, education and more. It encompasses
all aspects of the customer experience, while gathering data on customer satisfaction and needs. Although the migration of contact center technologies to the
cloud will deliver far more flexibility and enable support for service delivery anywhere, and on any available media, many enterprises are retaining their
existing (usually on-premises) systems to avoid the high costs involved in such a change. In such cases, companies are looking to introduce innovation to their
existing contact center platform.
In 2023, contact centers continued to adapt to allowing their agents to work from home. In parallel, the on-going growth in online consumer services
drove expansion in many contact centers as they adapted to the dramatic changes wrought by the pandemic. This required high numbers of agents working
remotely, while customers were offered omnichannel engagement, enabling customers to get in touch not just by phone but also via the internet or dedicated
mobile applications.
Another key driver that continued into 2023 was contact center automation. We saw increased interest in virtual agents, conversational IVR and
virtual agent assistants in this market as enterprises sought cost optimization through increasing live agent productivity and automation of the customer
engagement while retaining and improving the customer experience.
Cloud and AI Driven Convergence of Unified Communications and Contact Center Markets
While Unified Communications (UC) and Contact Center (CC) markets have unique attributes and trends, the broader IT trend towards deploying
cloud-based applications and services, plus the emergence of conversational AI, are accelerating the convergence of UC and CC technologies. As more
enterprises adopt cloud-based platforms, such as Microsoft Teams, for collaboration and communication, they find that the same platform can also be used to
deploy fully integrated Contact Center capabilities, with automation benefits delivered by conversational AI applications. This convergence can drive cost-
savings, reduce IT overhead to support both UC and CC, and enables enterprises to offer superior customer service via a single platform. In addition, as cloud-
based services, these combined UC and CC capabilities, along with AI, can be consumed as a service on a subscription basis, reducing the need for capital
expense and enabling the enterprise to scale users up and down as required during peak periods.
Service Provider All-IP Transition
In 2021 and for portions of 2022, we observed several telecom operators slowing down deployments due to the COVID-19 pandemic. However,
during the second half of 2022 and through 2023, several of our service provider customers began to resume deployment and pressed ahead and completed
their business customer migrations. In countries where the migration was completed, smaller tier 2 and tier 3 service providers expedited their ISDN contract
cancellation following the incumbent’s switch to all-IP. In the UK, we saw a pickup in migration pace, moving towards PSTN shutdown in 2025. Among the
factors that have caused telecom operators to replace legacy networks are the traditional TDM switches reaching end-of-life, the need to free-up the real estate
occupied by these switches, energy savings and the importance of competing with the growing numbers of alternative service providers.
Service providers typically apply two strategies for the business sector in the move towards all-IP networks. The first strategy is deploying customer
premises equipment (CPE) – such as VoIP media gateways, session border controllers or multi-service business routers – to connect the customers’ legacy or
IP systems to their own IP networks. The second strategy is seeking to aggregate a large number of TDM links, primarily ISDN PRI, at centralized points of
presence utilizing high-capacity VoIP media gateways.
During 2023, we also observed an increase in the need for speed to CPEs, driving the need to support Fiber connectivity (up to 1GB), as well as 4G
LTE (up to 300MB) and upcoming 5G. The Work From Home activity drives integration of such interfaces in our lower-end CPEs.
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BUSINESS STRATEGY
AudioCodes’ business strategy is focused on increasing its position as a leading communications software vendor of advanced UC and contact center
voice solutions and services, voice networking, all-IP voice network migration and Voice.AI solutions for the digital workplace. The following are key
elements of our strategy:
Maintain and extend technological leadership. AudioCodes is recognized as a global leader in voice technologies. We intend to continue to capitalize
on our voice expertise to drive new business opportunities, including through the application of AI, to add value to the employee and customer experience. We
continually seek to upgrade our product lines with additional functionalities, interfaces, densities and compatibility with the leading UC, CC and SIP solutions
in the market, providing agnostic voice and AI expertise to multi-vendor platforms. Our voice solutions have evolved to be software-based and run natively in
cloud environments, to comply with the industry trend of migrating to private and public clouds. We continue to invest heavily in putting voice and AI at the
forefront of technological evolution in our industry.
Strengthen and expand strategic relationships with key partners and customers. We sell our products and solutions to service providers and
enterprises worldwide, leading enterprise channels, regional and global system integrators, global equipment manufacturers and VARs, in the
telecommunications and networking industries and establish and maintain long-term working relationships with them. We work closely with our customers to
deliver products, solutions and services that meet their specific needs. The ongoing 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. Our partners and
customers are located around the world, and we are better able to serve them 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 solution partners. We sell our products through, or in cooperation with, partners that can offer or certify our products
as part of a complete solution to their customers. We expect to further develop our strategic partner relationships with solution providers in order to increase
our customer base. Our strategic partners include companies such as Microsoft, Zoom and Genesys.
Engage enterprise customers in direct touch 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 with these enterprises directly
enhances our ability to influence solution design and procurement decisions. This, in turn, is designed to increase demand, which we expect our business
partners to fulfill based on their relationship with AudioCodes and the enterprise customers.
Expand and enhance the development of highly integrated products and services. We plan to continue designing, developing and introducing new
product lines, product features and services that address the increasingly sophisticated needs of our customers while additionally helping them leverage new
technologies (such as AI). We believe that our knowledge of core technologies and our ability to combine them in the form of integrated cloud services
enables us to offer better solutions that (i) are more comprehensive, (ii) are easier to consume (via subscription) and (iii) contain more features than those
available in competitive alternatives. For example, the new AudioCodes Live Platform for Microsoft Teams offers integrated voice connectivity, contact
center, recording, analytics and conversational IVR, all via a single subscription-based service. We believe there are notable growth opportunities for our
development and profitability with respect to the offering of a broad range of highly integrated services that leverage our voice expertise with AI and drive the
convergence of unified communications and contact center as a service for our enterprise customers.
Expand and enhance our solution offering. While the market is constantly looking for advanced, open communications and collaboration solutions,
integration of multi-vendor products into a working solution is a complex task that enterprises, system integrators, service and cloud providers are challenged
with. Over the years, we have developed a broad portfolio of products and invested in lifecycle management platforms (day 1 and day 2 operations) for our
products that form a comprehensive solution, considerably simplifying the integration efforts required for setting up working unified communications, contact
center or hosted business solutions. Customers and partners realize and appreciate the advantages our solutions offer, and we plan to keep expanding them
with more products, management applications and enterprise productivity solutions.
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Build upon existing technologies to penetrate new markets, such as Contact Center. We are building on our expertise in voice and conversational AI
to penetrate new markets—a notable example of this is the Contact Center market for Microsoft Teams. AudioCodes already has an unrivalled portfolio of
voice connectivity, recording, devices and management solutions/services for Microsoft Teams. With Voca CIC, we now have a certified Microsoft Teams
Contact Center built on Azure, which allows us to enter the market as a fully-fledged contact center vendor, as opposed to solely an enabler of third-party
contact center capabilities. This is a new and potentially high-growth market segment for AudioCodes that can seek to leverage our existing strength and
reseller community within the Microsoft Teams ecosystem, which continues to grow as Microsoft increasingly dominates the enterprise collaboration
marketplace.
Develop and expand professional services and managed services offering. We continue to expand our product-led services offering in line with our
new products and solutions across voice, conversational AI and contact center categories. AudioCodes has a rich portfolio of managed services. We offer our
customers expert professional services to assist them with design, implementation, support and management of our products. System integrators, VARs and
service providers are able to leverage AudioCodes professional and managed services to complement their own, and are able to offer them under their own
brand to the end customers.
Expand our investments in conversational AI. As AI emerges as a key business tool, AudioCodes is investing heavily in conversational AI to deliver
practical benefits that leverage the combination of AI and our deep voice expertise to deliver unique benefits that improve both the employee and customer
experience. From automated recording and analytics of meetings to improve business intelligence and productivity, to compliant interaction recording and AI
automation that simplifies the customer journey and improves customer service, AudioCodes is committed to helping enterprises gain practical benefits from
AI. The applications and services that we deliver leveraging AI will seek to provide beneficial upsell and cross-sell opportunities to add value to, and extend
our relationship with, our global customer base.
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.
AUDIOCODES SOLUTIONS, PRODUCTS AND SERVICES
Solutions
Enterprise Business
Unified Communications
Our enterprise business is driven primarily by our solutions for UC environments. Beginning in 2020, we noted a clear shift towards uCaaS solutions
as enterprises continue to migrate their IT infrastructure, in general, and UC solutions, in particular, to the cloud. We expect such trend to continue in 2024 and
beyond, and consequently we plan to (x) focus on providing services and applications that add value to the uCaaS solutions, and (y) ensure a smooth migration
to cloud-based UC while offering operational simplicity, high quality and reliability.
Our efforts in the uCaaS arena are focused on a number of key partnerships, predominantly with Microsoft, who reported substantial growth in the
active users of their Teams UC and collaboration solution from 2020 through 2023. We expect our certified support for Teams Direct Routing, our
communications solutions (Voca Conversational Interaction Center, call recording and Meeting Insights productivity solution), and our growing offering of
audio and video devices and meeting room solutions to continue to be focus areas for us as enterprises migrate to Microsoft Teams Phone.
We anticipate that our AudioCodes Live for Microsoft Teams offering will continue to gain traction as enterprises look to streamline their UC
operations. Consumed on a monthly subscription basis, AudioCodes Live for Microsoft Teams enables enterprises to benefit from Teams voice calling services
and add-on applications without having to make capital investments in hardware and software, and without the need for specialized, in-house technical
expertise.
In addition to Microsoft Teams, we also sought to strengthen and build on our collaborations with Zoom Phone and Cisco Webex.
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Contact Centers
The contact center industry is accelerating migration from on-premises to cloud-based Contact Center as a Service, or CcaaS. AudioCodes helps
enterprises to migrate and modernizes their voice infrastructure to the cloud, especially when such enterprises use a large and distributed Contact Center. We
are providing voice managed services that complement the cCaaS OPEX model.
Voice.AI Business Line
In the last few years, dramatic leaps forward in machine learning and AI have driven a revolution in the way enterprises boost engagement with their
customers. These significant advances mean that businesses can now utilize conversational AI technologies offered by various providers to automate their
customer service departments and train bots to give callers a high level of service whenever they get in touch. As voice is the most fundamental and intuitive
method of conversation, we are focusing on enabling engagement of voice and telephony to various AI-based applications and implementing voice-based use
cases, leveraging on the investment made in AI and voice applications. We began investing in these applications in 2018 and we believe opportunities will
develop across various products. Accordingly, we anticipate that these applications will become a new growth engine for our business in the near- and long-
term.
Service Provider Business
In the service provider market, our go-to-market strategy concentrates on outreach to small and medium sized businesses (SOHO, SMB, SME) with
our VoIP gateways, SBCs and routers. We engage directly with service providers worldwide and supply them with our versatile range of products to suit
different business scenarios. This includes the ability to enable Microsoft Teams voice connectivity through the Direct Routing feature, which allows
companies to connect on-premises IP-PBX and UC platforms to the cloud-based Teams service.
On top of the direct routing, we also give SP the option to onboard their customers themselves using our live platform applications such as VOCA
CIC, SmartTAP and meeting insights.
For service providers, we offer a certified Operator Connect accelerate platform, enabling operators to connect a certified operator within the
Microsoft OC marketplace. The same Platform offers Zoom providers exchange and WebEx.
Products
Networking
Our Mediant family of SBCs, media gateways, or MGWs, and MSBRs is a line of versatile IP communications platforms that deliver seamless VoIP
connectivity.
Our Mediant SBCs include hardware and software platforms that offer cost-efficient, scalable SBC and hybrid SBC-MGW functionality (SIP to
TDM, SIP to SIP) for enterprises, service providers and cloud deployments. Our software SBCs are cloud-native and deliver elasticity and high scale on all
current major cloud platforms. SBCs are deployed at the border between the enterprise and the service provider, as well as between the networks of different
service providers. Our media gateways serve as an efficient junction between VoIP networks, legacy TDM equipment, and the PSTN.
AudioCodes MediaPack 1xx analog VoIP gateways are cost-effective, stand-alone VoIP devices for connecting legacy telephones, fax machines and
PBX systems with IP telephony networks and IP-based PBX systems. The MediaPack 1288 is a high-density analog media gateway for organizations that
need to integrate large numbers of analog devices into their new all-IP infrastructure.
Our family of MSBRs offers service providers a range of all-in-one SOHO, SMB and SME routers that combine access, data, voice and security in a
single device. These platforms are designed for managed data, SIP trunking, hosted PBX, and cloud-based communications services, and allow service
providers to deploy flexible and cost-effective solutions.
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Applications
AudioCodes offers a wide range of value-added voice applications to boost productivity and ensure a superior user experience.
SmartTAP
SmartTAP 360° Live is an intelligent, secure enterprise compliance recording solution for automatically capturing and indexing all types of internal
and customer organizational interactions, including voice, video and instant messaging (IM). SmartTAP is available for deployment in customers’ datacenters
and private clouds, or from the AudioCodes cloud.
SmartTAP 360° Live integrates seamlessly with Microsoft Teams to record all voice, video and iMs interactions, and offers Analytics, such as STT,
Sentiment Analysis, Key words detection and Categorization.
In 2023, our team was building, and will continue to build, until in or around May 2024 a new pure SaaS, multitenant application, including new GUI
and platform, that offers seamless updates, scalable architecture, and tailored feature deployment per tenant. It ensures data segregation and localization, with
options for customers to bring their own media storage. The application was developed with Data privacy and Security by Design, including adherence to
GDPR compliance and encryption.
Voca CiC
Voca CIC seeks to (i) provide a customer’s and user’s respective agents with real-time access to back-office experts during service calls, and (ii)
accelerate resolution times, removes department silos and ramps up employee experience.
Today’s modern workplace demands a new approach to customer experience, one that not only empowers agents to enjoy their jobs and provide
exceptional service to customers, but enables internal business lines to provide top-notch service throughout the organization.
Voca CIC, a lightweight cCaaS with built-in conversational AI, is designed entirely for Microsoft Teams to unify the customer’s (of the contact
center) and employee’s experience.
With Voca CIC as a Microsoft Teams application, a customer may consolidate the unified communications and contact center into one-screen,
enabling every Microsoft Teams user to become a potential agent.
Voca CIC is an Azure-native integration with Microsoft Teams and offers a unique mix of contact center and voice expertise, making it an ideal
solution for organizations looking to modernize their CX capabilities with minimal upfront costs.
Voca CIC’s marketing and sales efforts are growing rapidly across global markets, with an emphasis on North America, EMEA and APAC.
Voca CIC is available as a full SaaS-managed service solution delivered from AudioCodes Cloud, (Azure) in a highly available, geo-redundant
topology. Contact Center capabilities are powered by Microsoft Azure Communication Services, with conversational AI based on Microsoft Cognitive
Services.
Voice.AI Connect
AudioCodes Voice.AI Connect extends chat and voice bot functionality to telephony communications by connecting bots to any type of telephony
channel, thus enabling customers to speak naturally with bots for a voice-centric user experience. We work primarily with bot framework vendors to enable
and promote the creation of voice-bots by adding voice and telephony functionality to their bot framework platforms. We recurrently extend the supported bot
frameworks, including Microsoft Co-pilot Studio and others, to enable multiple conversational AI use cases, such as Virtual Agents, Agent Assist and
Conversational IVR.
We also initiated collaborations with a wide variety of market players, such as speech services providers, bot developers, system integrators and
advisors. We intend to leverage these alliances to create voice-bot opportunities for us, especially in the contact center domain.
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The Live Hub that started as a self-service SaaS version, or Voice.AI Connect Enterprise, expanded to become a central cloud hub for connecting and
orchestrating multiple enterprise voice communication services, including Bring-Your-Own-Carrier for contact centers and direct route for Teams, and serves
as a primary tool for exposing the bot development ecosystem to a wide array of voice-bot use cases via trials and proof of concept projects up to live
productions. Live Hub is being marketed towards smaller customers with simple setups that do not need customization.
Meeting Insights
Meeting Insights is an AI-powered enterprise solution that enables users to record any meeting generated content (audio and video), and
automatically creates meeting minutes for Microsoft Teams meetings. It provides a centralized company platform for all meeting recordings, webinars and
conference calls, making them more readily shareable across the organization.
Meeting Insights was integrated with Azure Open AI GPT model to automatically analyze meeting recordings and to generate, among other things,
summaries, list of action items, Issues & Solutions, Questions & Answers and Meeting outlines. In addition, a new pure SaaS, multi-tenant, platform was built
in 2023 to host the Meeting Insights application that offers seamless updates, scalable architecture, and tailored feature deployment per tenant. It ensures data
segregation and localization, with options for customers to bring their own media storage. Meeting Insights has been developed with data privacy and Security
by Design, including adherence to GDPR compliance and encryption.
Management and Operations
AudioCodes’ management and operational tools are designed for deployment within large-scale cloud or premises-based UC deployments. They
enable the management, monitoring and operation of the entire AudioCodes portfolio, including SBCs, media gateways, Microsoft-specific appliances and IP
phones.
OVOC is a 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 allows administrators to manage the full lifecycle of
VoIP devices and elements from a single centralized location, saving time and costs.
AudioCodes’ Device 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 Device Manager increases employee satisfaction and productivity and lowers IT expenses.
Managing the dial plan and call routing rules of multi-site, multi-vendor enterprise VoIP networks can be extremely complicated. ARM delivers a
highly effective, 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.
Devices
The AudioCodes 400HD series of IP phones includes a range of easy-to-use, feature-rich products for the enterprise unified communications, or UC,
service provider, hosted UC services and contact center markets. Based on the same advanced, field-proven underlying technology as our other VoIP products,
our high-quality IP phones enable systems integrators and end-customers to build end-to-end VoIP solutions. Our IP phone portfolio includes devices built
specifically for Microsoft Teams environments with full Teams integration and a native Teams interface.
The AudioCodes Room Experience, or RX, suite delivers productive meeting room experiences regardless of room size. It combines a range of
software and audio/video products from different UC solution vendors for effective voice-only conference calls and video-enabled collaboration sessions.
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Our RX suite currently participates in the Microsoft Teams Room (MTR) program. Our RX products are certified under the MTR program which
adds Teams to meeting rooms.
Services
Professional Services
We provide a modular portfolio of professional services to our partners and customers by delivering a complete voice network lifecycle model that is
based on the three basic phases of Plan, Implement and Operate. Our professional services portfolio delivers seamless integration, high availability, and vast
scalability to meet business and network demands.
Managed Services
We offer a range of managed services enabling our customers to deploy complex solutions solely by relying on the knowledge of our voice experts.
These include providing our applications (such as SmartTAP, Voca, Meeting Insights and management applications) as managed services and a range of
product-led services, such as managed SBCs and managed gateways.
AudioCodes Live for Microsoft Teams
AudioCodes Live for Microsoft Teams is a portfolio of services that removes complexity from the integration of Teams collaboration, UC and
enterprise telephony. It provides a seamless, rapid and cost-effective migration to Teams for high quality voice and video collaboration.
This service is complemented by devices-as-a-service, monitoring and management tools, and service enhancing applications. AudioCodes Live is
also available through our global network of telecom and Microsoft 365 partners.
AudioCodes Live Platform
AudioCodes Live Platform is a SaaS solution that enables service providers to offer their business customers a seamless migration to uCaaS
solutions, such as Microsoft Teams and Zoom Phone.
AudioCodes Live Platform includes the necessary services for Microsoft Teams Direct Routing and Operator Connect, value-add applications, as well
as Zoom Phone Provider Exchange, thus enabling service providers to reduce their initial investment.
AudioCodes Live Platform provides the voice connectivity infrastructure, customer onboarding automation, user lifecycle management and tools for
monitoring, reporting and analytics, to help get the service up and running expeditiously and effectively, with the service provider supplying the data
connectivity and SIP trunk minutes.
Sales and Marketing
Our sales and marketing strategy is focused on two primary go-to market strategies. Firstly, we look to obtain direct touch with enterprise end
customers to generate opportunities for new business and upsell new solutions or services to existing customers. This approach enables us to better understand
the challenges that our customers face and offer solutions best suited to solving those challenges. Secondly, we engage with the channel community in all of
our core markets, comprising service providers, managed service providers, system integrators and ICT resellers. This channel engagement allows us to scale
up our geographic and market coverage, as well as reach more enterprise end customers through the channel community.
We select our partners based on our coverage needs and their ability to provide effective field sales, end-customer engagement, marketing
communications and technical support to our customers. Our channel strategy also reflects the buying strategies of many enterprise end customers that have
established procurement relationships with their preferred channel, or that are obliged to purchase through specific channels based on regulatory, certification
or framework purchasing agreements (for example in the public sector).
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For larger enterprise deployments, prospective customers and channels generally need to commit resources to test and evaluate our products as a
“proof of concept” and integrate them into existing systems, networks and applications, or evaluate and adopt our professional services and managed services.
As a result, our sales process is often subject to delays associated with approval processes that typically accompany the design and testing of new technologies
or the SLA’s and security/compliance aspects of our service portfolio. For these reasons, the sales cycle of our products and services 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. Increasingly however, the cloud-based IT strategies adopted by enterprises are simplifying and
accelerating the deployment of unified communications or contact centers “as a service”. AudioCodes Live Platform is designed to accommodate this more
agile and speedy deployment strategy.
We market our products in North America, Europe, Asia, Latin America and Israel through a sales force that directly manages channel partners and
that has direct touch engagement with end customers. We have invested notable resources in setting up local field sales forces to give us a strong presence in
relevant markets.
We generally enter into non-exclusive sales representation/distribution agreements with channel partners in each of the major countries in which we
do business. Typical product agreements are for renewable 12-month terms or are terminable at will by us upon 90 days’ notice, and do not commit the
customer to inventory or 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. To support the cloud-based “as a service” model increasingly deployed by our customers and
channel partners, we also have subscription agreements, which typically run from 12 to 36 months, delivering reliable recurring revenue on a “per user per
month” basis as an increasing proportion of our business.
AudioCodes continues to enhance its marketing efforts with a focus on activities that generate new leads and opportunities to support our sales team
and channel partners in driving new business. An integrated marketing program comprising digital advertising, tradeshows, conferences, social media
marketing and media engagement is designed to generate leads and provide a level of brand credibility and awareness in our core markets, with a focus on two
primary campaigns: (i) unified communications; and (ii) contact center. In addition, our field marketing resources also drive local channel co-marketing,
recruitment and development activities.
Customers
Our customers consist of enterprises (with direct and indirect relationships), service providers (with direct and indirect relationships), and a small
percentage of OEM customers.
Our enterprise customers include a range of Fortune 1000 organizations, Public Sector organizations (central and local government, healthcare and
education) and smaller enterprises that use our equipment to primarily enable their UC or Contact Center solutions. Our solutions are sold to enterprise
customers through a wide network of resellers, integrators and distributors, and the bulk of our business is carried out in a two-tier model in over 100
countries. AudioCodes solutions and subscription services enable enterprises to smoothly migrate their communications infrastructure to cloud-based UC
solutions that have emerged to dominate the market in recent years, such as Microsoft Teams as well as cloud-based contact center as a service offerings. Our
sales in this segment are based on two major business offerings: (i) the traditional model, including equipment, maintenance contracts and, optionally, day-1
professional services; and (ii) a full “as-a-service” solution or managed service that includes the equipment, maintenance, day-1 and day-2 professional
services. The latter offering is generally growing year-on-year as a proportion of our revenues and promised recurring revenues and profits over time.
Our service provider customers include a range of tier 1, 2 and 3 service providers that deploy our solution as part of their voice, UC, SIP trunk or
other offerings for their business customers. Our solutions are deployed either at the customer's premises or at the service provider core as a white-labelled
cloud-based subscription service leveraging the AudioCodes Live Platform. Typically, these services allow the service provider to provide their customers
with voice connectivity and integration with UC platforms, such as Microsoft Teams, Zoom Phone, Cisco Webex, contact center as a service, conversational
AI recording and analytics. AudioCodes’ broad range of products, broad functionality and wide interoperability allow service providers to deploy our
solutions in practically any third-party solution environment and for a wide range of customers. Our solutions have been sold to service provider customers in
100 countries.
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AudioCodes’ OEM customers include vendors that leverage 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 own voice solutions.
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 Flex 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.
We utilize contract manufacturing for virtually all our manufacturing processes. Most of our manufacturing is carried out by third-party
subcontractors in China and Israel. 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 ODMs 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, 2023, were approximately $14 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, Polybrominatel diphenyl
ethers Bis (2-ethylhexyl) phthalate, benzyl butyl phthalate, Dibutyl phthalate and Diisobutyl phthalate We expect that other countries, including countries we
operate in, will adopt similar directives or other additional directives and regulations.
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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. See Item 3.D, “Key Information – Risk Factors – The
markets we serve are highly competitive and several of our competitors have competitive advantages over us, which may make it difficult for us to maintain
profitability.” The following sets forth a list of competing vendors and providers in each of our main product and service categories:
Networking Solutions
In the area of enterprise session border controllers, we compete with Oracle, Ribbon Communications, Metaswitch (acquired by Microsoft Azure for
Operators), TE-Systems and Ingate.
In the area of low and mid-density digital gateways we face competition from companies such as Ribbon Communications, Cisco, Dialogic,
NewRock, Patton, Ferrari and Sangoma.
Our competitors in the area of multi-service business routers are companies such as Cisco, Juniper, Adtran, One-Access (acquired by Ekinops),
Patton, Huawei, HP/3COM and Alcatel-Lucent.
Applications
Our competitors in the area of call recording, compliance recording and convenient include companies such as Verint, NICE, ACS, Red Box
(acquired by Uniphore), Teleware and Dubber.
Our competitors in the area of Conversational IVR, Speech Attendants include, but are not limited to, Nuance, Parlance and other contact center
vendors which provide IVR solutions.
Our competitors in the area of applications leveraging speech recognition and conversational AI technology include companies such as Twilio,
Nuance (acquired by Microsoft) and IBM, as well as Contact Center vendors such as Genesys, NICE and Five9s. Some public cloud providers offer
technology and services that partially overlap with ours and several smaller startup companies are also developing competing solutions.
Our competitors in the area of contact center include, but are not limited to, Anywhere365, Luware, Landis, ComputerTalk and other contact center
vendors, primarily focused on the Microsoft Teams product.
Our competitors in the area of SmartTAP360 live, which focuses mainly on compliance and quality recording in conjunction with Microsoft Teams,
include, among others, ASC, Red Box (acquired by Uniphore), Dubber, CallCabinet, Numonix, NICE and Verint. Such competitors are currently listed in the
certified list of Microsoft vendors although we mainly see their presence in mid-market projects.
Our competitors in the area of Meeting Insights, which is focused on productivity enhancement, organization repository and sharing for meetings in
the Microsoft Teams environment, include, but are not limited to, Avoma, Otter and Fireflies.AI.
Devices
Our principal competitors in the area of IP phones and meeting room devices are “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 Poly (acquired by HPQ), Yealink, Grandstream, Logitech, Crestron, VTEC (which acquired Snom Technology) and many
others.
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AudioCodes Live for Microsoft Teams and CCaaS Managed Services
Our main competitor in the area of Live is the in-house implementation of projects (after buying products either directly or through an integrator).
Competition is also exhibited in the form of system integrators, such as Converge One, NTT and BT, among several others, in various sizes, locations and
specialties.
Some of our competitors have the ability to offer vendor-sponsored financing programs to customers. Those 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 constantly being introduced.
Our competitors in content delivery or connectivity platform, as well as Operator Connect Accelerate, Zoom exchange providers and WebEx
enablement, include: (i) SIPPIO; (ii) DSTNY Group; and (iii) Nuwave. Some of our competitors are also customers of our products and technologies.
In the future, we may also develop and introduce other products or services with new or additional telecommunications capabilities or services. As a
result, we may compete directly with VoIP companies, system integrators, VARs 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 us 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 significant to our success.
We own U.S. patents that relate to our 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 unregistered 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.
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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.
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.
In the past, we have entered into technology licensing fee agreements with third parties. Under these agreements, we agreed to pay these third parties
royalties, based on sales of relevant products.
C.
ORGANIZATIONAL STRUCTURE
AudioCodes Ltd. is the parent company of a group that consists of AudioCodes Ltd. and over 20 subsidiaries worldwide. AudioCodes Inc., our
wholly-owned U.S. subsidiary incorporated in Delaware, is a significant subsidiary based in Piscataway, New Jersey.
D.
PROPERTY, PLANTS AND EQUIPMENT
We lease our main office and warehouse facilities, located in Airport City, Lod, Israel, which occupy approximately 274,000 square feet for annual
lease payments of approximately $6.5 million (including management fees). The term of this lease was extended until April 30, 2024. In November 2022, we
entered into new lease agreement in Park Naimi, which is located near Messubim Junction in Israel, or the New Lease Agreement. The New Lease Agreement
will replace the current lease agreement of our main offices in Israel. Pursuant to the New Lease Agreement, we will lease from the landlord an approximately
10,000 square meters facility, or the Premises. The lease of the Premises, which is still under construction, commenced during 2023. The initial lease term
under the New Lease Agreement is for 7 years. Additionally, we hold options under the New Lease Agreement to extend the lease term for additional periods
of five years.
In June 2023, we entered into a new lease agreement in Or Yehuda, or the Or Yehuda Lease, which commenced in 2023. The Or Yehuda Lease
replaces the current lease agreement of our warehouse in Israel. Pursuant to the Or Yehuda Lease, we have leased from the landlord an approximately 1,128
square meter facility. The initial lease term under the Or Yehuda Lease is for six years, commencing upon the transfer of possession of the Premises (as
defined in the Or Yehuda Lease). We additionally hold options under the Or Yehuda Lease to extend the lease term for additional periods of up to 10 years.
We also lease offices in Beer Sheva, Israel, or the Beer Sheva Lease. The annual lease payments in 2023 (including management fees) for Beer Sheva
Lease was approximately $419,000.
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Our U.S. subsidiary, AudioCodes Inc., leased an approximately 14,706 square foot facility in Piscataway, New Jersey, or the New Jersey Lease, on
May 13, 2022. AudioCodes Inc. also leases offices in Morrisville, North Carolina, or the North Carolina Lease. The annual lease payments in 2023 (including
management fees) for all our offices in the United States were approximately $467,000.
We lease additional offices in Israel as well as for our international offices; however, we do not believe the lease agreements for these offices are
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.
ITEM 4.A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Critical Accounting 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 contains additional information regarding our accounting policies and other disclosures
required by U.S. GAAP.
On an ongoing 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 credit losses;
Inventories;
Intangible assets;
Goodwill;
Income taxes and valuation allowance;
Share-based compensation; and
Contingent liabilities.
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The extent of the impact of current macroeconomic conditions, including, but not limited to, rising inflation, an overall global economic slowdown
and the ongoing conflicts in Ukraine and in the Middle East, on our business, financial condition and results of operations will depend on future developments,
which are highly uncertain at this time. Accordingly, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to
apply certain of our significant accounting policies.
Revenue Recognition and Allowance for Sales Returns
We generate our revenues primarily from the sale of software licenses, equipment, and related services through a direct sales force and sales
representatives. Our products are delivered to our customers, which include original equipment manufacturers, or OEMs, network equipment providers,
systems integrators, enterprises, carriers and distributors in the telecommunications and networking industries, all of whom are considered end-users.
Revenues are recognized in accordance with Accounting Standards Codification, or ASC, 606, “Revenue from Contracts with Customers”. As such,
we identify a contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to
each performance obligation in the contract and recognize revenues when (or as) we satisfy its performance obligations.
We enter into contracts that can include combinations of products and services that are capable of being distinct and accounted for as separate
performance obligations. The software licenses and equipment are distinct as the customer can derive the economic benefit of it without any additional
services. We allocate the transaction price to each performance obligation, based on its relative standalone selling price out of the total consideration of the
contract.
Software license and equipment revenues are recognized at the point of time when control is transferred, the product has been delivered and the
benefit of the asset has been transferred.
Revenues from maintenance and support services are recognized over time ratably over the term of the contract.
We enter into contracts that included combinations of products and services that are capable of being distinct and accounted for as separate
performance obligations. The software licenses and equipment are distinct as the customer can derive the economic benefit of it without any additional
services. We allocate the transaction price to each performance obligation, based on its relative standalone selling price out of the total consideration of the
contract.
As we generally do not sell the products separately on a standalone basis, the standalone selling prices are not directly observable. Therefore, we
make estimates, based on reasonably available information. The estimated selling price is established considering multiple factors such as historical selling
prices, internal pricing practices, gross margin objectives and discount policy.
We grant to certain customers a right of return or the ability over a limited period to exchange for other products a specific percentage of the total
price paid for products they have purchased. We maintain a provision for product returns and exchanges and other incentives, based on our experience with
historical sales returns, analysis of credit memo data and other known factors, all in accordance with ASC 606. This provision is deducted from revenues and
amounted to approximately $2.1 million and $2.7 million as of December 31, 2023 and 2022, respectively. This provision was recorded as part of other
payables and accrued expenses.
In instances of contracts where revenue recognition differs from the timing of invoicing, the Company generally determined that those contracts do
not include a significant financing component. The primary purpose of the invoicing terms is to provide customers with simplified and predictable ways of
purchasing the Company's products and services, not to receive or provide financing. We use the practical expedient and does not assess the existence of a
significant financing component when the difference between payment and revenue recognition is a year or less.
Deferred revenues include amounts invoiced to customers for which revenue has not yet been recognized. Deferred revenues are recognized as (or
when) we perform the performance obligations under the contract.
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Allowance for Credit Losses
Our trade receivables are derived from sales to customers located primarily in the Americas, the Eastern Asia, Israel and Europe. We perform ongoing
credit evaluations of our customers and to date have not experienced any material losses from uncollected receivables. our expected allowance for credit losses
for trade receivables is based upon its assessment of various factors, including historical experience, the age of the trade receivable balances, credit quality of
its customers, current economic conditions and other factors. 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 market 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 product lines and market prices lower than cost. During the year ended December 31, 2023, we wrote off
inventory in the aggregate amount of approximately $1.1 million, during the year ended December 31, 2022, inventory write off was immaterial, and during
the year ended December 31, 2021, we wrote off inventory in the aggregate amount of approximately $1.7 million.
Intangible Assets
As a result of our acquisitions, our balance sheet included acquired intangible assets in the aggregate amount of approximately $1.0 million and $1.6
million as of December 31, 2023 and 2022, respectively.
We allocated the purchase price of the companies we 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 such assumptions 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 could materially and adversely 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 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, 2023, 2022 and 2021, no impairment charges were identified.
Goodwill
As a result of our acquisitions, our balance sheet included acquired goodwill in the aggregate amount of approximately $37.6 million as of December
31, 2023 and 2022. 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.
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ASC 350, 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, 2023, 2022 and 2021, no impairment losses were identified with respect to intangible assets.
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 from 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 and Israel 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 stock
options. We recognized share-based compensation expense of $11.4 million, $15.1 million and $14.1 million in the years ended December 31, 2023, 2022 and
2021, respectively. As of December 31, 2023, there was approximately $10.7 million of total unrecognized share-based compensation expense related to non-
vested share-based compensation arrangements granted by us. As of December 31, 2023, such expense is expected to be recognized over a weighted-average
period of 2.68 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. No provision was recorded as of December 31, 2023.
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Recently Issued and Adopted Accounting Pronouncements
Not applicable.
New Accounting Pronouncements Not Yet Effective
See Note 2ab 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
AudioCodes is a leading vendor of advanced communications software, products and productivity solutions for the digital workplace. Our products
are deployed on-premises or delivered from the cloud. Providing software communications, cloud-based platforms, customer premise equipment and software
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 unified communications and collaboration business services. In addition, we offer a complete suite of professional and
managed services that allow our partners and customers to choose a service package (or complement their own offering) from a modular portfolio of
professional services.
Our products are deployed globally in enterprise and service provider cloud networks. Our products include session border controllers, or SBC, life
cycle management solutions, VoIP network routing solutions, media gateways, multi-service business routers, IP phones, value added applications and
professional services. Our high-definition VoIP technologies and products provide enhanced intelligibility and a better end user experience in emerging voice
communications services. We have tens of millions of SBC, media gateway and media server sessions deployed in over 100 countries across the globe. Our
high availability platforms cover the spectrum of low, mid and high-density applications for service providers and large enterprises.
With over 25 years in the telecommunications market, we offer a broad range of solutions and services for both enterprise and service provider
deployments. These solutions are built around our field-proven VoIP product range. Our VoIP technology contains voice quality enhancements and best-of-
breed VoIP network elements and applications, and has a proven track record in product and network interoperability with the industry’s leading companies.
With full support for industry standard protocols such as SIP, and proven interoperability with industry leading soft switches, private branch exchanges, or
PBXs, IP-PBXs, unified communications and contact center platforms, we deliver innovative solutions for virtually any voice communications environment,
offering reduced total cost of ownership, enhanced features, and superior voice quality.
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 and Microsoft Teams. 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 and Microsoft Teams environment. Our products to the Skype for Business and Microsoft Teams
Unified Communications market are sold primarily to our channel partners.
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 China. We
have other offices located in Europe, Asia, Latin America and Australia.
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Historically, a substantial portion of our revenue has been derived from large purchases by a limited number of OEMs, NEPs, systems integrators and
distributors. Westcon Group, our largest customer, accounted for approximately 16.3%, 15.1% and 15.4% of our revenues in the years ended December 31,
2023, 2022 and 2021, respectively. In addition, ScanSource Communications Group accounted for approximately 10.3%, 10.0% and 10.9%, of our revenues in
the years ended December 31, 2023, 2022 and 2021, respectively. Our top five customers accounted for approximately 39.2%, 38.2% and 38.7% of our
revenues in the years ended December 31, 2023, 2022 and 2021, respectively. If we lose a large customer and fail to add new customers to replace the
associated lost revenue, or the revenue derived from any such customers materially decreases, our operating results may be materially adversely affected.
Revenues, based on the location of our customers for the last three fiscal years, are as follows:
Americas, principally the United States
Eastern Asia
Europe
Israel
Total
2023
Year Ended December 31,
2022
2021
51.7 %
14.5
32.3
1.5
100.0 %
50.7 %
15.3
31.9
2.1
100.0 %
46.5 %
15.7
35.6
2.2
100.0 %
Beyond repeated business from distributors and service providers, we believe that prospective customers are generally 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 dollar and, as such, we use the dollar as our
functional currency. Transactions and balances originally denominated in dollars are presented at their original amounts. All transaction gains and losses from
the premeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected in the statement of operations as financial income or
expenses, as appropriate.
The demand for 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
credit losses and write-offs of accounts receivable could increase.
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Ongoing Conflict in Ukraine
In February 2022, Russia launched a large-scale invasion of Ukraine, and Russia and Ukraine continue to engage in active and armed conflict. Such
conflict has resulted, and will likely continue to result in, significant destruction of Ukraine’s infrastructure and substantial casualties amongst military
personnel and civilians. As a result of Russia’s invasion of Ukraine, the governments of several nations have implemented commercial and economic sanctions
against Russia (as well as certain banks, companies, government officials, and other individuals in Russia and Belarus). In addition to governmental entities,
actors in the private sector, including, among others, tech firms, consumer brands and major manufacturers, have stopped, or previously announced that they
intend to stop, operations in Russia and cease their partnerships with Russian firms, and shippers, insurance companies and refiners have similarly indicated
that they will no longer purchase or ship crude oil from Russia. In March 2022, Israel’s then Foreign Minister Mr. Yair Lapid indicated that Israel would not
function as a route to bypass sanctions imposed on Russia by the United States and other western countries, and Israeli banks have elected to sever
relationships with sanctioned Russian banks. While Israel has not, as of the date of this Annual Report, imposed explicit sanctions on Russia or Belarus, it has
publicly rejected Russia’s annexation of the four occupied regions of Ukraine and voiced support for Ukraine’s sovereignty and territorial integrity. Moreover,
Israeli companies who hold ties to the United States, the United Kingdom and the European Union could be indirectly subject to the measures imposed by
such nations.
In May 2023, in coordination with the G7, Australia, and other partners, the United States imposed new sanctions on Russia. As part of these actions,
the U.S. Department of State imposed sanctions on over 200 entities, individuals, vessels, and aircraft, as well as designated certain entities and individuals (i)
across Russia’s defense and related materiel, technology, and metals and mining sectors and (ii) involved in expanding Russia’s future energy production and
capacity.
In December 2023, President Biden signed an executive order which seeks to strengthen U.S. sanctions authorities against financial facilitators of
Russia’s war efforts, and additionally provided authority to broaden U.S. import bans on certain Russian goods. Moreover, in February 2024, the United
States’ Treasury Department, State Department and Department of Commerce, collectively, imposed an extensive set of new sanctions on Russia, which
specifically target Russia’s financial sector and military-industrial operations. Such sanctions seek to restrict Russia’s energy industry and limit the evasion of
sanctions outside the United States, including by encompassing 500 additional persons associated with the ongoing Russo-Ukrainian conflict.
While it is not possible to predict or determine the ultimate consequences and impact of the conflict in Ukraine, such conflict could result in, among
other things, significant regional instability and geopolitical shifts, and material and adverse effects on global macroeconomic conditions, financial markets,
exchange rates and supply chains. To the extent negotiations between Russia and Ukraine are ultimately unsuccessful, the conflict in Ukraine could have a
lasting impact in the near- and long-term on the financial condition, business and operations of our business (and the businesses of the counterparties with
whom we engage), and the global economy at large.
Ongoing War in Gaza and Regional Hostilities
On October 7, 2023, terrorists from Hamas and other terrorist organizations infiltrated Israel’s southern border from the Gaza Strip and conducted a
series of attacks on civilian and military targets, including widespread killings and kidnappings. Shortly following the attack, Israel declared war against
Hamas. In addition, since the commencement of these events, there have been continued hostilities along Israel’s northern border with Hamas supporters,
including Lebanon (with the Hezbollah terror organization) and Syria. The aggressors have utilized, and could continue to use, terror, rocket and drone attacks,
which target locations throughout Israel and cause substantial disruption and damage. Israel may not be able to defend effectively against such attacks and
such attacks could have a material and adverse impact on our business, operations and financial condition. Additionally, the Houthi movement, which controls
parts of Yemen, launched a number of rocket attacks targeting Israel’s southern border and attacks on marine vessels traversing the Red Sea, which marine
vessels were thought to either be in route towards Israel or to be partly owned by Israeli businessmen. It is possible that these hostilities will escalate, and that
other terrorist organizations, including the Palestinian military organizations in the West Bank as well as other hostile countries, such as Iran, will join the
hostilities.
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In 2023, sales to customers in Israel accounted for less than 1.5% of our total revenues. Our Israeli facilities are based in central Israel, in an area that
to date has seen minor disruptions from rocket attacks. To date, none of our facilities or infrastructure have been damaged nor have our supply chains been
significantly impacted since the war commenced in October 2023. However, we cannot predict the ultimate effect that the ongoing war and hostilities will
have on us, including our supply chain and our ability to ship products from Israel, and any 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. For example, in connection with the war with Hamas and conflicts with its
supporters described above, some of our employees were called up to serve in the army. Some of our employees live within conflict area territories and may be
forced to stay at home instead of reporting to work. 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 materially and adversely affected.
A number of countries and organizations continue to restrict or ban business with Israel or with Israeli companies, or with companies doing business
with Israel or with Israeli companies, which may limit our ability to make sales in those countries. The war with Hamas and conflicts with its supporters have
also led to a reduction in the number of airlines and flights to Israel as well as a threat to shipping lines. 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. Moreover, any deterioration in the capital markets resulting directly or indirectly from the
ongoing conflict could limit our ability to obtain external financing.
We cannot predict the full impact of the war with Hamas and the related conditions on us in the future, particularly if emergency circumstances or
geopolitical tensions continue, any aspect of which could have a material adverse effect on our business, financial position, operating results and cash flows.
To the extent that the ongoing war with Hamas and conflicts with its supporters materially and adversely affects our business and financial results, such may
also have the effect of heightening many of the other risks described in Item 3.D, “Key Information – Risk Factors.”
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Results of Operations
The following table sets forth the results of operations in dollars and as a percentage of total revenues for the periods indicated:
Revenues:
Products
Services
Total revenues
Cost of revenues:
Products
Services
Total cost of revenues
Gross profit
Operating expenses:
Research and development, net
Selling and marketing
General and administrative
Total operating expenses
Operating income
Financial income (expenses), net
Income before taxes on income
Taxes on income
Net income
Year ended December 31,
2023
Amount
% of
Revenues
2022
Amount
% of
Revenues
$ 123,991
120,392
244,383
50.7 % $ 164,302
110,791
49.3
275,093
100.0
59.7 %
40.3
100.0
47,964
38,070
86,034
158,349
57,169
70,243
16,513
143,925
14,424
(52)
14,372
19.6
15.6
35.2
64.8
23.4
28.7
6.8
58.9
5.9
-
5.9
63,686
32,629
96,315
178,778
59,842
70,123
17,494
147,459
31,319
2,864
34,183
23.1
11.9
35.0
65.0
21.8
25.4
6.4
53.6
11.4
1
12.4
(5,592)
8,780
$
(2.3)
3.6 % $
(5,717)
28,466
(2.1)
10.3 %
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Revenues. Revenues decreased by 11.2% to $244.4 million in the year ended December 31, 2023, from $275.1 million in the year ended December
31, 2022.
Our revenues from sales of products in the year ended December 31, 2023 decreased by 24.5% to $124.0 million, or 50.7% of total revenues, from
$164.3 million, or 59.7% of total revenues, in the year ended December 31, 2022. The decrease in revenues from sales of products was primarily attributable
to the softness in our service provider segment, as carriers reduced inventories and purchases in light of elevated interest rate environment as well as slowing
decision cycle from enterprises owing to uncertain macroeconomic backdrop.
Our revenues from sales of services in the year ended December 31, 2023 increased by 8.7% to $120.4 million, or 49.3% of total revenues, from
$110.8 million, or 40.3% of total revenues, in the year ended December 31, 2022. The increase in revenues from sales of services was primarily driven by the
growth of our professional and managed services offerings. At the core of this growth is our continued progress in pivoting to recurring revenues with strong
execution in our operation of the AudioCodes Live offering. The growth in product support services was attributable to sales of products in prior periods that
resulted from an increase of our renewal rate of support agreements in some regions and from support services for a larger number of products being
supported. The growth in sales of professional services was attributable to offering more managed services with larger contract value as part of our
AudioCodes Live offering and a broader portfolio of professional services offered by us and an increase in demand for such services in the Enterprise UC
market (mainly Microsoft Teams).
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Cost of Revenues and Gross Profit. Cost of revenues includes the cost of hardware, quality assurance, overhead related to professional and support
customer services, overhead related to manufacturing activity, technology licensing and royalty fees payable to third parties and to the IIA. Gross profit
decreased to $158.3 million in the year ended December 31, 2023, from $178.8 million in the year ended December 31, 2022. Gross profit as a percentage of
total revenues was 64.8% in the year ended December 31, 2023, compared to 65.0% in the year ended December 31, 2022. Expenses included in cost of
revenues related to share-based compensation were $0.4 million in each of the years ended December 31, 2023 and 2022.
Cost of revenues related to sales of products decreased by 24.7% to $48.0 million in the year ended December 31, 2023, from $63.7 million in the
year ended December 31, 2022. Gross margin percentage from products was 61.3% in the year ended December 31, 2023 and 61.2% in the year ended
December 31, 2022.
Cost of revenues related to sales of services in the year ended December 31, 2023 increased by 16.7% to $38.0 million, from $32.6 million in the year
ended December 31, 2022. 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 enterprise customers. In the year ended December 31, 2023, the gross margin percentage from sales of
services decreased to 68.4%, from 70.5% in the year ended December 31, 2022.
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 the IIA. Research
and development expenses decreased by 4.5% in the year ended December 31, 2023 to $57.2 million, from $59.8 million in the year ended December 31,
2022. As a percentage of total revenues, research and development expenses, net increased to 23.4% in the year ended December 31, 2023, from 21.8% in the
year ended December 31, 2022. The decrease on an absolute basis is primarily due to a decrease in the total number of our employees and related expenses. In
addition, in the year ended December 31, 2023, expenses included in research and development expenses related to share-based compensation were $2.7
million, compared to $3.5 million in the year ended December 31, 2022. IIA grants recognized were $0.7 million in the year ended December 31, 2023,
compared to $0.6 million in the year ended December 31, 2022.
Selling and Marketing Expenses. Selling and marketing expenses consist primarily of salaries and related costs (including sales commissions) of sales
and marketing personnel, as well as exhibition, travel and related expenses. Selling and marketing expenses increased by 0.2% in the year ended December 31,
2023 to $70.2 million, from $70.1 million in the year ended December 31, 2022. As a percentage of total revenues, selling and marketing expenses increased
to 28.7% in the year ended December 31, 2023, from 25.5% in the year ended December 31, 2022. In the year ended December 31, 2023, expenses included in
selling and marketing expenses related to share-based compensation were $4.3 million, compared to $6.0 million in the year ended December 31, 2022.
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 credit losses, as well as insurance and consultant services expenses. General
and administrative expenses decreased by 5.6% to $16.5 million in the year ended December 31, 2023, from $17.5 million in the year ended December 31,
2022. As a percentage of total revenues, general and administrative expenses increased to 6.8% in the year ended December 31, 2023, from 6.4% in the year
ended December 31, 2022. The decrease on an absolute basis is primarily due to a decrease in payroll expenses. In addition, in the year ended December 31,
2023, expenses included in general and administrative expenses related to share-based compensation were $4.0 million compared to $5.2 million in the year
ended December 31, 2022.
Financial Income (Expenses), Net. Financial income (expenses), net consists primarily of interest earned on cash and cash equivalents, marketable
securities and bank deposits, gains from financial investments, net of interest on our bank loans and bank charges, exchange rate differences and linkage
differences to the Israeli consumer price Index, or Israeli CPI, and amortization of marketable securities premiums and accretion of discounts, net. Financial
expense, net, in the year ended December 31, 2023 was $0.1 million, compared to financial income, net of $2.9 in the year ended December 31, 2022. The
increase in financial expenses, net in the year ended December 31, 2023 was primarily due to (i) higher expenses related to exchange rate fluctuations; and (ii)
higher interest expenses recorded with respect to derivative instruments.
Taxes on Income. Taxes on income in the year ended December 31, 2023, were $5.6 million, compared to $5.7 million in the year ended December
31, 2022.
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A discussion with respect to a comparison of the results of operations for the year ended December 31, 2022, compared to the year ended December
31, 2021 is contained under the heading “Results of Operations” in Item 5 of our Annual Report on Form 20-F for the year ended December 31, 2022, or the
2022 Form 20-F.
Impact of Inflation, Devaluation and Fluctuation of Currencies on Results of Operations, Liabilities and Assets
Since the majority of our revenues are denominated in or linked to the dollar, we believe that inflation and fluctuations in the NIS/dollar exchange
rate have no material impact on our revenues. However, most of the costs of our Israeli operations, mainly personnel and facility-related, is incurred in NIS.
Inflation in Israel and dollar exchange rate fluctuations have some influence on our expenses and, as a result, on our net income. Our NIS costs, as expressed
in dollars, 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 or
appreciation of the NIS in relation to the dollar.
To protect against the changes in value of forecasted foreign currency cash flows resulting from payments in NIS, we 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.
Rising inflation in the United States and other markets in which we operate (or derive revenue) may impact the economy and ultimately the demand
for our products and services. See Item 3.D, “Key Information – Risk Factors – High rates of global inflation and the occurrence of a recession could have a
material and adverse impact on our business, results of operations and financial condition” for further information regarding the risks associated with such
inflation.
The following table presents information about the rate of inflation in Israel, the rate of devaluation of the NIS against the dollar, and the rate of
inflation in Israel adjusted for the devaluation:
Year Ended
December 31,
2023
2022
2021
B.
LIQUIDITY AND CAPITAL RESOURCES
Israeli
inflation
rate
%
NIS devaluation
or appreciation
rate
%
3.0
5.3
2.8
3.1
13.2
(3.3)
Israeli
inflation
adjusted for
devaluation or
appreciation
%
0.1
7.9
(6.1)
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, 2023, we had $106.7 million in cash and cash equivalents, short-term and long-term marketable securities, short-term and long-
term financial investments and bank deposits, a decrease of $17.6 million from $124.3 million as of December 31, 2022.
Our material cash requirements from known contractual and other obligations include our lease commitments and purchase commitments. For
additional information on the foregoing lease commitments and purchase commitments, see Note 9 and Note 10a to our Consolidated Financial Statements
included elsewhere in this Annual Report.
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Share Repurchase Program and Cash Dividends
In June 2022 and in January, June and December 2023, we received court approval to purchase up to $35.0 million, $25.0 million, $25.0 million and
$20.0 million of our ordinary shares, respectively. The most recent court approvals allowed us to use the approved amounts for share repurchases or cash
dividends. 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 every six months by submitting a new court application, based on the then prevailing facts. 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.
During the year ended December 31, 2023, we acquired an aggregate of 1,794,931 of our ordinary shares for approximately $18.3 million, and
declared and paid cash dividends in the aggregate amount of $11.4 million. During the year ended December 31, 2022, we acquired an aggregate of 1,513,207
of our ordinary shares for approximately $38.1 million, and declared and paid a cash dividend in the aggregate amount of $11.6 million. In February 2024, we
declared a cash dividend in the aggregate amount of $5.5 million. As of March 20, 2024, we had approximately $10.2 million available for share repurchases
or dividends under the most recent court approval granted in December 2023. The current approval is valid through June 18, 2024.
Cash Flows from Operating Activities
Our operating activities provided cash in the approximate amount of $14.9 million in the year ended December 31, 2023, primarily due to net income
of $8.8 million, an increase of $3.1 million in deferred revenues, non-cash charges of $2.6 million for depreciation and amortization, and $11.4 million for
share-based compensation expenses and a decrease of $1.4 million in deferred tax assets, partially offset by a decrease of $6.2 million in other payables and
accrued expenses, an increase of $7.8 million in inventories and a decrease of $3.8 million in trade payables.
Our operating activities provided cash in the approximate amount of $8.3 million in the year ended December 31, 2022, primarily due to net income
of $28.5 million, an increase of $3.5 million in trade payables, non-cash charges of $3.0 million for depreciation and amortization, and $15.1 million for share-
based compensation expenses, and a decrease of $1.8 million in deferred tax assets, partially offset by an increase of $20.6 million in trade receivables, an
increase of $12.7 million in inventories, a decrease of $4.1 million in other payables and accrued expenses and a decrease of $2.0 million in deferred revenues.
Cash Flows from Investing Activities
In the year ended December 31, 2023, our investment activities used cash in the amount of $20.0 million, primarily as a result of proceeds of $14.1
million derived from the redemption of financial investments and proceeds of $5.0 million derived from short-term and restricted bank deposits.
In the year ended December 31, 2022, our investment activities used cash in the amount of $19.7 million, primarily as a result of a (i) $16.6 million
purchase of financial investments and (ii) $5.0 million investment in short-term and restricted bank deposits.
Financing Activities
In the year ended December 31, 2023, we used $28.9 million of cash in financing activities, primarily as a result of $18.3 million used to repurchase
our shares and $11.4 million used to pay cash dividends to our shareholders, partially offset by $0.8 million of proceeds from the issuance of shares upon
exercise of stock options.
In the year ended December 31, 2022, we used $48.6 million of cash in financing activities, primarily as a result of $38.1 million used to repurchase
our shares and $11.6 million used to pay cash dividends to our shareholders, partially offset by $1.1 million of proceeds from the issuance of shares upon
exercise of stock options.
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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. 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.
See Item 3.D, “Key Information – Risk Factors” with respect to risks, conditions and circumstances that could adversely impact our liquidity and
capital resources. Information with respect to Liquidity and Capital Resources as of December 31, 2022 and for the year then ended is contained under the
heading “Liquidity and Capital Resources” in Item 5 of our 2022 Form 20-F.
C.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
Research and Development
In order to accommodate the rapidly changing needs of our markets, we place considerable emphasis on research and development projects designed
to improve our existing products and to develop new ones. We invest in cloud and virtualization technologies, making sure our products and technologies suit
and are optimized to cloud and hosted services environments. We are also further developing our SaaS offers with solutions like SmartTAP, Meeting Insights,
Voice.AI Connect, Live platform and Voca. We are developing productivity solutions, and specialized appliances and applications for Microsoft Teams such as
Direct Routing Survivable Branch Appliances (SBA). We are constantly enhancing our session border controllers and digital media gateways for carrier and
enterprise deployments, multi-service business routers, IP phones and meeting room devices, and management applications with increased capacity, new
functionalities and compliance with the latest relevant standards and protocols.
In addition, we continue to maintain our analog and digital media gateways for carrier and enterprise applications, multi-service business routers and
develop further our session border controllers, IP phones, management routing and productivity applications, as well as specialized appliances for Microsoft
Skype/Teams for Business such as SBA, CCE and CloudBond 365. Our platforms are expected to feature increased session capacity, new functionalities,
enhanced signaling software and compliance with new protocols, as well as new management and productivity applications. We also invest in cloud and
virtualization technologies, making sure our product and technology suites are optimized for cloud and hosted services. As of December 31, 2023, 330 of our
employees were engaged primarily in research and development on a full-time basis.
Our net research and development expenses were approximately $57.2 million in the year ended December 31, 2023, compared to $59.8 million in
the year ended December 31, 2022, and $53.4 million in the year ended December 31, 2021. From time to time, we have received grants from the IIA. As a
recipient of grants from the IIA, we are obligated to perform all manufacturing activities for projects subject to the grants in Israel unless we receive an
exemption (except for up to 10% of our manufacturing activities, which requires only a notice to be made to the IIA). Know-how from research and
development which is used to produce products may not be transferred to third parties without the approval of the IIA and may require significant payments.
The IIA approval is not required for the export of any products resulting from such research or development.
Through December 31, 2023, we had obtained grants from the IIA aggregating approximately $7.3 million for certain of our research and
development projects related to our other Israeli subsidiaries. We are obligated to pay royalties to the IIA, amounting to 3% to 5% of the revenues from the
sales of the products and other related revenues generated from such projects, up to 100% of the grants received, if no additional payments are required, linked
to the dollar and bearing interest at the rate of the higher of SOFR + 1% and 4%. 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. If we transfer our manufacturing outside of Israel, the rate of royalties will increase.
As of December 31, 2023, our other Israeli subsidiaries have a contingent obligation to pay royalties in the amount of approximately $21.3 million.
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D.
TREND INFORMATION
There is a growing global trend of use of AI and machine learning, and we have started implementing these capabilities in our Voice.AI products. The
Voice.AI product suite is focusing on content gathering and providing insights and predictions based on the content by using AI and machine learning.
Using content gathering within organizations for AI analysis has several benefits, including:
● Improved decision-making;
● Cost savings;
● Increased accuracy;
● Scalability; and
● Competitive advantage.
Some of the latest trends in conversational AI include:
● Multimodal Conversational AI: Conversational AI is moving beyond text and voice to include other forms of interaction, such as images, videos
and augmented reality. This allows for more natural and intuitive conversations.
● Personalized Conversational AI: Personalized conversational AI systems are becoming more prevalent, leveraging user data and machine
learning algorithms to provide more personalized and relevant responses.
● Increased Adoption of Conversational AI: As conversational AI technology becomes more advanced and accessible, it is being adopted across a
range of industries and use cases, including customer service, healthcare and education.
Another ongoing trend is the global migration to All-IP, which continues to impact our business as it has done for several years, with the shift from
traditional communications systems to IP communications and unified communications. The COVID-19 pandemic expedited this trend, as many organizations
accelerated their plans for migration and moved their employees to a Work from Home environment or Hybrid Workplace environment.
The continued growth of private and public cloud-based services in the telecommunications industry has continued to impact our business. Adopting
cloud services, such as Microsoft Teams, is an attractive proposition for enterprises and service providers, with the potential to deliver significant operational
and capital cost savings, as well as increased productivity and flexibility. We offer a range of software-based products and solutions designed with the cloud in
mind. While we predict sales of these software-based solutions to increase, this may result in lower revenues from our hardware-based session border
controller products.
As data traffic becomes the dominant factor in communications, service providers are building and maintaining converged networks for integrated
voice and data services. This is driving integration of new data networking technologies, such as SD-WAN and the adoption of integrated devices supporting
these capabilities. Additionally, aging legacy TDM switches, high-cost maintenance contracts and regulatory guidelines are driving service providers
worldwide to announce “PSTN shutdown” and migrate their telephony services to IP communication.
We are experiencing decreasing demand for our technology products from customers who previously manufactured network equipment products
based on our enabling technology. These customers are migrating from our enabling technology products to diverse integrated comprehensive solutions and,
as a result, the demand for our technology products is being adversely affected.
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E.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with 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 the section entitled “Critical
Accounting Estimates” above in this Item 5 as well as Note 2 to our Consolidated Financial Statements included elsewhere in this Annual Report, which
contains additional information regarding our accounting policies and other disclosures required by U.S. GAAP.
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 20, 2024:
Name
Stanley B. Stern
Shabtai Adlersberg
Niran Baruch
Lior Aldema
Ofer Nimtsovich
Yair Hevdeli
Eyal Frishberg
Yehuda Herscovici
Tal Dor
Shaul Weissman
Joseph Tenne(1)(2)(3)
Shai Levy(1)(2)(3)
Doron Nevo(1)(2)(3)
Zehava Simon (2) (3)
Shira Fayans Birenbaum (1)
(1) Member of Audit Committee
(2) Member of Nominating Committee
(3) Member of Compensation Committee
Position
Age
66
71
53
58
54
58
65
57
54
57
68
59
68
65
59
Chairman of the Board of Directors
President, Chief Executive Officer and Director
Vice President Finance and Chief Financial Officer
Chief Business Officer
Chief Operating Officer
Vice President, Research and Development
Vice President, Operations
Vice President, Products
Vice President, Human Resources
Vice President, Business Development
Director
Director
Director
Director
Director
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Stanley Stern became a director and our Chairman of the Board in December 2012. Mr. Stern is the Managing Partner of Alnitak Capital, which he
founded in 2013 to provide board level strategic advisory services and merchant banking services, primarily to companies in technology-related industries.
From 1981 to 2000 and from 2004 to 2013, he was a Managing Director at Oppenheimer & Co, where, among other positions, he was head of the investment
banking department and technology investment banking group. He also held positions at Salomon Brothers, STI Ventures and C.E. Unterberg. Mr. Stern has
served as chairman of the board of directors of AudioCodes, Ltd. (Nasdaq: AUDC), a U.S. public company, since 2012, and serves as a member of the board
of directors of the following U.S. public and private companies: Tigo Energy, Inc. (Nasdaq: TIGO) since 2015 and Radware Ltd. (Nasdaq: RDWR) since
September 2020. Mr. Stern previously served from 2015 to 2018 as the chairman of the board of directors of SodaStream International Ltd., a U.S. public
company until its sale to Pepsico in 2018, and as a member of the board of directors of the following public and private companies, for which he no longer
serves as a director: Given Imaging Ltd., Fundtech Inc., Tucows, Inc. (chairman), Polypid Ltd., Odimo, Inc, and Ekso Bionics Holdings, Inc. (lead
Independent director).
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 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 has served as our Vice President Finance and Chief Financial Officer since July 2016 after serving as our Vice President Finance and
Chief Accounting Officer since May 2015. He joined AudioCodes in 2005 as Director of Finance and became Vice President Finance in 2011, responsible for
the management of the finance department. Mr. Baruch has 20 years of experience with Nasdaq traded public companies, and is a Certified Public Accountant
(CPA) with a B.A. in Business Management and Accounting.
Lior Aldema has served as Chief Business Officer (CBO) since January 2018, previously served as a director from July 2018 through September
2022, 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.
Ofer Nimtsovich has served as our Chief Operating Officer since January 2018 and as Vice President, Global Services from March 2013 to
December 2018. From 2000 until February 2013, Mr. Nimtsovich served in various executive positions at Retalix, including Chief Information Officer,
Executive Vice President of Global Services and, most recently as the head of the Software as a Service division of Retalix. From 1994 until 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 M.B.A. degree from the University of Texas.
Yair Hevdeli joined AudioCodes in July 2013 as Vice President, Research and Development. From 2003 until 2013, Mr. Hevdeli served in various
executive positions at Veraz/Dialogic, including Global Vice President, Research and Development and, most recently, as Senior Vice President, Research and
Development and General Manager, Bandwidth Optimization BU. From 1998 until 2003, Mr. Hevdeli worked for ECI Ltd., 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.
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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, part
of Israel Aerospace Industries, in the planning and control department. Mr. Frishberg holds a B.Sc. in Industrial Engineering from Tel Aviv University and an
M.B.A. from Ben-Gurion University of the Negev.
Yehuda Herscovici has served as our Vice President, Products, overseeing 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.
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.
Joseph Tenne has served as one of our directors since June 2003. Mr. Tenne serves as a director of MIND CTI Ltd. (NASDAQ: MNDO), OPC
Energy Ltd. (TASE: OPCE), Sapir Corp Ltd. (TASE: SPIR), Electreon Wireless Ltd. (TASE: ELWS) and Tarya Israel Ltd. (TASE: TRA). Mr. Tenne served as
a financial executive at Itamar Medical Ltd. (NASDAQ and TASE: ITMR, (until December 2021)) from May 2017 to August 2023. From August 2014 to
April 2017, Mr. Tenne served as the Vice President Finance and Chief Financial Officer of Itamar Medical Ltd. From March 2005 until April 2013, Mr. Tenne
served as the Chief Financial Officer of Ormat Technologies, Inc. (NYSE and TASE: ORA). From 2003 to 2005, Mr. Tenne was the Chief Financial Officer of
Treofan Germany GmbH & Co. KG, a German company. From 1997 until 2003, Mr. Tenne was a partner in Kesselman & Kesselman, Certified Public
Accountants in Israel (PwC Israel) and a member of PricewaterhouseCoopers International Limited. Mr. Tenne holds a B.A. in Accounting and Economics and
an M.B.A. from Tel Aviv University. Mr. Tenne is also a Certified Public Accountant in Israel.
Shai Levy has served as one of our directors since October 2023. Mr. Levy holds the position of President Strategic Business as well as several other
roles with the Amdocs group (NYSE: DOX). Mr. Levy has over 23 years of experience in the telecommunications industry. At Amdocs, Mr. Levy held
multiple positions, ranging from General Manager of Amdocs Israel, managing customers and customer division in North America, Amdocs competency
centers, Amdocs managed service division and more. Prior to joining Amdocs, Mr. Levy held the position of CFO and controller in several Israeli based
companies. Mr. Levy holds an M.B.A., B.A. in economics and an additional B.A. in accounting, all from Tel Aviv University.
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Doron Nevo has served as one of our directors since 2000. Mr. Nevo was co-Founder and CEO of MultiVu, a 3D imaging company, from 2019 to
2023. From 2001 to 2018, Mr. Nevo was co-Founder, President and CEO of KiloLambda Technologies. From 1999 to 2001, Mr. Nevo was involved in fund
raising activities for Israeli-based startup companies. From 1996 to 1999, Mr. Nevo served as President and CEO of NKO, Inc. Mr. Nevo established NKO in
early 1995 as a startup subsidiary of Clalcom, Ltd. NKO designed and developed a full scale, carrier grade, IP telephony system platform and established its
own IP network. From 1992 to 1996, Mr. Nevo was President and CEO of Clalcom Ltd. Mr. Nevo established Clalcom in 1992 as a telecom service provider
in Israel. He also serves as a director of Hadasit Bio-Holdings (TASE: HBL) and of several 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 as 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, InSightec from 2005-2012 and Amiad Water System Ltd. from 2014-2020. Ms. Simon is also a
board member at Nova Measuring Instruments Ltd. (NASDAQ: NVMI) and NICE Ltd. (NASDAQ: NICE). Ms. Simon holds a bachelor’s degree in Social
Sciences from the Hebrew University, a law degree (LL.B.) from the Interdisciplinary Center in Herzlia and a master’s degree in Business and Management
from Boston University.
Shira Fayans Birenbaum was appointed as a director in March 2022. Ms. Shira Fayans Birenbaum currently holds the position of a board member at
several publicly traded and private international companies including POMVOM Ltd. (TASE: PMVM), AnyVision Interactive (OOSTO) Ltd., RiskQ Ltd. N.Y
and Anan Datacenter Solutions Ltd, as an advisory board member. Ms. Fayans Birenbaum has 25 years of experience as a Board Member serving in all
committees in publicly traded companies such as technology, investment houses, banks, insurance, real estate, manufacturers, semiconductor and educational
institutions. In the years 2014-2019, Ms. Fayans Birenbaum held the position of COO and CMO of Microsoft Israel (NASDAQ: MSTF) leading Digital
Transformation, and in 2021-2022 held the position of President Global of CYMPIRE lTD. Ms. Fayans Birenbaum has extensive experience in Executive C
Level positions in her previous roles. Ms. Fayans Birenbaum holds an MBA and BA both from Tel Aviv University and Marketing management certification
studies from The College of Management Academic Studies.
B.
COMPENSATION
The table and summary below outline the compensation granted to our five most highly compensated office holders during or with respect to the year
ended December 31, 2023. 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, share-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, 2023.
Name and Principal Position
Shabtai Adlersberg – President and CEO
Lior Aldema – CBO
Ofer Nimtsovich – COO
Niran Baruch – VP Finance and CFO
Yehuda Herscovici – VP Products
Salary
Bonus (1)
Share-Based
Compensation
(2)
$ 358,403 $ 578,420 $ 2,091,942 $
$
$
$
$
$ 1,167,613
802,116
$
722,331
$
651,703
$
$ 144,605
$
99,256
$ 144,605
43,011
$
$ 258,023
$ 215,042
$ 220,843
$ 210,772
All Other
Compensation
(3)
185,086 $
$
95,769
$
90,576
$
77,426
$
72,765
Total
3,213,852
1,666,010
1,206,990
1,165,205
978,250
(1)
(2)
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, 2023, with respect to
share-based compensation granted to the Covered Executive.
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(3)
Amounts reported in this column include personal benefits and perquisites, including those mandated by applicable law. Such benefits and perquisites
may include, to the extent applicable to the respective Covered Executive, payments, contributions and/or allocations for savings funds (e.g.,
Managers Life Insurance Policy), education funds (referred to in Hebrew as “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 our guidelines. All
amounts reported in the table represent incremental cost to us.
The aggregate direct remuneration paid during the year ended December 31, 2023 to the 16 persons who served in the capacity of director, senior
executive officer or key employee during 2023 was approximately $4.3 million, including approximately $0.5 million 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 approximately $39,600 and a fee of $1,190 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 do not receive board meeting fees. Instead, Mr. Shabtai Adlersberg receives compensation in accordance with the terms
of his respective employment agreement.
Upon election or reelection to the board of directors for a term of three years, each non-employee director is granted 7,500 restricted share units, or
RSUs, each year that vest over a three-year period from the grant date.
Options to purchase our ordinary shares granted under our 2008 Equity Incentive Plan to persons who served in the capacity of director or executive
officer are generally exercisable at the fair market value at the date of grant and expire seven years from the date of grant. The options generally vest in four
equal annual installments, commencing one year from the date of grant.
A summary of our stock option and RSU activity and related information for the years ended December 31, 2023, 2022 and 2021 for the persons who
served in the capacity of director, senior executive or key employee officer during those years is as follows:
Outstanding at the beginning of the year
Granted
Cancelled
Options exercised / RSUs vested
Outstanding at the end of the year
Number
of
Options and
RSUs
894,897 $
287,500
$
—
(367,887)
814,510
$
$
Weighted
Average
Exercise
Price
2.69
0.00
1.91
2.09
Number
of
Options and
RSUs
984,838 $
315,150
$
—
(405,091)
894,897
$
$
Weighted
Average
Exercise
Price
3.17
0.00
3.19
2.69
2023
Year Ended December 31,
2022
2021
Number
of
Options and
RSUs
Weighted
Average
Exercise
Price
1,209,768 $
$
3.97
0.00
293,735
(26,250)
(492,415)
984,838
$
$
3.19
3.17
As of December 31, 2023, options to purchase 138,000 ordinary shares were exercisable by the 15 persons who served as an officer or director during
the year ended December 31, 2023 at an average exercise price of $11.64 per share. As of December 31, 2023, the 16 persons who served as an officer,
director or key employee during the year ended December 31, 2023 held an aggregate of 618,385 RSUs.
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C.
BOARD PRACTICES
Corporate Governance Practices
We are incorporated in Israel and therefore are subject to various corporate governance practices under 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 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, Shai Levy, Zehava Simon, Stanley Stern, Joseph Tenne and Shira Fayans Birenbaum qualify as independent directors under the
applicable SEC and Nasdaq rules, as well as under the Companies Law.
Under the Companies Law, a person may not serve as an outside director if at the date of the person’s election or within the prior two years the person
is a relative of the company’s controlling shareholder, or the person or his or her relatives, partners, employers, supervisors or entities under the person’s
control, have or had any affiliation with us or with a controlling shareholder or relatives of a controlling shareholder, and, in the case of a company without a
controlling shareholder or a shareholder holding at least 25% of the voting rights, any affiliation, at the time of election, to the chairman of the board of
directors, the chief executive officer, an interested party or the company’s most senior finance officer. Under the Companies Law, “affiliation” includes:
●
●
●
●
an employment 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.
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
thereunder.
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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 the rules promulgated by the SEC.
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 Companies Law and is otherwise prohibited from
receiving any other compensation, directly or indirectly, from the company. In accordance with such regulations, our shareholders approved that our outside
directors are to receive compensation equal to that paid to the other members of the board of directors. For further information, please see Item 6.B,
“Directors, Senior Management and Employees—Compensation” in this Annual Report.
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Audit Committee
Under the Companies Law and the requirements for listing on the Nasdaq Global Select Market, our board of directors is required to appoint an audit
committee. Our audit committee must be comprised of at least three directors, including all of the outside directors (one of whom must serve as the chair of the
audit committee), and a majority of the committee members must comply with the director independence requirements prescribed by the Companies Law. The
audit committee consists of: Doron Nevo, Shai Levy, Joseph Tenne and Shira Fayans Birenbaum with Doron Nevo serving as the chairman of the audit
committee. Our board of directors has determined that Joseph Tenne is an “audit committee financial expert” as defined in SEC rules and that all members of
the audit committee are independent under the applicable SEC rules, Nasdaq rules and provisions of the Companies Law.
The audit committee may not include the chairman of the board, or any director employed by us, by a controlling shareholder or by any entity
controlled by a controlling shareholder, or any director providing services to us, to a controlling shareholder or to any entity controlled by a controlling
shareholder on a regular basis, or any director whose income is primarily dependent on a controlling shareholder, and may not include a controlling
shareholder or any relatives of a controlling shareholder. Individuals who are not permitted to be audit committee members may not participate in the
committee’s meetings other than to present a particular issue. However, an employee who is not a controlling shareholder or relative may participate in the
committee’s discussions but not in any 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.
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Nominating Committee
Nasdaq rules require that director nominees be selected or recommended for the board’s selection either by a committee composed solely of
independent directors or by a majority of independent directors. Our nominating committee assists the board of directors in its selection of individuals as
nominees for election to the board of directors and/or to fill any vacancies or newly created directorships on the board of directors. The nominating committee
consists of Doron Nevo, Shai Levy, Joseph Tenne and Zehava Simon, 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.B, “Additional Information – Memorandum and Articles of Association –
Compensation of Executive Officers and Directors; Executive Compensation Policy.”
The compensation committee consists of Doron Nevo, Shai Levy, 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. Mr. Oren Grupi of KPMG Somekh Chaikin, Israel has been our internal auditor since July 2018.
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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
Shai Levy
Shira Fayans Birenbaum
Joseph Tenne
Shabtai Adlersberg
Stanley B. Stern
Chairman of the Board
Class I
Class I
Class II
Class II
Class III
Class III
2025
2025
2026
2026
2024
2024
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 President and Chief Executive Officer.
D.
EMPLOYEES
We had the following number of employees as of December 31, 2023, 2022 and 2021 in the departments set forth in the table below:
Research and development
Sales and marketing, technical service and support
Operations
Management and administration
Our employees were located in the following areas as of December 31, 2023, 2022 and 2021.
Israel
United States
Europe
Eastern Asia
Latin America
2023
As of December 31,
2022
2021
330
489
86
45
950
339
495
88
44
966
316
443
84
42
885
As of December 31,
2023
2022
2021
489
188
103
140
30
950
491
200
108
136
31
966
456
182
96
127
24
885
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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 7.05% to 19.6% of wages up to specified wage levels, of which the employee contributes approximately 60% and the employer contributes
approximately 40%.
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. 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 Economy and Industry, 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.
E.
SHARE OWNERSHIP
The following table sets forth the share ownership of our directors and officers as of March 20, 2024 and the outstanding number of options and
RSUs held by them that vest within 60 days of March 20, 2024.
Name
Total
Shares
Beneficially
Owned
Percentage
of
Ordinary
Shares
Number of
Options and
RSUs
Shabtai Adlersberg
Stanley B. Stern
Niran Baruch
Lior Aldema
Ofer Nimtsovich
Yair Hevdeli
Eyal Frishberg
Yehuda Herscovici
Tal Dor
Shaul Weissman
Joseph Tenne
Shai Levy
Doron Nevo
Zehava Simon
Shira Fayans Birenbaum
* Represented less than one percent.
4,600,253
*
*
*
*
*
*
*
*
*
*
*
*
*
*
15.2 %
*
*
*
*
*
*
*
*
*
*
*
*
*
*
105,000
*
*
*
*
*
*
*
*
*
*
*
*
*
*
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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 20, 2024.
Number of
Options
15,000
15,000
15,000
15,000
15,000
15,000
15,000
Grant Date
December 14, 2017
March 14, 2018
June 14, 2018
September 14, 2018
December 14, 2018
March 14, 2019
June 14, 2019
Exercise
Price
7.13
7.56
7.33
10.59
10.66
13.27
15.93
$
$
$
$
$
$
$
Exercised
Cancelled
Vesting
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4 years
4 years
4 years
4 years
4 years
4 years
4 years
Expiration Date
December 14, 2024
March 14, 2025
June 14, 2025
September 14, 2025
December 14, 2025
March 14, 2026
June 14, 2026
The following table sets forth information with respect to the RSUs granted to Mr. Adlersberg as of March 20, 2024. These RSUs vest quarterly over
a four-year period from the date of grant, subject to his continuing service to us.
Number of
RSUs
80,000
80,000
80,000
80,000
Grant Date
September 14, 2020
September 14, 2021
September 14, 2022
September 14, 2023
Issued
70,000
50,000
30,000
10,000
Employee Share Plans
We have 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 Israeli Income Tax Ordinance (New Version), 1961, or 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 the Israeli Income Tax Ordinance, or Section 102, and deposited in
trust with the trustee.
2008 Equity Incentive Plan
We adopted an equity incentive plan under Section 102, which provides certain tax benefits in connection with share-based compensation to
employees, officers and directors. This plan, our 2008 Equity Incentive Plan, was approved by the Israel 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 to 4,009,122 in 2010, 6,009,122 in 2013, 8,009,122 in 2016, 10,009,122 in 2019 and
12,009,122 in 2022. This number is reduced by one share for each equity grant we make under the 2008 Plan. During 2023, options to purchase 20,000
ordinary shares and 589,042 restricted share units were granted under the 2008 Plan. As of December 31, 2023, 1,729,170 ordinary shares remained available
for grant under the 2008 Plan. As of December 31, 2023, there are 265,300 options to purchase ordinary shares and 1,231,879 restricted share units
outstanding under the plan.
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The Israel 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 vest over four years from the grant date or in accordance with
the alternative vesting schedule applicable to the specific grant. If the employment of an employee is terminated for any reason, the employee (or in the case of
death, the designated beneficiary) may exercise his or her vested options within ninety days of the date of termination (or within twelve months of the date of
termination in the case of death or disability) and shall be entitled to any rights upon vested restricted shares and vested restricted share units to be delivered to
the employee to the extent that they were vested prior to the date his or her employment terminates. Directors are generally eligible to exercise his or her
vested options within twelve months from the date the director ceases to serve on the board of directors.
The holders of options under all of the plans are responsible for all personal tax consequences relating to the options. The exercise prices of the
options are based on the fair value of the ordinary shares at the time of grant, as determined by our board of directors. The current practice of our board of
directors is to grant options with exercise prices that equal 100% of the closing price of our ordinary shares on the applicable date of grant.
F.
DISCLOSURE OF A REGISTRANT’S ACTION TO RECOVER ERRONEOUSLY AWARDED COMPENSATION
Not applicable.
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
20, 2024, the number of our ordinary shares, which constitute our only outstanding voting securities, beneficially owned by (i) all shareholders known to us to
own more than 5% of our outstanding ordinary shares, and (ii) all of our directors and senior executive officers as a group.
Identity of Person or
Group
Shabtai Adlersberg(1)
Leon Bialik(2)
Senvest Management, LLC(3)
Morgan Stanley Capital Services LLC and Morgan Stanley(4)
William Blair Investment Management, LLC(5)
All directors and senior executive officers as a group (15 persons)(6)
Amount
Owned
4,705,253
2,311,704
2,543,368
1,885,616
1,536,371
4,918,027
Percent of
Class(8)
15.5 %
7.6 %
8.4 %
6.2 %
5.1 %
16.2 %
(1) The information is derived from a statement on Schedule 13G/A of Shabtai Adlersberg filed with the SEC on February 5, 2024. Includes options to purchase 105,000 shares exercisable within
60 days of March 20, 2024.
(2) The information is derived from a statement on Schedule 13G/A of Leon Bialik filed with the SEC on January 25, 2024.
(3) The information is derived from a statement on Schedule 13G/A of Senvest Management, LLC filed with the SEC on February 9, 2024.
(4) The information is derived from a statement on Schedule 13G of Morgan Stanley Capital Services LLC and Morgan Stanley filed with the SEC on February 9, 2024.
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(5) The information is derived from a statement on Schedule 13G/A of William Blair Investment Management, LLC filed with the SEC on February 12, 2024.
(6)
Includes 131,250 ordinary shares which may be purchased pursuant to options exercisable within 60 days following March 20, 2024 and 28,510 ordinary shares issuable pursuant to restricted
share units that vest within 60 days of March 20, 2024.
(7) This percentage calculation is rounded to the nearest tenth and based on 30,324,284 outstanding shares as of March 20, 2024 (which does not include treasury shares outstanding as of March
20, 2024).
Mr. Adlersberg held approximately 15.0% of our ordinary shares as of December 31, 2023, as compared to 14.0% of our ordinary shares as of
December 31, 2022, and 14.1% of our ordinary shares as of December 31, 2021.
Mr. Bialik held approximately 7.6% of our ordinary shares as of December 31, 2023, as compared to 7.4% of our ordinary shares as of December 31,
2022, and 7.6% of our ordinary shares as of December 31, 2021.
Morgan Stanley and Morgan Stanley Capital Services LLC collectively held 6.2% of our ordinary shares as of December 31, 2023. Neither Morgan
Stanley nor Morgan Stanley Capital Services LLC filed a statement on Schedule 13G/A (with respect to its ownership in the Company) for the year ended
December 31, 2022. However, Morgan Stanley and Morgan Stanley Capital Services LLC collectively held approximately 4.6% of our ordinary shares as of
December 31, 2021.
The Phoenix Holdings Ltd. held approximately 5.3% of our ordinary shares as of December 31, 2023, as compared to 5.5% of our ordinary shares as
of December 31, 2022, and 5.1% of our ordinary shares as of December 31, 2021.
William Blair Investment Management, LLC held approximately 5.0% of our ordinary shares as of December 31, 2023, as compared to 5.2% of our
ordinary shares as of December 31, 2022. William Blair did not file a statement on Schedule 13G (with respect to its ownership in the Company) for the year
ended December 31, 2021.
Copeland Capital Management, LLC did not file a statement on Schedule 13G/A (with respect to its ownership in the Company) for the years ended
December 31, 2023 or December 31, 2022. Copeland Capital Management, LLC held approximately 5.1% of our ordinary shares as of December 31, 2021.
Senvest Management, LLC held approximately 8.3% of our ordinary shares as of December 31, 2023. Senvest Management, LLC did not file a
statement on Schedule 13G (with respect to its ownership in the Company) for the years ended December 31, 2022 or December 31, 2021.
As of March 20, 2024, there were approximately four 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.
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Legal Proceedings
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are currently not involved in any
pending or contemplated legal proceedings that could reasonably be expected to have a significant effect on our financial position, or profitability. We may
become involved in material legal proceedings in the future. Regardless of the outcome, litigation can have an adverse impact on us because of defense and
settlement costs, diversion of management resources and other factors.
Dividend Policy
For a discussion of our dividend policy, please see Item 10.B, “Additional Information-Memorandum and Articles of Association-Dividends.”
B.
SIGNIFICANT CHANGES
No significant change has occurred since December 31, 2020, except as otherwise disclosed in this Annual Report.
ITEM 9. THE OFFER AND LISTING
A.
OFFER AND LISTING DETAILS
Our ordinary shares are listed on the Nasdaq Global Select Market and the TASE under the symbol “AUDC.”
B.
PLAN OF DISTRIBUTION
Not applicable.
C.
MARKETS
Our ordinary shares are listed for trading on the Nasdaq Global Select Market under the symbol “AUDC.” Our ordinary shares are also listed for
trading on the Tel-Aviv Stock Exchange under the symbol “AUDC.” In addition, we are aware of our ordinary shares being traded on the following markets:
Frankfurt Stock Exchange, Berlin Stock Exchange, Munich Stock Exchange, Stuttgart Stock Exchange, the German Composite and XETRA.
D.
SELLING SHAREHOLDERS
Not applicable.
E.
DILUTION
Not applicable.
F.
EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A.
SHARE CAPITAL
Not applicable.
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B.
MEMORANDUM AND ARTICLES OF ASSOCIATION
Objectives
Our objectives, set forth in our articles of association, are to engage in any legal occupation or business.
Share Capital
Our authorized share capital consists of NIS 1,025,000 divided into 100,000,000 ordinary shares, nominal value NIS 0.01 per share, and 2,500,000
preferred shares, nominal value NIS 0.01 per share. As of March 20, 2024, we had 30,324,284 ordinary shares outstanding (which does not include
34,406,682 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
In general, shareholders may amend our articles of association by a resolution adopted at a shareholders meeting by the holders of 50% of the voting
power represented at the meeting in person or by proxy and voting thereon. The amendment of certain provisions of our articles of association requires an
increased voting threshold. For example, the approval of amendments to the provisions concerning business combinations with certain shareholders requires
the approval of holders of 85% of our outstanding voting shares. Additionally, the amendment of the provisions concerning (i) the procedure according to
which shareholders may propose items to include in the agenda of a general meeting of the shareholders and (ii) the role and composition of the board of
directors, including the method of appointment of its members, require the approval sixty-six and two-thirds percent (66 2/3)% of the voting power
represented at the meeting in person or by proxy and voting thereon.
Qualification of Directors
No person shall be disqualified to serve as a director by reason of his not holding AudioCodes shares or by reason of his having served as a director
in the past.
Dividends
Under the Companies Law, a company may make “distributions”, as such term is defined in the Companies Law (which definition includes the
payment of dividends and a company’s repurchase of its outstanding shares) only out of its profits as determined for statutory purposes, unless court approval
is granted for such despite the lack of statutory profits. There is a unified statutory test for the payment of dividends and a company’s repurchase of its
outstanding shares. In 2023, we received court approval to pay dividends (and repurchase our shares) up to certain ceilings, despite the lack of statutory
profits. The current approval is valid until June 18, 2024. We may seek further approvals to repurchase our shares and to continue to pay dividends. As we are
a Nasdaq-listed company, court approval is not required for our repurchase of our shares, provided that we notify our creditors of the proposed repurchase and
allow such creditors an opportunity to initiate a court proceeding to review the repurchase. If within 30 days such creditors do not file an objection, then we
may proceed with the repurchase. In each case, we are only permitted to make the distribution if our board of directors and, if applicable, the court, determines
there is no reasonable concern that such distribution will prevent us from satisfying our existing and foreseeable obligations as they become due. The amount
of any dividend to be distributed among shareholders is based on the nominal value of their shares.
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Voting Rights and Powers
Unless any shares have special rights as to voting, every shareholder has one vote for each share held of record.
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 articles of association, we may, from time to time, by a resolution approved by the holders of a simple majority of the
voting power represented at the meeting in person or by proxy and voting thereon, provide for shares with such preference rights, deferred rights or conversion
rights, or any other special rights or limitations as may be stipulated in such resolution.
If at any time our share capital is divided into different classes of shares, we may modify or abrogate the rights attached to any class, unless otherwise
provided by the articles of association, by a resolution approved by the holders of a simple majority of the voting power represented at the meeting in person
or by proxy and voting thereon, subject to the consent in writing of the holders of a simple majority of the issued shares of that class (unless otherwise
provided by law or by the terms of issue of the shares of that class).
The provisions of our articles of association relating to general meetings also apply, mutatis mutandis, to any separate general meeting of the holders
of the shares of a particular class.
The creation or issuance of shares of any class, including a new class, shall not be deemed to alter the rights and privileges attached to previously
issued shares of that class or of any other class (unless otherwise provided by our articles of association, including the terms of issue of the shares of any
class).
Shareholder Meetings
An annual meeting of shareholders is to be held once a year, within 15 months after the previous annual meeting. The annual meeting may be held in
Israel or outside of Israel, as determined by the board of directors.
The board of directors may, whenever it thinks fit, convene a special shareholders meeting. The board of directors must convene a special
shareholders meeting at the request of:
●
●
at least two directors;
at least one-quarter of the directors in office; or
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●
one or more shareholders who hold at least 10% of the outstanding share capital and at least 1% of the voting rights, or one or more
shareholders who hold at least 10% of the outstanding voting rights.
Notice of General Meetings; Omission to Give Notice
A special shareholders meeting may be held in Israel or outside of Israel, as determined by the board of directors.
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 or on our website.
Notice of a meeting of shareholders must specify the type of meeting, the place and time of the meeting, the agenda, a summary of the proposed
resolutions, the majority required to adopt the proposed resolutions, and the record date for the meeting. The notice must also include the address and
telephone number of our registered office, and a list of times at which the full text of the proposed resolutions may be examined at the registered office.
The accidental omission to give notice of a meeting to any shareholder, or the non-receipt of notice sent to such shareholder, does not invalidate the
proceedings at the meeting.
Limitations on Foreign Shareholders to Hold or Exercise Voting Rights
There are no limitations on foreign shareholders in our articles of association. Israeli law restricts the ability of citizens of countries that are in a state
of war with Israel to hold shares of Israeli companies.
Fiduciary Duties; Approval of Transactions under Israeli Law
Fiduciary duties. 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.
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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.
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 chairman of the board of directors or audit committee, as applicable, to present the matter being considered. If a majority of the board
of directors or the audit committee has a personal interest in the transaction, shareholder approval also would be required.
Shareholders
The Companies Law imposes on a controlling shareholder of a public company the same disclosure requirements described above as it imposes on an
office holder. For this purpose, a “controlling shareholder” is any shareholder who has the ability to direct the company’s actions, including any shareholder
holding 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company. Two or more shareholders with a
personal interest in the approval of the same transaction are deemed to be one shareholder.
Approval of the audit committee, the board of directors and our shareholders, in that order, is required for extraordinary transactions, including a
private placement, with a controlling shareholder or in which a controlling shareholder has a personal interest.
Approval of the compensation committee, the board of directors and our shareholders, in that order, is required for the terms of compensation or
employment of a controlling shareholder or his or her relative, as an officer holder or employee of our company or as a service provider to the company,
including through a company controlled by a controlling shareholder.
Shareholder approval must include the majority of shares voted at the meeting. In addition to the majority vote, the shareholder approval must satisfy
either of two additional tests:
●
●
the majority includes at least a majority of the shares voted by shareholders who have no personal interest in the transaction; or
the total number of shares held by disinterested shareholders that voted against the approval of the transaction does not exceed 2% of the
aggregate voting rights of our company.
Generally, the approval of such a transaction may not extend for more than three years, except that in the case of an extraordinary transaction,
including a private placement, with a controlling shareholder or in which a controlling shareholder has a personal interest that does not concern compensation
for employment or service, the transaction may be approved for a longer period if the audit committee determines that the approval of the transaction for a
period longer than three years is reasonable under the circumstances.
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Compensation of Executive Officers and Directors; Executive Compensation Policy
In accordance with the Companies Law, we have adopted a compensation policy for our executive officers and directors. The purpose of the policy is
to describe our overall compensation strategy for our executive officers and directors and to provide guidelines for setting their compensation, as prescribed by
the Companies Law. In accordance with the Companies Law, the policy must be reviewed and readopted at least once every three years.
Approval of the compensation committee, the board of directors and our shareholders, in that order, is required for the adoption of the compensation
policy. The shareholders’ approval must include the majority of shares voted at the meeting. In addition to the majority vote, the shareholder approval must
satisfy either of two additional tests:
●
●
the majority includes at least a majority of the shares voted by shareholders other than our controlling shareholders or shareholders who
have a personal interest in the adoption of the compensation policy; or
the total number of shares held by non-controlling shareholders and disinterested shareholders that voted against the adoption of the
compensation policy does not exceed 2% of the aggregate voting rights of our company.
Under the Companies Law, the compensation arrangements for officers (other than the Chief Executive Officer) who are not directors require the
approval of the compensation committee and the board of directors; provided, however, that if the compensation arrangement is not in compliance with our
executive compensation policy, the arrangement may only be approved by the compensation committee and the board of directors for special reasons to be
noted, and the compensation arrangement shall also require a special shareholder approval. If the compensation arrangement is an immaterial amendment to an
existing compensation arrangement of an officer who is not a director and is in compliance with our executive compensation policy, the approval of the
compensation committee is sufficient.
Arrangements regarding the compensation of the Chief Executive Officer and of directors require the approval of the compensation committee, the
board and the shareholders, in that order. In certain limited cases, the compensation of a new Chief Executive Officer who is not a director may be approved
without the approval of the shareholders.
In August 2023 our board of directors approved certain amendments to our compensation policy in order to adopt a clawback policy, or the Clawback
Policy, which is administered by our compensation committee and was adopted in compliance with Section 10D of the Exchange Act and applicable rules of
the Nasdaq Global Select Market. The Clawback Policy, which was additionally approved by our shareholders on October 24, 2023 in connection with our
2023 Annual General Meeting of Shareholders, requires the return of incentive compensation paid to our executive officers in the case of certain restatements
of our financial statements under the rules of the Nasdaq Global Select Market. A copy of the Clawback Policy is included as Exhibit 97.1 to this Annual
Report.
Duties of Shareholders
Under the 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.
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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
Companies Law also provides that a breach of the duty of fairness will be governed by the laws governing breach of contract; however, the 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;
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 Israeli Securities Law, 1968, as amended, or 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).
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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.
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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.
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
None.
D.
EXCHANGE CONTROLS
Non-residents of Israel who own our ordinary shares may freely convert all amounts received in Israeli currency in respect of such ordinary shares,
whether as a dividend, liquidation distribution or as proceeds from the sale of the ordinary shares, into freely-repatriable non-Israeli currencies at the rate of
exchange prevailing at the time of conversion (provided in each case that the applicable Israeli income tax, if any, is paid or withheld).
Since January 1, 2003, all exchange control restrictions on transactions in foreign currency in Israel have been eliminated, although there are still
reporting requirements for foreign currency transactions. Legislation remains in effect, however, pursuant to which currency controls may be imposed by
administrative action at any time.
The State of Israel does not restrict in any way the ownership or voting of our ordinary shares by non-residents of Israel, except with respect to
subjects of countries that are in a state of war with Israel.
E.
TAXATION
The following is a summary of the material Israeli and United States federal tax consequences, Israeli foreign exchange regulations and certain Israeli
government programs affecting us. To the extent that the discussion is based on new tax or other legislation that has not been subject to judicial or
administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax or other authorities in question.
The discussion is not intended, and should not be construed, as legal or professional tax advice, is not exhaustive of all possible tax considerations and should
not be relied upon for tax planning purposes. Potential investors are urged to consult their own tax advisors as to the Israeli tax, United States federal income
tax and other tax consequences of the purchase, ownership and disposition of ordinary shares, including, in particular, the effect of any foreign, state or local
taxes.
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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. Each investor should consult its own tax or legal advisor as to the Israeli tax consequences of the purchase,
ownership and disposition of our ordinary shares.
General Corporate Tax Structure in Israel
Israeli companies are generally subject to corporate tax on their taxable income. Taxable income of a company is subject to a corporate tax rate of
23% effective from January 1, 2018. However, the effective tax rate payable by a company that qualifies as an Industrial Company that derives income from a
Preferred Technological Enterprise (as discussed below) may be considerably less. Capital gains derived by an Israeli company are subject to the prevailing
corporate tax rate.
Law for the Encouragement of Capital Investments, 1959, or the Investment Law
The Investment Law provides certain incentives for capital investments in production facilities (or other eligible assets) by “Industrial Enterprises”
(as defined under the Investment Law).
The Investment Law was significantly amended effective April 1, 2005, or the 2005 Amendment, and further amended as of January 1, 2011, or the
2011 Amendment, and January 1, 2017, or the 2017 Amendment. 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, or BEPS, project).
Tax Benefits Prior to the 2005 Amendment
An investment program that is implemented in accordance with the provisions of the Investment Law prior to the 2005 Amendment, referred to as an
“Approved Enterprise,” is entitled to certain benefits. A company that wished to receive benefits as an Approved Enterprise must have received approval from
the Investment Center of the Israeli Ministry of Economy and Industry, 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.
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.
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 obligated 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).
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Trapped Earnings
On November 15, 2021, a new amendment to the Investment Law, or the Investment Law Amendment, was approved, introducing a new dividend
distribution ordering rule to cause the distribution of earnings that were tax exempt under the historical Approved or Beneficial Enterprise regimes, or Trapped
Earnings, to be on a pro-rata basis from any dividend distribution. The Investment Law Amendment is applicable to distributions starting from August 15,
2021 onwards. Therefore, the corporate income tax, or CIT, claw-back will apply upon any dividend distribution, as long as the Company has Trapped
Earnings.
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. 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.
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.
In May 2019, we notified the Israel Tax Authority that we waived our Beneficiary Enterprise status starting from the 2019 tax year and thereafter.
The 2017 Amendment provides new tax tracks for a “Preferred Technological Enterprise”– an enterprise for which total consolidated revenues of its
parent company and all subsidiaries are less than NIS 10 billion for a tax year. Under the law, a Preferred Technological Enterprise, which is located in the
center of Israel will be subject to tax at a rate of 12% on profits being derived from intellectual property and “Preferred Technological Enterprise” which is
located in development area A will be subject to tax rate of 7.5%. In addition, a “Preferred Technological Enterprise” will receive a reduced corporate tax rate
of 12% on capital gains derived from the sale of certain “Benefitted Intangible Assets” (as defined in the Investment Law) to a related foreign company if (i)
the Benefitted Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million, and (ii) such sale receives
prior approval from the IIA. However, the proportion of income that may be considered Preferred Technological Income and receive the tax benefits described
immediately above is calculated according to a nexus formula, which is based on the proportion of qualifying expenditures on intellectual property compared
to overall expenditures.
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The 2017 Amendment further provides that a Preferred Company with group consolidated revenues of at least NIS 10 billion will qualify as a
“Special Preferred Technological Enterprise” and will receive a reduced corporate tax rate of 6% on “Preferred Technological Income” regardless of the
company’s geographic location within Israel. In addition, a “Special Preferred Technological Enterprise” will receive a reduced corporate tax rate of 6% on
capital gains derived from the sale of certain “Benefitted Intangible Assets” to a related foreign company if (i) the Benefitted Intangible Assets were either
developed by the Special Preferred Enterprise or acquired from a foreign company on or after January 1, 2017, and (ii) such sale received prior approval from
the IIA. A “Special Preferred Technological Enterprise” that acquires Benefitted Intangible Assets from a foreign company for more than NIS 500 million will
be eligible for these benefits for at least 10 years, subject to the receipt of certain approvals as specified in the Investment Law.
Dividends paid out of Preferred Technological Income, which are distributed by a Preferred Technological Enterprise or a “Special Preferred
Technological Enterprise,” are generally subject to tax at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the
receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is
required to be withheld. If such dividends are distributed to a foreign company that holds solely or together with other foreign companies 90% or more of the
Israeli company and other conditions are satisfied, the tax rate will be 4%. However, dividends paid out to natural persons may be subject to an additional
surtax of 3%, as described below.
We are eligible for tax benefits as a Preferred Technological Enterprise mentioned above and the changes in the tax rates relating to Preferred
Technological Enterprises were taken into account in the computation of deferred taxes as of December 31, 2023.
Tax Benefits and Funding for Research and Development
Israeli tax law allows, under specific conditions, a tax deduction for expenditures, including capital expenditures, relating to scientific research and
development projects, for the year in which they are incurred if:
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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. Under these research and development deduction rules, no deduction is allowed for any expense invested in
an asset depreciable under the general depreciation rules of the Israeli Income Tax Ordinance. Expenditures not so approved are deductible over a three-year
period in equal amounts if the research and development is for the promotion or development of the company.
Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law
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.
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:
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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.
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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 more than 25% 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. Such dividends are generally subject to Israeli withholding
tax at a rate of 25% so long as the shares are registered with a nominee company (whether the recipient is a substantial shareholder or not).
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 Beneficiary Enterprise, unless a reduced tax rate is provided under an applicable tax treaty. If the dividend is
being paid out of certain income attributable to a Preferred Technological Enterprise, the dividend will be subject to tax at the rate of 20%. A different rate
may be provided in a treaty between Israel and the shareholder’s country of residence, as mentioned below.
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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%. However, generally, the maximum rate of
withholding tax on dividends, not generated by an Approved Enterprise, or Beneficiary Enterprise or a Preferred Technological Enterprise, that are paid to a
United States corporation holding 10% or more of the outstanding voting capital throughout the tax year in which the dividend is distributed as well as during
the previous tax year, is 12.5%, provided that not more than 25% of the gross income for such preceding year consists of certain types of dividends and
interest. If the above conditions are met and the dividends are generated by an Approved Enterprise, or Beneficiary Enterprise or a Preferred Technological
Enterprise, the maximum rate of withholding tax on such dividends is 15%. If the dividend is attributable partly to income derived from Approved Enterprise,
Beneficiary Enterprise or a Preferred Technological Enterprise, and partly to other sources of income, the withholding rate will be a blended rate reflecting the
relative portions of the two types of income. We cannot assure you that we will designate the profits that we may distribute in a way that will reduce
shareholders’ tax liability.
Surtax
Individuals who are subject to tax in Israel (whether or not Israeli residents) are subject to a surtax at a rate of 3% of annual taxable income in excess
of NIS 721,560 (for the 2024 tax year, 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:
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an individual who is either a U.S. citizen or a resident of the United States for U.S. federal income tax purposes;
a corporation or other entity taxable as a corporation for U.S. federal income tax purposes created or organized in or under the laws of the
United States or any political subdivision thereof;
an estate the income of which is subject to U.S. federal income tax regardless of the source of its income; and
a trust, if (a) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust, or (b) the trust has a valid election in effect under applicable U.S. Treasury
Regulations to be treated as a U.S. person.
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This summary does not consider all aspects of U.S. federal income taxation that may be relevant to particular U.S. Holders by reason of their
particular circumstances, and does not consider the potential application of the U.S. federal estate, gift or alternative minimum tax, or any aspect of state, local
or non-U.S. federal tax laws or U.S. federal tax laws other than U.S. federal income tax laws. In addition, this summary is directed only to U.S. Holders that
hold our ordinary shares as “capital assets” within the meaning of Section 1221 of the Code and does not address the considerations that may be applicable to
particular classes of U.S. Holders, including U.S. expatriates, banks, financial institutions, regulated investment companies, real estate investment trusts,
pension funds, insurance companies, broker-dealers or traders in securities, commodities or currencies, tax-exempt organizations, grantor trusts, partnerships
(including entities classified as partnerships for U.S. federal income tax purposes) or other pass-through entities, persons that will hold our ordinary shares in
partnerships or other pass-through entities, holders whose functional currency is not the 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.
Distributions With Respect to Our Ordinary Shares
In the event we 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 dollar value of the gross amount of cash and/or the fair market
value of any property distributed, including the amount of any Israeli taxes withheld on such distribution as described above under “Israeli Tax
Considerations – Taxation of Non-Israeli Shareholders on Receipt of Dividends.” Other than distributions in liquidation or in redemption of our ordinary
shares that are treated as exchanges, a distribution with respect to our ordinary shares to a U.S. Holder generally will be treated as a dividend to the extent of
our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. The amount of any distribution that exceeds these
earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. Holder’s tax basis in its ordinary shares (but not below zero), and
then generally as capital gain from a deemed sale or exchange of such ordinary shares. However, because we do not account for our earnings and profits in
accordance with U.S. federal income tax principles, U.S. Holders should expect all distributions to be reported to them as dividends. Corporate U.S. Holders
generally will not be allowed a deduction under Section 243 of the Code for dividends received on our ordinary shares and thus will be subject to tax at the
rate applicable to their taxable income.
Currently, a non-corporate U.S. Holder’s “qualified dividend income” generally is subject to tax at lower long-term capital gains rates. For this
purpose, “qualified dividend income” generally includes dividends paid by a foreign corporation if, among other things, the non-corporate U.S. Holder meets
certain minimum holding period requirements, is not under an obligation to make related payments with respect to positions in substantially similar or related
property, and either (a) the stock of such corporation is readily tradable on an established securities market in the U.S., including the Nasdaq Global Select
Market, or (b) such corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that includes an information exchange
program and is determined to be satisfactory by the U.S. Secretary of the Treasury. The U.S. Secretary of the Treasury has indicated that the income tax treaty
between the United States and Israel is satisfactory for this purpose. Dividends paid by us will not be treated as qualified dividend income, however, if we are
treated, for the tax year in which the dividends are paid or the preceding tax year, as a “passive foreign investment company” for U.S. federal income tax
purposes. See the discussion below under the heading “Passive Foreign Investment Company Status.”
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A non-corporate U.S. Holder may be subject to an additional tax based on its “net investment income,” (which generally is computed as gross income
from interest, dividends, annuities, royalties and rents and gain from the sale of property (other than property held in the active conduct of a trade or business
that does not regularly trade financial instruments or commodities), less the amount of deductions properly allocable to such income or gain. Such tax is equal
to 3.8% of the lesser of an individual U.S. Holder’s (i) net investment income or (ii) the excess of such U.S. Holder’s “modified adjusted gross income”
(adjusted gross income plus the amount of any foreign earned income excluded from income under Section 911(a)(1) of the Code, net of deductions and
exclusions disallowed with respect to such foreign earned income) over a specified threshold amount ($250,000 in the case of a joint return or surviving
spouse, $125,000 in the case of a married individual filing a separate return and $200,000 in any other case). In the case of a U.S. Holder which is an estate or
trust, the tax is equal to 3.8% of the lesser of (i) undistributed net investment income or (ii) the excess of adjusted gross income (as defined in Section 67(e) of
the Code) over the dollar amount at which the highest tax bracket applicable to an estate or trust begins.
U.S. Holders are urged to consult their own tax advisors regarding the U.S. federal income tax consequences of their receipt of any distributions
with respect to our ordinary shares.
A dividend paid by us in NIS will be included in the income of U.S. Holders at the 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 dollars. U.S. Holders
will have a tax basis in the NIS for U.S. federal income tax purposes equal to that dollar value. Any gain or loss upon the subsequent conversion of the NIS
into dollars or other disposition of the NIS will constitute foreign currency gain or loss taxable as ordinary income or loss and will be treated as U.S.-source
income or loss for U.S. foreign tax credit purposes.
Dividends received with respect to our ordinary shares will constitute “portfolio income” for purposes of the limitation on the deductibility of passive
activity losses and, therefore, generally may not be offset by passive activity losses. Dividends received with respect to our ordinary shares also generally will
be treated as “investment income” for purposes of the investment interest deduction limitation contained in Section 163(d) of the Code, and generally as
foreign-source passive income for U.S. foreign tax credit purposes. Subject to certain limitations, U.S. Holders may elect to claim as a foreign tax credit
against their U.S. federal income tax liability for any Israeli income tax withheld from distributions with respect to our ordinary shares which constitute
dividends under U.S. income tax law. A U.S. Holder that does not elect to claim a foreign tax credit may instead claim a deduction for Israeli income tax
withheld, but only if the U.S. Holder elects to do so with respect to all foreign income taxes in such year. If a refund of the tax withheld is available under the
applicable laws of Israel or under the Israel-U.S. income tax treaty, the amount of tax withheld that is refundable will not be eligible for such credit against
your U.S. federal income tax liability (and will not be eligible for the deduction against your U.S. federal taxable income). In addition, special rules may apply
to the computation of foreign tax credits relating to “qualified dividend income,” as defined above. The calculation of foreign tax credits and, in the case of a
U.S. Holder that elects to deduct foreign income taxes, the availability of deductions involves 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.
However, if we are a “United States-owned foreign corporation,” solely for foreign tax credit purposes, a portion of the dividends allocable to our
U.S. source earnings and profits may be recharacterized as U.S. source. A “United States-owned foreign corporation” is any foreign corporation in which
United States persons own, directly or indirectly, 50% or more (by vote or by value) of the stock. In general, United States-owned foreign corporations with
less than 10% of earnings and profits attributable to sources within the United States are excepted from these rules. In such case, if 10% or more of our
earnings and profits are attributable to sources within the United States, a portion of the dividends paid on our ordinary shares allocable to our U.S. source
earnings and profits will be treated as U.S. source, and, as such, a U.S. Holder may not offset any foreign tax withheld as a credit against U.S. federal income
tax imposed on that portion of dividends. The rules governing the treatment of foreign taxes imposed on a U.S. Holder and foreign tax credits are complex,
and each U.S. Holder should consult their respective tax advisor about the impact of these rules in their particular situation.
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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 dollar
value of the amount realized and the U.S. Holder’s tax basis in the ordinary shares disposed of (measured in 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 non-corporate U.S. Holders generally may deduct annually from ordinary income up to
$3,000 of net capital losses. In general, any capital gain or loss recognized by a U.S. Holder upon the taxable disposition of our ordinary shares will be treated
as U.S.-source income or loss for U.S. foreign tax credit purposes, although the tax treaty between the United States and Israel may permit gain derived from
the taxable disposition of ordinary shares by a U.S. Holder to be treated as foreign-source income for U.S. foreign tax credit purposes under certain
circumstances.
A U.S. Holder’s tax basis in its ordinary shares generally will be equal to the dollar purchase price paid by such U.S. Holder to acquire such ordinary
shares. The dollar cost of ordinary shares purchased with foreign currency generally will be equal to the 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 dollars at a conversion rate other than the spot rate in effect on the settlement date, such U.S. Holder may have a foreign currency exchange
gain or loss treated as ordinary income or loss for U.S. federal income tax purposes. A U.S. Holder who uses the accrual method of accounting may elect the
same treatment required of cash method taxpayers with respect to a taxable disposition of ordinary shares, provided that the election is applied consistently
from year to year. Such election may not be changed without the consent of the U.S. Internal Revenue Service. If an accrual method U.S. Holder does not (or
is not eligible to) elect to be treated as a cash method taxpayer (pursuant to U.S. Treasury Regulations applicable to foreign currency transactions), such U.S.
Holder may be deemed to have realized an immediate foreign currency gain or loss for U.S. federal income tax purposes in the event of any difference
between the 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, or PFIC, for U.S. federal income tax purposes for any tax year if,
in such tax year, either (i) 75% or more of its gross income (including its pro rata share of the gross income of any company in which it is considered to own
25% or more of the shares by value) is passive in nature, or the Income Test, or (ii) the average percentage of its assets during such tax year (including its pro
rata share of the assets of any company in which it is considered to own 25% or more of the shares by value) which produce, or are held for the production of,
passive income (determined by averaging the percentage of the fair market value of its total assets which are passive assets as of the end of each quarter of
such year) is 50% or more, or the Asset Test. Passive income for this purpose generally includes dividends, interest, rents, royalties and gains from securities
and commodities transactions. Cash is treated as generating passive income.
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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, or the
1997 Act, indicates that for purposes of the Asset Test, “the total value of a publicly traded foreign corporation’s assets generally will be treated as equal to the
sum of the aggregate value of its outstanding stock plus its liabilities.” It is unclear whether other valuation methods could be employed to determine the value
of a publicly traded foreign corporation’s assets for purposes of the Asset Test.
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 2020, we do not
believe that we were a PFIC during any of such tax years. It is likely, however, that under the asset valuation method described in the legislative history of the
1997 Act, we would have been classified as a PFIC for each of 2001, 2002 and 2003 primarily because (a) a significant portion of our assets consisted of the
remaining proceeds of our two public offerings of ordinary shares in 1999, and (b) the public market valuation of our ordinary shares during such years was
relatively low. There can be no assurance that we will not be deemed a PFIC for the current tax year or any future tax year in which, for example, the value of
our assets, as measured by the public market valuation of our ordinary shares, declines in relation to the value of our passive assets (generally, cash, cash
equivalents and marketable securities). If we are treated as a PFIC with respect to a U.S. Holder for any tax year, the U.S. Holder will be deemed to own
ordinary shares in any of our subsidiaries that are also PFICs.
If we are treated as a PFIC for U.S. federal income tax purposes for any year during a U.S. Holder’s holding period of our ordinary shares and the
U.S. Holder does not make a QEF Election or a “mark-to-market” election (both as described below), the U.S. Holder would be subject to the following rules:
(i)
the U.S. Holder would be required to (a) report as ordinary income any “excess distributions” (as defined below) allocated to the current
tax year and any period prior to the first day of the first tax year in which we were a PFIC, (b) pay tax on amounts allocated to each prior
tax year in which we were a PFIC at the highest rate for individuals or corporations as appropriate in effect for such prior year, and (c) pay
an interest charge on the tax due for prior tax years in which we were a PFIC at the rate applicable to deficiencies of U.S. federal income
tax. “Excess distributions” with respect to any U.S. Holder are amounts received by such U.S. Holder with respect to our ordinary shares in
any tax year that exceed 125% of the average distributions received by such U.S. Holder from us during the shorter of (i) the three
previous years, or (ii) such U.S. Holder’s holding period of our ordinary shares before the then-current tax year. Excess distributions must
be allocated ratably to each day that a U.S. Holder has held our ordinary shares; and
(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 annually.
For any tax year in which we are treated as a PFIC, a U.S. Holder may elect to treat its ordinary shares as an interest in a qualified electing fund, or a
QEF Election, in which case the U.S. Holder would be required to include in income currently its proportionate share of our earnings and profits in years in
which we are a PFIC regardless of whether distributions of our earnings and profits are actually made to the U.S. Holder. Any gain subsequently recognized
by the U.S. Holder upon the sale or other disposition of its ordinary shares, however, generally would be taxed as capital gain.
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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.
The mark-to-market election is available only for “marketable stock,” which is stock that is regularly traded on a qualified exchange or other market,
as defined in applicable U.S. Treasury regulations. Our ordinary shares are traded on Nasdaq and TASE. Because a mark-to-market election cannot be made
for equity interests in any lower-tier PFICs we own, a U.S. Holder generally will continue to be subject to the PFIC rules with respect to its indirect interest in
any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes. Nasdaq is a qualified exchange, and we
believe TASE should be treated as a qualified exchange but there can be no assurance that the trading in our ordinary shares will be sufficiently regular to
qualify our ordinary shares as marketable stock. U.S. Holders should consult their own tax advisor as to the availability and desirability of a mark-to-market
election, as well as the impact of such election on interests in any lower-tier PFICs.
Each U.S. person that is an investor of a PFIC is generally required to file an annual information return on IRS Form 8621 containing such
information as the U.S. Treasury Department may require. The failure to file IRS Form 8621 could result in the imposition of penalties and the extension of
the statute of limitations with respect to U.S. federal income tax.
Due to the complexity of the PFIC rules and the uncertainty of their application in many circumstances, U.S. Holders should consult their own
tax advisors with respect to the U.S. federal income tax risks related to owning and disposing of our ordinary shares, the consequence of our status as a
PFIC and, if we are treated as a PFIC, compliance with the applicable reporting requirements and the eligibility, manner and advisability of making a
QEF Election or a mark-to-market election.
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 24%. The information reporting requirements will not apply,
however, to payments to certain exempt U.S. Holders, including corporations and tax-exempt organizations. In addition, backup withholding will not apply to
a U.S. Holder that furnishes a correct taxpayer identification number on U.S. Internal Revenue Service Form W-9 (or substitute form) or establishes an
exemption. The backup withholding tax is not an additional tax. Amounts withheld under the backup withholding tax rules may be credited against a U.S.
Holder’s U.S. federal income tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding tax rules by
timely filing the appropriate claim for refund with the U.S. Internal Revenue Service. U.S. Holders should consult their own tax advisors regarding their
qualification for an exemption from the backup withholding tax and the procedures for obtaining such an exemption, if applicable.
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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
Our website is http://www.audiocodes.com. We are subject to the informational requirements of the Exchange Act applicable to foreign private
issuers and fulfill the obligations with respect to such requirements by filing reports with the SEC. We make available, free of charge, on our website (under
the heading “Investor Relations”) our Annual Reports on Form 20-F, Reports on Form 6-K and amendments to those reports as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the SEC. No information contained on our website is intended to be included as part of, or
incorporated by reference into, this Annual Report on Form 20-F. The SEC maintains an Internet site that contains reports, proxy statements and other
information regarding issuers that file electronically with the SEC. The address of the SEC’s website is http://www.sec.gov.
I.
SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risk associated with changes in foreign currency exchange rates. To mitigate these risks, we use derivative
financial instruments. The majority of our revenues and expenses are generated in 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 dollar exchange rates in effect for the year ending December 31, 2023 would cause a decrease in net income of approximately
$8.1 million.
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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
Our original Articles of Association and Memorandum of Association were adopted prior to the enactment of the Companies Law and were only
amended on limited occasions since adoption. In light of changes in the business and legal environment that occurred since such time, in August 2020, our
Board of Directors approved, and in September 2020 our shareholders approved, our Amended and Restated Articles of Association and Amended and
Restated Memorandum of Association, which amended and restated our prior Articles of Association and Memorandum of Association in their entirety. The
description of the amendments, set forth in our proxy statement filed as Exhibit 99.1 to our Form 6-K filed with the SEC on August 13, 2020, is incorporated
herein by reference, and the Amended and Restated Articles of Association and Amended and Restated Memorandum of Association are incorporated by
reference as Exhibits 1.1 and 1.2 to this Annual Report.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our President and Chief Executive Officer and our Vice President Finance and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures (as defined in 13a-15(e) under the Exchange Act) as of December 31, 2023. Based on
this evaluation, our President and Chief Executive Officer and Vice President Finance and Chief Financial Officer have concluded that, as of such date, our
disclosure controls and procedures were (i) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known
to our management, including our President and Chief Executive Officer and Vice President Finance and Chief Financial Officer, by others within those
entities, as appropriate to allow timely decisions regarding required disclosure, particularly during the period in which this report was being prepared and
(ii) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management, under the supervision of our President and Chief Executive Officer and our Vice President Finance and Chief Financial Officer, is
responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rules 13a-15(f) of the Exchange Act. Our
internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal
control over financial reporting includes policies and procedures that:
●
●
●
pertain to the maintenance of our records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions;
provide reasonable assurance that our transactions are recorded as necessary to permit the preparation of our financial statements in
accordance with generally accepted accounting principles;
provide reasonable assurance that our receipts and expenditures are made only in accordance with authorizations of our management and
board of directors (as appropriate); and
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●
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, 2023 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, 2023.
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 F-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 16.A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Joseph Tenne is an “audit committee financial expert” (as defined in Item 16.A of Form 20-F) and is
“independent” (as defined in the applicable regulations).
ITEM 16.B. CODE OF ETHICS
We have adopted a Code of Conduct and Business Ethics, which was updated in 2019, that applies to our President and Chief Executive Officer, Vice
President Finance and Chief Financial Officer and other senior financial officers. This Code has been posted on our website, www.audiocodes.com.
ITEM 16.C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Kost Forer Gabbay & Kasierer, a member of EY Global, has served as our independent public accountants for each of the years in the three-year
period ended December 31, 2023. The following table presents the aggregate fees for professional audit services and other services rendered by Kost Forer
Gabbay & Kasierer in 2023 and 2022.
Audit Fees
Tax Fees
Total
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Year Ended December 31,
(Amounts in thousands)
2023
2022
$
$
488
68
556
$
$
524
194
718
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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 2023 and 2022, the
provision of consents and the review of documents filed with the SEC.
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, or the Policy.
Under the Policy, proposed services either (i) may be pre-approved by the audit committee without consideration of specific case-by-case services as
general pre-approval or (ii) require the specific pre-approval of the audit committee as specific pre-approval. The audit committee may delegate either type of
pre-approval authority to one or more of its members. The appendices to the Policy set out the audit, audit-related, tax and other services that have received the
general pre-approval of the audit committee, including those described in the footnotes to the table, above; these services are subject to annual review by the
audit committee. All other audit, audit-related, tax and other services must receive a specific pre-approval from the audit committee.
The audit committee pre-approves fee levels annually for the audit services. Non-audit services are pre-approved as required. The financial expert of
the audit committee may approve non-audit services of up to $25,000 and then request the audit committee to ratify his decision.
During 2023 and 2022, no services provided to AudioCodes by Kost Forer Gabbay & Kasierer were approved by the audit committee pursuant to the
de minimis exception to the pre-approval requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. We approve all such compensation
by the audit committee.
ITEM 16.D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
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ITEM 16.E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
In 2023, we repurchased an aggregate of 1,794,931 of our ordinary shares for an aggregate consideration of approximately $18.3 million, as set forth
below:
Period
January 1 - January 31, 2023
February 1 - February 28, 2023
March 1 - March 31, 2023(3)
April 1 - April 30, 2023
May 1 - May 31, 2023
June 1 - June 30, 2023
July 1 - July 31, 2023
August 1 - August 31, 2023(4)
September 1 - September 30, 2023
October 1 - October 31, 2023
November 1 - November 30, 2023
December 1 - December 31, 2023
Total in 2023
(a) Total
Number of
Ordinary Shares
Purchased
(1)
—
—
—
—
59,477
259,414
181,109
223,712
475,636
300,652
90,389
204,542
1,794,931
(b)
Average
Price
Paid
per
Ordinary Share ($)
(2)
(c) Total
Number of
Ordinary
Shares
Purchased as
Part
of Publicly
Announced Program
—
—
—
—
8.63
9.26
9.82
10.51
10.28
9.52
11.05
11.77
10.14
—
—
—
—
59,477
259,414
181,109
223,712
475,363
300,652
90,389
204,542
1,794,931
(d)
Approximate
dollar
Value of
Shares
That
May Yet be
Purchased
under
the Program
($)
25,000,000
25,000,000
18,282,168
18,282,168
18,767,108
24,728,171
22,943,889
14,905,978
10,000,000
7,130,200
6,128,381
19,244,603
19,244,603
(1) In January 2023, we received court approval in Israel to repurchase up to $25.0 million of our ordinary shares, and in each of June and December 2023,
the court approved an additional $25.0 and $20.0 million, respectively. Each of the approvals received in 2023 allowed us to use the approved amounts for
share repurchases or cash dividends. The Israeli court generally limits its approval to six months from the date of application. Consequently, although the
program does not have a set end date, it requires renewal each six months by submitting new court application based on the then prevailing facts. No
shares were repurchased during 2023 other than through the repurchase program.
(2) Excluding commissions.
(3) In March 2023, we paid a cash dividend in the aggregate amount of $5.7 million.
(4) In August 2023, we paid a cash dividend in the aggregate amount of $5.7 million.
ITEM 16.F. CHANGE IN REGISTRANT’S CERTIFIED ACCOUNTANT
Not applicable.
ITEM 16.G. CORPORATE GOVERNANCE
As a foreign private issuer whose shares are listed on the Nasdaq Global Select Market, we are permitted to follow certain home country corporate
governance practices instead of certain requirements of the Nasdaq Marketplace Rules.
We do not comply with the Nasdaq requirement that we obtain shareholder approval for certain dilutive events, such as for the establishment or
amendment of certain share-based compensation plans (including amendments to increase the number of shares available for grant under our existing equity
incentive plan). Instead, we follow Israeli law and practice which permits the establishment or amendment of certain share-based compensation plans
approved by our board of directors without the need for a shareholder vote, unless such arrangements are for the compensation of directors and the chief
executive officer, in which case they also require compensation committee and shareholder approval.
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We may elect in the future to follow Israeli practice with regard to, among other things, director nomination, composition of the board of directors
and quorum at shareholders’ meetings. In addition, we may follow Israeli law, instead of the Nasdaq Marketplace Rules, which require that we obtain
shareholder approval for an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances
of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company.
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 16.H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 16.I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
ITEM 16.J. INSIDER TRADING POLICIES
Not applicable.
ITEM 16.K. CYBERSECURITY
Risk management and strategy
We have a cybersecurity program for assessing, identifying, and managing material risks from cybersecurity threats, and we monitor the prevention,
detection, mitigation and remediation of cybersecurity incidents, as applicable. We believe our cybersecurity program is reasonably designed to materially
protect the security of our data and the data in our possession. Our policies and procedures address security governance, security awareness and training,
access management, vulnerability management, penetration testing, security monitoring and incident response. In addition, our employees regularly undergo
continuing cybersecurity training, and employees in higher-risk functions receive additional training and cybersecurity awareness education. Audits,
cybersecurity simulations and employee testing results indicate that our program is effective in protecting our information. We also engage regularly with third
parties to evaluate the strength of our program through penetration testing, vulnerability testing and mock phishing campaigns to identify and mitigate risks.
We have policies and processes to govern third-party access and reduce the risks associated with such access. In general, we seek to address cybersecurity
risks through a comprehensive, cross-functional approach that is focused on preserving the confidentiality, security and availability of the information that we
collect and store by identifying, preventing and mitigating cybersecurity threats and effectively responding to cybersecurity incidents when they occur.
AudioCodes’ risk management and strategy is based on the following principles:
●
●
Risk management is a continuous, cyclical process that involves six steps: (1) establishing context; (2) identifying and describing risks; (3)
quantifying and assessing risks; (4) taking action to control risks; (5) monitoring and reviewing risks; (6), and communicating and
consulting about risks; and
Risk management is a key organizational responsibility that aims to identify and control all risks that might have an impact on the
organization's objectives, its employees, and the people it interacts with.
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●
●
●
●
Risk management is a good management practice and central to the effective running of the organization. AudioCodes will seek to ensure
that any decisions made on behalf of the organization are taken with due consideration of the effective management of risks.
Risk management is supported by an annual external audit and review of governance, risk management, and internal controls, as well as
regular internal audits and reports.
AudioCodes shall seek to implement the information security controls as detailed in its work plan and risk assessment table.
AudioCodes has assigned clear roles and responsibilities for risk management to its senior management, the CISO, its employees and its
contractors.
Our systems face cybersecurity risks, and although such risks have not to date materially affected, and we do not believe they are reasonably likely to
materially affect, us, our business strategy, results of operations or financial condition, we may, from time to time, experience threats to and security incidents
related to our data and systems. We can provide no assurance that we will not experience any material cybersecurity threats or incidents in the future. See Item
3.D, “Key Information – Risk Factors – A data security or privacy breach could adversely affect our business and services.”
Corporate governance
Under the ultimate direction of our Chief Information Officer, or the CIO, our CIO has primary responsibility for day-to-day management of our
cybersecurity risk management program, including leading a dedicated team of technology professionals to monitor cybersecurity risks on behalf of
AudioCodes. Our IT department, led by our CIO, is responsible for assessing potential vulnerabilities and exposures to cybersecurity threats, implementing
controls and measures designed to mitigate these risks, and regularly monitoring and updating these measures as appropriate to adapt to evolving cybersecurity
threats. Our current CIO possesses approximately 10 years of experience with information technology and cybersecurity risk management.
As part of our board of directors enterprise risk management process, our board of directors has responsibility for oversight of cybersecurity risk
management. Our board of directors has delegated to the audit committee of our board of directors oversight of our cybersecurity risk management program,
which, pursuant to the audit committee charter, includes reviewing our cybersecurity and other information technology risks, controls and procedures,
including our plans to mitigate cybersecurity risks and to respond to data breaches. Our internal auditor provides periodic reports to the audit committee
covering cybersecurity and other information technology risks affecting us. In the event of a cybersecurity incident, we have implemented a process in which
our CIO would report such incident to our board of directors if the incident is determined to present critical risk to us.
AudioCodes’ senior management has the ultimate responsibility for the implementation of its risk management policy and risk management process
on a day-to-day basis. Senior management is accountable for ensuring that the risk management policy is established, implemented, maintained and reviewed
in accordance with the ISO 27001 standard and the organizational objectives. Senior management is also responsible for providing the necessary resources,
support and guidance for the effective execution of the risk management process. In particular, AudioCodes’ senior management demonstrates leadership and
commitment to the risk management policy and the risk management process by:
●
●
●
●
Establishing and communicating the risk appetite and the risk criteria for the organization;
Approving the risk management policy and ensuring its alignment with the information security policy and the Information Security
Management System, or ISMS, manual;
Ensuring that the roles and responsibilities for the risk management process are clearly defined and assigned; and
Ensuring that the risk management process is integrated into the organizational processes and the ISMS manual.
- 106 -
Table of Contents
●
●
●
Ensuring that the risk management process is monitored and reviewed regularly and that the results are reported and acted upon.
Ensuring that the risk management process is subject to internal and external audits and that the audit findings are addressed and resolved.
Security and privacy committee meets quarterly and discusses on open issues regarding cyber security and cyber risks.
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
Reference is made to pages F-1 to F-41 of the financial statements attached hereto.
- 107 -
Table of Contents
ITEM 19. EXHIBITS
The following exhibits are filed as part of this Annual Report:
Exhibit
No.
Document
Incorporated by Reference
Form
File No.
Date Filed
1.1
1.2
2.1*
4.1
4.2
4.3
4.4
4.5
4.6†
4.7†
4.8†
4.9
4.10
4.11
4.12
4.13
4.14
Amended and Restated Memorandum of Association of Registrant.
Amended and Restated Articles of Association of Registrant.
Description of Securities.
License Agreement between AudioCodes Ltd. and DSP Group, Inc., dated as
of May 6, 1999.
Employment Agreement between AudioCodes Ltd. and Shabtai Adlersberg.
Amendment No. 1 to Employment Agreement between AudioCodes Ltd. and
Shabtai Adlersberg.
Amendment No. 2 to Employment Agreement between AudioCodes Ltd. and
Shabtai Adlersberg.
Amendment No. 3 to Employment Agreement between AudioCodes Ltd. and
Shabtai Adlersberg.
6-K
6-K
F-1
6-K
6-K
6-K
6-K
000-30070
000-30070
9/15/2020
9/15/2020
333-10352
5/22/1999
000-30070
11/12/2009
000-30070
8/8/2013
000-30070
8/8/2017
000-30070
8/14/2019
English Summary of Terms of Employment of Lior Aldema, as of
March 2019.
20-F (2019)
000-30070
3/19/2020
Building and Tenancy Lease Agreement, dated May 11, 2007, by and between
Airport City Ltd. and AudioCodes Ltd.
English Summary of Addendum, dated September 23, 2013, to Lease and
Construction Agreement of November 14, 2000, between Airport City Ltd., as
landlord and AudioCodes Ltd., as tenant.
AudioCodes Ltd. 2008 Equity Incentive Plan.
Amendment to AudioCodes Ltd. 2008 Equity Incentive Plan.
Amendment No. 2 to AudioCodes Ltd. 2008 Equity Incentive Plan.
Amendment No. 3 to AudioCodes Ltd. 2008 Equity Incentive Plan.
Amendment No. 4 to AudioCodes Ltd. 2008 Equity Incentive Plan.
Form of Insurance, Indemnification and Exculpation Agreement between the
Registrant and each of its directors and executive officers.
20-F
(2006)
6-K
20-F
(2008)
S-8
S-8
S-8
S-8
6-K
000-30070
6/27/2007
000-30070
1/6/2014
000-30070
6/30/2009
333-170676
11/18/2010
333-190437
8/7/2013
333-210438
333-230388
3/29/2016
3/19/2019
000-30070
11/10/2011
- 108 -
6-K
000-30070
8/10/2022
20-F
(2015)
20-F
(2020)
S-8
20-F
(2022)
20-F
(2022)
000-30070
3/29/2016
000-30070
2/25/2020
333-264535
000-30070
4/28/2022
4/24/2023
000-30070
4/24/2023
Table of Contents
4.15
4.16
4.17†
4.18
4.19
4.20†
4.21*†
8.1*
12.1*
12.2*
13.1*
13.2*
15.1*
97.1*
101.1*
Form of AudioCodes Ltd. Executive Compensation Policy for the years 2022-
2024 (as amended by the provisions set forth under Exhibit 97.1 being filed
herewith).
Summary of Request for Receipt Of A Loan In Foreign Currency – The First
International Bank Of Israel Ltd.
English Summary of Royalty Buyout Agreement, dated November 25, 2019,
by and among AudioCodes Ltd., AudioCodes Development Ltd., and the
Israel National Authority for Technology and Innovation.
Amendment No. 5 to AudioCodes Ltd. 2008 Equity Incentive Plan.
Lease Agreement, dated May 13, 2022, by and between Kingsbridge 2005
LLC and AudioCodes Ltd.
English Summary of Building and Tenancy Lease Agreement, dated
November 16, 2022, by and between Naimi Towers Ltd. and AudioCodes Ltd.
English Summary Translation of Building and Tenancy Lease Agreement,
dated June 14, 2023, by and between MAY A.B. NADLAN LTD, Migdal
Group Insurance & Finance Migdal Makefet Pension Funds and Provident
Funds Ltd, PEL-HAMAGEN HOUSE LTD (sides 2-4: “Migdal”), and
AudioCodes Ltd.
Subsidiaries of the Registrant.
Certification of Shabtai Adlersberg, President and Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Niran Baruch, Vice President Finance and Chief Financial
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by President and Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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.
Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young
Global.
Clawback Policy
Interactive Data Files (XBRL-Related Documents).
†
*
English summary of Hebrew original.
Filed herewith.
- 109 -
Table of Contents
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 27, 2024
AUDIOCODES LTD.
By:
/s/ SHABTAI ADLERSBERG
Shabtai Adlersberg
President and Chief Executive Officer
- 110 -
Table of Contents
AUDIOCODES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2023
IN U.S. DOLLARS
INDEX
Reports of Independent Registered Public Accounting Firm (PCAOB ID No.1281)
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
F-1
Page
F-2
F-5
F-7
F-8
F-9
F-10
F-12
Table of Contents
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, 2023 and 2022 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, 2023, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2023, 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, 2023, 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 27, 2024, expressed an unqualified
opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that: (i) relates to accounts or disclosures that are material to the consolidated financial statements
and (ii) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our
opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-2
Table of Contents
Description of the Matter
Kost Forer Gabbay & Kasierer
144 Menachem Begin Road, Building A
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
Revenue Recognition
As described in Note 2 to the consolidated financial statements, the
Company generates revenues mainly from sales of products and services.
The Company's contracts with customers often contain multiple goods and
services that are accounted for separately if they are distinct performance
obligations. In such contracts, the transaction price is then allocated to the
distinct performance obligations on a relative standalone selling price basis
and revenue is recognized when control of the distinct performance
obligation is transferred.
Auditing the Company’s revenue recognition involved a high degree of
auditor judgment due to the effort to evaluate (a) the identification and
determination of whether products and services are considered distinct
performance obligations that should be accounted for separately such as
software licenses and related services, and (b) the determination of
standalone selling prices for each distinct performance obligation that is not
sold separately.
We obtained an understanding, evaluated the design and tested the operating
effectiveness of internal controls related to the identification of distinct
performance obligations, and the determination of stand-alone selling prices
for each distinct performance obligation.
Our audit procedures also included, among others, selecting a sample of
contracts with customers and reading contract source documents for each
selection, including the executed contracts and purchase orders. We tested
management’s identification of significant terms for completeness, including
the identification and determination of distinct performance obligations. We
also evaluated the methodology and reasonableness of management’s
assumptions used for the estimate of stand-alone selling prices on a sample
basis for products and services that are not sold separately. Finally, we
assessed the appropriateness of the related disclosures in the consolidated
financial statements.
How We Addressed the Matter in Our Audit
We have served as the Company’s auditor since 1997.
Kost Forer Gabbay & Kasierer,
a Member of EY Global
Tel-Aviv, Israel
March 27, 2024
F-3
Table of Contents
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 Internal Control over Financial Reporting
We have audited AudioCodes Ltd. internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our
opinion, AudioCodes Ltd. (collectively, the "Company") maintained, in all material respects, effective internal control over financial reporting as of December
31, 2023, 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, 2023 and 2022, 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, 2023, and the related notes and our report dated
March 27, 2024 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.
Kost Forer Gabbay & Kasierer,
a Member of EY Global
Tel-Aviv, Israel
March 27, 2024
F-4
Table of Contents
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
Short-term financial investments
Trade receivables (net of allowance for credit losses of $505 and $463 as of December 31, 2023 and 2022,
$
respectively)
Other receivables and prepaid expenses
Inventories
Total current assets
LONG-TERM ASSETS:
Long-term trade receivables
Long-term marketable securities
Long-term financial investments
Deferred tax assets
Operating lease right-of-use 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.
F-5
AUDIOCODES LTD.
December 31,
2023
2022
$
30,546
212
7,438
—
51,125
9,381
43,959
24,535
5,210
2,120
15,258
56,424
10,006
36,377
142,661
149,930
16,798
65,732
2,730
6,208
36,712
17,202
13,099
75,946
1,242
9,073
13,517
17,933
145,382
130,810
10,893
1,021
37,560
3,965
1,566
37,560
$
337,517
$
323,831
Table of Contents
CONSOLIDATED BALANCE SHEETS (Cont.)
U.S. dollars in thousands, except share and per share data
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade payables
Other payables and accrued expenses
Deferred revenues
Short-term operating lease liabilities
Total current liabilities
LONG-TERM LIABILITIES:
Accrued severance pay
Deferred revenues and other liabilities
Long-term operating lease liabilities
Total long-term liabilities
COMMITMENTS AND CONTINGENT LIABILITIES (Note 10)
Total liabilities
SHAREHOLDERS’ EQUITY:
Share capital:
Ordinary shares of NIS 0.01 par value -
AUDIOCODES LTD.
December 31,
2023
2022
7,556
29,943
38,820
7,878
84,197
16,662
17,142
31,404
65,208
11,338
38,316
36,634
8,169
94,457
17,755
16,308
5,551
39,614
149,405
134,071
Authorized: 100,000,000 shares as of December 31, 2023 and 2022; Issued: 64,611,583 and 63,998,443 shares as of
December 31, 2023 and 2022, respectively; Outstanding: 30,506,753 and 31,688,544 shares as of December 31,
2023 and 2022, respectively
Additional paid-in capital
Treasury stock at cost – 34,104,830 and 32,309,899 shares as of December 31, 2023 and 2022, respectively
Accumulated other comprehensive loss
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of the consolidated financial statements.
110
407,122
(236,003)
(3,905)
20,788
109
394,941
(217,744)
(10,953)
23,407
188,112
189,760
$
337,517
$
323,831
F-6
Table of Contents
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
Taxes on income
Net income
Earnings per share:
Basic
Diluted
Weighted average number of shares used in computations of earnings per share:
Basic
Diluted
The accompanying notes are an integral part of the consolidated financial statements.
F-7
AUDIOCODES LTD.
2023
Year Ended December 31,
2022
2021
$
123,991
120,392
$
164,302
110,791
$
155,089
93,831
244,383
275,093
248,920
47,964
38,070
86,034
63,686
32,629
96,315
52,750
25,279
78,029
158,349
178,778
170,891
57,169
70,243
16,513
59,842
70,123
17,494
53,396
62,057
15,914
143,925
147,459
131,367
14,424
(52)
14,372
5,592
31,319
2,864
34,183
5,717
39,524
123
39,647
5,896
8,780
$
28,466
$
33,751
0.28
0.28
$
$
0.89
0.88
$
$
1.03
1.00
$
$
$
31,400,900
31,578,713
31,849,422
32,500,141
32,703,478
33,845,559
Table of Contents
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
U.S. dollars in thousands
Net income
Other comprehensive income (loss) related to:
Change in unrealized gains (losses) on marketable securities available-for-sale, net of tax:
Gain (loss) on marketable securities recognized in other comprehensive income
Loss on marketable securities recognized in income
Other comprehensive income (loss) related to unrealized gains (losses) on marketable securities
available-for-sale
Change in unrealized gains (losses) on cash flow hedges, net of tax:
Gain (loss) on derivative instruments recognized in other comprehensive income,
Gain (loss) on derivative instruments recognized in income
Other comprehensive income (loss), related to unrealized gains (losses) on cash flow hedges, net of tax
Other comprehensive income (loss), net of tax
Total comprehensive income
The accompanying notes are an integral part of the consolidated financial statements.
AUDIOCODES LTD.
2023
Year Ended December 31,
2022
2021
$
8,780
$
28,466
$
33,751
2,859
(213)
2,646
(2,165)
6,567
4,402
7,048
(5,434)
—
(5,434)
(8,979)
3,683
(5,296)
(1,395)
—
(1,395)
1,538
(2,138)
(600)
(10,730)
(1,995)
$
15,828
$
17,736
$
31,756
F-8
Table of Contents
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
U.S. dollars in thousands, except share and per share data
Balance as of January 1, 2021
Share
capital
105
Additional
paid-in
capital
362,164
AUDIOCODES LTD.
Accumulated Retained
Treasury
stock
(137,793)
other
comprehensive
income (loss)
1,772
earnings
(accumulated
deficit)
(16,393)
Purchase of treasury stock
Issuance of shares upon exercise of options and vesting of RSUs
Share-based compensation related to options and RSUs granted to employees and non-employees
Cash dividends paid
Other comprehensive loss
Net income
Balance as of December 31, 2021
Purchase of treasury stock
Issuance of shares upon exercise of options and vesting of RSUs
Share-based compensation related to options and RSUs granted to employees and non-employees
Cash dividends paid
Other comprehensive loss
Net income
Balance as of December 31, 2022
—
2
—
—
—
—
107
—
2
—
—
—
—
109
—
2,438
14,164
—
—
—
(41,852)
—
—
—
—
—
378,766
(179,645)
—
—
—
—
(1,995)
—
—
—
(10,865)
—
—
(223)
33,751
6,493
—
(38,099)
1,053
15,122
—
—
—
—
—
—
—
—
—
—
—
—
(10,730)
—
394,941
(217,744)
(10,953)
Purchase of treasury stock
Issuance of shares upon exercise of options and vesting of RSUs
Share-based compensation related to options and RSUs granted to employees and non-employees
Cash dividends paid
Other comprehensive income
Net income
Balance as of December 31, 2023
—
1
—
—
—
—
110
—
801
11,380
—
—
—
407,122
(18,259)
—
—
—
—
—
(236,003)
—
—
—
—
7,048
—
(3,905)
The accompanying notes are an integral part of the consolidated financial statements.
F-9
Total
equity
209,855
(41,852
2,440
14,164
(10,865
(1,995
33,751
205,498
(38,099
1,055
15,122
(11,552
(10,730
28,466
189,760
(18,259
802
11,380
(11,399
7,048
8,780
188,112
—
—
—
(11,552)
—
28,466
23,407
—
—
—
(11,399)
—
8,780
20,788
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
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
Share-based compensation related to options and RSUs granted to employees and non-employees
Financial expenses (income), net
Decrease in deferred tax assets, net
Decrease (increase) in trade receivables, net
Decrease (increase) in other receivables and prepaid expenses
Decrease (increase) in inventories
Decrease in operating lease right-of-use assets
Decrease in operating lease liabilities
Decrease in royalty buyout liability
Increase (decrease) in trade payables
Increase (decrease) in other payables and accrued expenses
Increase (decrease) in deferred revenues
Decrease in accrued severance pay, net
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of property and equipment
Purchase of marketable securities
Purchase of financial investments
Proceeds from redemption of marketable securities
Proceeds from redemption of financial investments
Proceeds from sale of marketable securities
Investment in short-term and restricted bank deposits
Proceeds from short-term and restricted bank deposits
Proceeds from long-term and restricted bank deposits
Net cash paid for acquisition of subsidiary
AUDIOCODES LTD.
2023
Year Ended December 31,
2022
2021
$
8,780
$
28,466
$
33,751
2,596
1,348
11,380
(218)
1,437
1,600
625
(7,791)
9,281
(6,914)
—
(3,782)
(6,233)
3,144
(362)
2,984
1,513
15,122
(892)
1,780
(20,567)
(1,621)
(12,653)
6,639
(9,509)
—
3,475
(4,077)
(2,030)
(349)
2,432
1,589
14,164
54
3,406
(14,438)
(1,221)
4,504
7,445
(7,556)
(11,684)
879
9,601
5,480
(1,062)
14,891
8,281
47,344
(5,965)
—
(81)
3,084
14,094
3,846
—
4,998
—
—
(1,487)
—
(16,615)
1,123
1,052
2,250
(5,000)
10
94
(1,100)
(1,174)
(43,808)
—
3,240
—
2,571
—
84,597
—
(2,804)
Net cash provided by (used in) investing activities
$
19,976
$
(19,673)
$
42,622
The accompanying notes are an integral part of the consolidated financial statements.
F-10
Table of Contents
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
Cash dividends paid
Proceeds from issuance of shares upon exercise of options
Net cash used in financing activities
Increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at the beginning of the year
Cash, cash equivalents and restricted cash at the end of the year
Supplemental disclosure of cash flow activities:
Cash paid during the year for income taxes
Cash paid during the year for interest
Significant non-cash transactions:
Inventory transferred to be used as property and equipment
Non-cash purchase of property and equipment
Operating lease right-of-use asset recognized with corresponding lease liability
The accompanying notes are an integral part of the consolidated financial statements.
F-11
AUDIOCODES LTD.
2023
Year Ended December 31,
2022
2021
$
(18,259)
—
(11,399)
802
(28,856)
$
(38,099)
—
(11,552)
1,055
(48,596)
6,011
(59,988)
24,535
30,546
$
84,523
24,535
$
(41,852)
(1,200)
(10,865)
2,440
(51,477)
38,489
46,034
84,523
4,196
$
4,024
$
1,584
— $
— $
455
209
2,805
32,476
$
$
$
264
$
— $
701
—
3,699
$
(1,528)
$
$
$
$
$
$
$
Table of Contents
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 with the Company, the “Group”) is a leading vendor of advanced
communication, software, products and productivity solutions for the digital workplace. The Company’s products are deployed on-
premises or delivered from the cloud. Providing software communications, cloud-based platforms, customer premise equipment and
software applications, the Company’s 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 for unified communications, contact centers, and hosted business
services. In addition, the Company offers a complete suite of professional and managed services that allow the Company’s partners and
customers to choose a service package (or complement their own offering) from a modular portfolio of professional services.
The Company operates through its wholly-owned subsidiaries in the United States, Europe, Asia, Latin America, Australia and Israel.
b.
Material customers and suppliers:
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 for these particular components, management believes that
other suppliers could provide similar components on comparable terms to the extent needed. Any change in suppliers, however, could
cause a delay in manufacturing and a possible loss of sales, which could materially and adversely affect the operating results and
financial position of the Group.
During the years ended December 31, 2023, 2022 and 2021, the Group had a major customer which accounted for 16.3%, 15.1% and
15.4%, respectively, of total revenues in those years. In addition, during the years ended December 31, 2023, 2022 and 2021, the Group
had an additional major customer which accounted for 10.3%, 10.0% and 10.9%, respectively, of total revenues the years ended
December 31, 2023, 2022 and 2021. No other customer accounted for more than 10% of the Group's revenues in the years ended
December 31, 2023, 2022 and 2021.
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”), applied on a consistent basis as follows:
a.
Use of estimates:
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and
assumptions that affect the amounts reported in the consolidated financial statements. The Company’s management believes that the
estimates, judgments and assumptions used are reasonable based upon information available at the time they were made. As applicable
to these consolidated financial statements, the most significant estimates and assumptions relate to revenue recognition and allowance
for sales returns, allowance for credit losses, inventories write-off, intangible assets, goodwill, income taxes and valuation allowance,
share-based compensation and contingent liabilities. Actual results could differ from those estimates.
F-12
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
b.
Financial statements in U.S. dollars (“dollars”):
AUDIOCODES LTD.
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 (“NIS”). Management believes that the dollar is the currency in the primary economic environment in
which the Group operates. Thus, the functional and the 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
monetary balance sheet items are reflected in the consolidated statements of operations as financial income or expenses, as appropriate.
c.
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany
transactions and balances, including profits from intercompany sales not yet realized outside the Group, have been eliminated upon
consolidation.
d.
Cash equivalents:
Cash equivalents represent short-term highly liquid investments that are readily convertible into cash with original maturities of three
months or less at the date acquired.
e.
Short-term and restricted bank deposits:
Short-term and restricted bank deposits are deposits with maturities of more than three months, but less than one year. The deposits are
mainly in dollars and bear interest at an average annual rate of 2.72% and 1.06% for the years ended December 31, 2023 and 2022,
respectively. Short-term and restricted deposits are presented at cost. Any accrued interest on these deposits is included in other
receivables and prepaid expenses.
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents, and restricted cash shown in the statement
$
2023
30,546
$
—
2022
24,535
$
—
2021
79,423
5,100
December 31, December 31, December 31,
of cash flows
f.
Trade receivables:
$
30,546
$
24,535
$
84,523
The Group records trade receivables for amounts invoiced and yet unbilled invoices. The Group’s allowance for credit losses for trade
receivables is based upon its assessment of various factors, including historical experience, the age of the trade receivable balances,
credit quality of its customers, current economic conditions and other factors. The estimated allowance for credit losses is recorded as
general and administrative expenses in the consolidated statements of operations.
F-13
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
g.
Marketable securities:
AUDIOCODES LTD.
The Group accounts for investments in debt securities in accordance with ASC 320, “Investments - Debt 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, 2023, the Group classified all of its marketable securities as available-for-sale (“AFS”). AFS securities are carried
out 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. 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 periodically evaluates its AFS debt securities for impairment in accordance with Accounting Standards Update (“ASU”)
2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. If the amortized
cost of an individual security exceeds its fair value, the Group considers its intent to sell the security or whether it is more likely than
not that it will be required to sell the security before recovery of its amortized basis. If either of these criteria are met, the Group writes
down the security to its fair value and records the impairment charge in the consolidated statements of operations. If neither of these
criteria are met, the Group assesses whether credit loss exists. In making this assessment, the Group considers the extent to which fair
value is less than amortized cost, any changes to the rating of the security by a rating agency, and any adverse conditions specifically
related to the security, among other factors. If this assessment indicates that a credit loss may exist, the present value of the cash flows
expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows
expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses will be recorded,
limited by the amount that the fair value is less than the amortized cost basis. Any additional impairment not recorded through an
allowance for credit losses is recognized in other comprehensive income or loss.
During the years ended December 31, 2023, 2022 and 2021, the Group’s credit losses were immaterial.
h.
Long-term and restricted bank deposits:
Bank deposits and the related accrued interest with maturities of more than one year are included in long-term investments and
presented at their cost. Accrued interest that is payable within a one-year period is included in other receivables and prepaid expenses.
i.
Inventories:
Inventories are stated at the lower of cost or market value. Cost is determined as follows:
Raw materials - using the “weighted average cost” method; and
Finished products - using the “weighted average cost” method with the addition of direct manufacturing costs.
F-14
Table of Contents
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 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 product lines, and market prices lower than cost.
j.
Property and equipment:
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over
the estimated useful lives of the assets at the following annual rates:
Computers and peripheral equipment
Office furniture and equipment
Leasehold improvements
33%
6% to 20% (mainly 15%)
Over the shorter of the term of the lease, or the useful life of the
assets
The Group’s long-lived assets (asset group) to be held and used, including right of use assets and intangible that are subject to
amortization are reviewed for impairment in accordance with ASC 360, “Property, Plant and Equipment” whenever events or changes in
circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. If such assets are considered to be
impaired, recoverability of assets (asset group) to be held and used is measured by a comparison of the carrying amount of an asset
(asset group) to the future undiscounted cash flows expected to be generated by the asset. 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, 2023, 2022 and 2021, no impairment losses have been identified.
k.
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 to 10 years.
l.
Leases:
The Group evaluates the contracts it enters into to determine whether such contracts contain leases. A contract contains a lease if the
contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for
consideration.
The Group determines if an arrangement is a lease at inception of the contract, which is the date on which the terms of the contract are
agreed to, and the agreement creates enforceable rights and obligations. The commencement date of the lease is the date that the lessor
makes an underlying asset available for the lessee's use. At commencement, contracts containing a lease are further evaluated for
classification as an operating or finance lease where the Company is a lessee, or as an operating, sales-type or direct financing lease
where the Company is a lessor, based on their terms.
F-15
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
As the Group's lease arrangements as a lessee do not provide an implicit rate, the Group uses its incremental estimated borrowing rate at
lease commencement to measure the right-of-use (“ROU”) assets and lease liabilities. Operating lease expense is generally recognized
on a straight-line basis over the lease term. For leases with a term of one year or less, the Group elected not to record the ROU asset or
liability. The Group elected to not recognize a lease liability or ROU asset for leases with a term of twelve months or less. The Group
also elected the practical expedient to not separate lease and non-lease components for its leases.
A portion of the Group's sales of equipment to customers are made through bundled lease arrangements which typically include
software license, equipment and services. Revenues under these bundled lease arrangements are allocated considering the relative
standalone selling prices of the lease and non-lease components included in the bundled arrangement. The two primary accounting
provisions the Group use to classify transactions as sales-type or operating leases are: (i) a review of the lease term to determine if it is
for the major part of the economic life of the underlying equipment; and (ii) a review of the present value of the lease payments to
determine if they are equal to or greater than substantially all of the fair market value of the equipment at the inception of the lease.
Equipment included in arrangements meeting these conditions are accounted for as sales-type leases and revenue is recognized at lease
commencement. Equipment included in arrangements that do not meet these conditions are accounted for as operating leases and
revenue is recognized over the term of the lease. For the year ended December 31, 2023, equipment leases that were classified as
operating leases were immaterial.
m.
Goodwill:
Goodwill and certain other purchased intangible assets have been recorded in the Group's financial statements as a result of acquisitions.
Goodwill represents the excess of the purchase price over the estimated fair value of net assets of a business acquired in a business
combination. Under ASC 350, "Intangibles - Goodwill and Other", goodwill is not amortized, but rather is subject to an impairment test
at least annually.
The Group performs an annual impairment test of goodwill in the fourth quarter of each fiscal year, or more frequently. if events or
changes in circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment at the reporting unit
level, by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit
is less than its carrying amount. If the reporting unit does not pass the qualitative assessment, the Group carries out a quantitative test for
impairment of goodwill, by comparing the fair value of the reporting unit with the carrying amount of the reporting unit that includes
goodwill. The Group may bypass the qualitative assessment and proceed directly to performing the quantitative goodwill impairment
test. The Group operates as one reporting segment, and this segment comprises its only reporting unit. Therefore, goodwill is tested for
impairment at that level. The Group did not record goodwill impairment charges during the years ended December 31, 2023, 2022 and
2021.
n.
Revenue recognition:
The Group generates its revenues primarily from the sale of software licenses, equipment, and related services 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, enterprises, carriers and distributors in the telecommunications and networking
industries, all of whom are considered end-users.
F-16
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
Revenues are recognized in accordance with ASC 606, "Revenue from Contracts with Customers”. As such, the Group identifies a
contract with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the
transaction price to each performance obligation in the contract and recognizes revenues when (or as) the Group satisfies its
performance obligations.
The Group enters into contracts that can include combinations of products and services that are capable of being distinct and accounted
for as separate performance obligations. The software licenses and equipment are distinct as the customer can derive the economic
benefit of it without any additional services. The Group allocates the transaction price to each performance obligation, based on its
relative standalone selling price out of the total consideration of the contract.
Software license and equipment revenues are recognized at the point of time when control is transferred,
Revenues from maintenance and support services are recognized over time ratably over the term of the contract.
As the Group generally does not sell the products separately on a standalone basis, the standalone selling prices are not directly
observable. Therefore, the Group makes estimates, based on reasonably available information. The estimated selling price is established
considering multiple factors such as historical selling prices, internal pricing practices, gross margin objectives and discount policy. The
Group typically bills customers based on actual delivery. The payment terms vary, mainly with terms of 60 days or less.
The Group grants to certain customers a right of return or the ability over a limited period of time to exchange for other products a
specific percentage of the total price paid for products they have purchased. The Group maintains a provision for product returns and
exchanges and other incentives, based on its experience with historical sales returns, analysis of credit memo data and other known
factors, all in accordance with ASC 606. This provision is deducted from revenues and amounted to $2,137 and $2,704 as of December
31, 2023 and 2022, respectively. This provision was recorded as part of other payables and accrued expenses.
In instances of contracts where revenue recognition differs from the timing of invoicing, the Group generally determined that those
contracts do not include a significant financing component. The primary purpose of the invoicing terms is to provide customers with
simplified and predictable ways of purchasing the Group’s products and services, not to receive or provide financing. The Group uses
the practical expedient and does not assess the existence of a significant financing component when the difference between payment and
revenue recognition is a year or less.
Deferred revenues include amounts invoiced to customers for which revenue has not yet been recognized. Deferred revenues are
recognized as (or when) the Group performs the performance obligations under the contract.
The Group pays sales commissions to sales and marketing personnel, based on their attainment of certain predetermined sales goals.
Amortization expenses related to these costs are included in selling and marketing expenses in the consolidated statements of
operations.
The Group has included as part of other receivables and prepaid expenses in its consolidated balance sheet, costs to obtain a contract in
the amount of $542 and $829, as of December 31, 2023 and 2022, respectively.
F-17
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
Remaining performance obligations represents contracted revenues that have not yet been recognized, which includes deferred revenues
and non-cancelable contracts that will be recognized as revenue in future periods. The following table represents the remaining
performance obligations as of December 31, 2023, which are expected to be satisfied and recognized in future periods:
Products
Services
Year Ending December 31,
2024
227
38,593
38,820
$
$
$
$
2025
2026 and
thereafter
2
$
9,927
—
6,981
9,929 $
6,981
Significant changes in the balances of deferred revenues during the years are as follows:
Balance, at the beginning of the year
Revenue recognized
Increase in deferred revenues and customer advances
Balance, at the end of the year
Less current portion at the end of the year
Year Ended December 31,
2023
52,586
$
2022
54,616
$
(17,469)
20,613
55,730
(38,820)
(38,625)
36,595
52,586
(36,634)
Long-term portion at the end of the year
$
16,910
$
15,952
o.
Warranty costs:
The Group usually provides an assurance-type warranty for a 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, 2023 and 2022, the provision for warranty amounted to $149 and $212, respectively.
p.
Research and development costs:
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 Group’s product development process, technological feasibility is established upon the completion of a working model.
The Group does not incur material costs between the completion of a working model and the point at which the product is ready for
general release. Therefore, research and development costs are charged to the consolidated statement of operations, as incurred.
Participation grants from the Israel Innovation Authority (the “IIA”) for research and development activity are recognized at the time
the Group is entitled to such grants based on the costs incurred and included as a deduction from research and development costs.
Research and development grants recognized during the years ended December 31, 2023, 2022 and 2021 were $665, $624 and $570,
respectively.
F-18
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
q.
Income taxes:
AUDIOCODES LTD.
The Group accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 prescribes the use of the liability method
whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax
bases of assets and liabilities and for carryforward 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.
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.
r.
Accumulated other comprehensive income (loss) (“AOCI”):
The Group accounts for comprehensive income (loss) in accordance with ASC 220, “Comprehensive Income”, which establishes
standards for the reporting and presentation 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:
Balance as of January 1, 2023
Gains (losses)
on AFS
marketable
securities
Gains (losses)
on cash flow
hedges
$
(6,376)
$
(4,577)
$
Other comprehensive loss before reclassifications, net of tax
Amounts reclassified from AOCI
Other comprehensive income, net of tax
2,859
(213)
2,646
(2,165)
6,567
4,402
Total
(10,953)
481
6,567
7,048
Balance as of December 31, 2023
$
(3,730)
$
(175)
$
(3,905)
F-19
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
Amounts reclassified from AOCI
Cost of revenues
Research and development expenses, net
Selling and marketing expenses
General and administrative expenses
Year Ended December 31,
2022
2021
2023
$
$
1,400
2,983
1,217
967
$
814
1,735
708
426
(513)
(990)
(406)
(229)
Total operating expenses (income), before income taxes
$
6,567
$
3,683
$
(2,138)
The effects on net income of amounts reclassified from AOCI in the year ended December 31, 2023 derive from realized losses on cash
flow hedges recorded in operating expenses and from realized losses on AFS marketable securities recorded in financial income
(expenses), net.
s.
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
denominated instruments with major banks in Israel and in the United States. The Group is exposed to credit risk in the event of default
by financial institutions to the extent of the amounts recorded on the accompanying consolidated balance sheets exceed federally
insured limits. 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.
Marketable securities include investments in dollar-denominated corporate bonds. The Company’s investment policy, approved by the
Board of Directors, limits the amount the Group may invest in any one type of investment or issuer, thereby reducing credit risk
concentrations. Management believes that the Group’s portfolio is well diversified and, accordingly, minimal credit risk exists with
respect to these marketable debt securities.
The trade receivables of the Group are derived from sales to customers located primarily in the Americas, Europe, Eastern Asia and
Israel. 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 credit losses.
t.
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”.
F-20
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AUDIOCODES LTD.
Certain outstanding options and restricted share units (“RSUs”) 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 and RSUs that have been excluded from the calculation of diluted earnings per share was 710,761, 153,191 and
26,686 for the years ended December 31, 2023, 2022 and 2021, respectively.
u.
Accounting for share-based compensation:
The Company accounts for share-based compensation in accordance with ASC 718, “Compensation-Stock Compensation”. ASC 718
requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The
value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the
Company’s consolidated statement of operations.
The Company recognizes compensation expenses for the value of its awards, which have graded vesting, based on the accelerated
attribution method over the requisite service period of each of the awards. The Company accounts for forfeitures as they occur.
The weighted-average estimated fair value of employee stock options granted during the years ended December 31, 2023, 2022 and
2021, was $3.98, $8.99, and $10.64 per share, respectively, using the Black-Scholes option pricing model. Fair values were estimated
using the following weighted-average assumptions (annualized percentages):
Dividend yield
Expected volatility
Risk-free interest
Expected life
2023
1.13%
46.24%
4.57%
Year Ended December 31,
2022
1.13%
47.64%
2.83%
3.60 years 4.10 years 3.61 years
2021
0.88%
49.45%
0.5%
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 future dividend
payouts and may be subject to substantial change in the future. The Company paid its first cash dividend during the third quarter of
2018 and has been paying cash dividends on a bi-annual basis since then. The Company currently expects to continue pay cash
dividends in the future, subject to the Board of Director’s approval and receipt of required Israeli court approvals, although there can be
no assurance that it will do so. See also Note 11.
F-21
Table of Contents
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, 2023, 2022 and 2021 were included in items of the consolidated statements of operations, as follows:
Cost of revenues
Research and development expenses, net
Selling and marketing expenses
General and administrative expenses
Total share-based compensation expenses
v.
Treasury stock:
Year Ended December 31,
2022
2023
2021
$
$
388
2,685
4,297
4,010
11,380
$
$
425
3,481
6,032
5,184
15,122
$
$
411
2,772
6,170
4,811
14,164
The Company repurchases its ordinary shares from time to time in the open market 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 11a.
w.
Severance pay:
The liability for severance pay for Israeli employees is calculated pursuant to the Israeli 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, 2023, 2022 and 2021, amounted to $2,995, $3,907 and $2,373, respectively.
F-22
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
x.
Employee benefit plan:
AUDIOCODES LTD.
The Group has 401(k) defined contribution plans covering employees in the United States. All eligible employees may elect to
contribute a portion of their annual compensation to the plan through salary deferrals, subject to the Internal Revenue Service limit of
$20.5 during the years ended December 31, 2023 and 2022, plus a catch-up contribution of $7.5 for participants aged 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, 2023, 2022 and 2021, the Group matched contributions in the amount of $524, $531 and $431, respectively.
y.
Advertising expenses:
Advertising expenses are charged to the consolidated statements of operations as incurred. Advertising expenses for the years ended
December 31, 2023, 2022 and 2021 amounted to $1,942, $1,733 and $582, respectively.
z.
Fair value of financial instruments:
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” 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.
Observable inputs, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in
Level 2 -
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.
Level 3 -
Unobservable inputs which are supported by little or no market activity and that are significant to the fair value of the
assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use
significant unobservable inputs.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. See also Note 7.
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, bank deposits, trade receivables, trade payables, other receivables and other
payables and accrued expenses approximate their fair value due to the short-term maturity of such instruments.
F-23
Table of Contents
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 Group measures its investments in marketable securities and foreign currency derivative contracts at fair value. Marketable
securities and foreign currency derivative contracts are classified within Level 2 as the valuation inputs are based on quoted prices and
market observable data of similar instruments.
The fair value of financial investments consists of investments in limited partnerships, that are valued at the net asset value (“NAV”)
which is a practical expedient to their estimate fair value. The NAV is provided by the fund administrator and is based on the value of
the underlying assets owned less its liabilities.
aa.
Derivative instruments and hedging:
The Group accounts for derivative instruments 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 the 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 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.
To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on
hedged transactions.
ab.
Recently issued accounting pronouncement not yet adopted:
In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-07, “Segment Reporting (Topic 280):
Improvements to Reportable Segment Disclosures”, which requires public entities to disclose information about their reportable
segments’ significant expenses and other segment items on an interim and annual basis. Public entities with a single reportable segment
are required to apply the disclosure requirements in ASU 2023-07, as well as all existing segment disclosures and reconciliation
requirements in ASC 280 on an interim and annual basis. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023,
and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently
evaluating the impact of adopting ASU 2023-07.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”, which
requires public entities, on an annual basis, to provide disclosure of specific categories in the rate reconciliation, as well as disclosure of
income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with
early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2023-09.
F-24
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:- MARKETABLE SECURITIES
The following is a summary of AFS marketable securities:
AUDIOCODES LTD.
Maturing within one year:
Corporate bonds
Governmental bonds
Maturing between one to five years:
Corporate bonds
Governmental bonds
Amortized
cost
December 31, 2023
Gross
unrealized
gains
Gross
unrealized
losses
$
$
6,128
967
$
$
— $
— $
(163)
(10)
$
$
69,137
1,744
—
—
(4,476)
(157)
Fair
value
5,965
957
64,661
1,587
Balance as of December 31, 2023
$
77,976
$
— $
(4,806)
$
73,170
Maturing within one year:
Corporate bonds
Maturing between one to five years:
Corporate bonds
Governmental bonds
Amortized
cost
December 31, 2022
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
$
1,531
$
— $
(32)
$
1,499
81,866
2,880
—
—
(7,897)
(282)
73,969
2,598
Balance as of December 31, 2022
$
86,277
$
— $
(8,211)
$
78,066
The following table presents gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December
31, 2023, and the length of time that those investments have been in a continuous loss position:
Less than 12 months
Gross
12 months and greater
Gross
As of December 31, 2023
unrealized
loss
Fair value
$
— $
Fair value
— $ 73,170
unrealized
loss
(4,806)
$
As of December 31, 2022
$
3,411
$
(225) $ 74,655
$
(7,986)
Less than 12 months
Gross
unrealized
loss
Fair value
12 months and greater
Gross
unrealized
loss
Fair value
F-25
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 4:-
INVENTORIES
Raw materials
Finished products
AUDIOCODES LTD.
December 31,
2023
2022
$
$
18,742
25,217
43,959
$
$
14,541
21,836
36,377
During the year ended December 31, 2023, the Group wrote off inventory in a total amount of approximately $1.1 million , during the year ended
December 31, 2022, the Group's inventory write off was immaterial and during the year ended December 31, 2021, the Group wrote off
inventory in a total amount of approximately $1.7 million.
NOTE 5:- 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,
2023
2022
$
$
16,395
6,272
8,748
31,415
13,008
4,625
2,889
20,522
Depreciated cost
$
10,893
$
25,840
12,858
3,375
42,073
23,984
11,291
2,833
38,108
3,965
Depreciation expenses amounted to $2,051, $2,181 and $2,074 for the years ended December 31, 2023, 2022 and 2021, respectively.
NOTE 6:-
INTANGIBLE ASSETS, NET
a.
Cost:
Acquired technology and license
Customer relationship
Accumulated amortization:
Acquired technology and license
Customer relationship
Useful life
(years)
4 - 10
4.5 - 9
$
December 31,
2023
2022
$
21,815
4,951
26,766
20,900
4,845
25,745
Amortized cost
$
1,021
$
F-26
21,815
4,951
26,766
20,399
4,801
25,200
1,566
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 6:-
INTANGIBLE ASSETS, NET (Cont.)
AUDIOCODES LTD.
b.
c.
Amortization expenses related to intangible assets amounted to $545, $804 and $358 for the years ended December 31, 2023, 2022 and
2021, respectively.
Expected amortization expenses are as follows:
Year ending December 31,
2024
2025
2026 and thereafter
$
$
532
470
19
1,021
NOTE 7:- FAIR VALUE MEASUREMENTS
In accordance with ASC 820, the Group measures its foreign currency derivative instruments and marketable securities, 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 (liabilities) are valued using alternative pricing sources and models utilizing market observable inputs.
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:
Marketable securities
Financial investments
Financial assets related to foreign currency derivative hedging
contracts
December 31, 2023
Fair value measurements
using input type
$
Level 2
73,170
—
$
Total
73,170
—
NAV
Total
$
— $
2,730
—
2,730
(461)
(461)
—
—
Total financial net assets as of December 31, 2023
$
72,709
$
72,709
$
2,730
$
2,730
December 31, 2022
Fair value measurements
using input type
Level 2
Total
NAV
Total
Marketable securities
Financial investments
Financial assets related to foreign currency derivative hedging
contracts
$
78,066
—
$
78,066
—
$
— $
16,500
—
16,500
(5,143)
(5,143)
—
—
Total financial net assets as of December 31, 2022
$
72,923
$
72,923
$
16,500
$
16,500
F-27
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 7:- FAIR VALUE MEASUREMENTS (Cont.)
Financial Investments:
Secured Bridge Loans Fund
Secured Bridge Loans Fund
Financial Investments:
Secured Bridge Loans Fund
Secured Bridge Loans Fund
AUDIOCODES LTD.
December 31, 2023
Fair value
Redemption
frequency
Redemption
notice
period
$
$
1,461
1,269
2,730
—
—
—
—
December 31,2022
Redemption
Frequency
Redemption
Notice
Period
Fair Value
$
$
15,258 Monthly (Eligible)
1,242
—
16,500
90 days
—
As of December 31, 2023 this class includes two Secured Bridge Loans Funds that offer short-term loans to various consumers, which are
secured by real-estate assets and vehicles.
One investment fund can be redeemed by the investees during the next five years. The fair value of this investment in this class has been
estimated using the net asset value (“NAV”) of the Group’s ownership interest in partners’ capital.
The second investment in an equity fund is locked-up until its maturity after five years from investment date. The value of this investment in this
class has been presented at its cost.
Gains from the financial investments amounted to $336 and $937 for the years ended December 31, 2023 and 2022, respectively.
NOTE 8:- OTHER PAYABLES AND ACCRUED EXPENSES
Payroll and other employee related accruals
Forward liability
Accrued expenses
Government authorities
Provision for returns
Other
NOTE 9:- LEASES
Lease agreements:
The Group as a lessee:
$
December 31,
2023
2022
$
16,715
461
8,339
2,274
2,137
17
17,999
5,150
9,511
2,806
2,704
146
$
29,943
$
38,316
The Group’s facilities are leased under several lease agreements for periods ending up to 2033, with options to extend the leases ending up to
2038. In addition, the Group has various operating lease agreements with respect to motor vehicles.
F-28
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:- LEASES (Cont.)
The components of operating lease costs were as follows:
Fixed lease cost
Variable lease cost
Sublease income
Total net lease costs
2023
$ 10,979
477
(1,167)
$ 10,289
AUDIOCODES LTD.
2021
9,745
99
(1,547)
8,297
$
Year ended
December 31,
2022
9,271
260
(1,516)
$
8,015
$
$
The Group’s operating lease agreements have remaining lease terms ranging from one year to 14.46 years, including agreements with options to
extend the leases for up to seven years.
The following table represents the weighted-average remaining lease term and discount rate:
Weighted average remaining lease term
Weighted average discount rate
The following table presents supplemental cash flows information related to the lease costs for operating leases:
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows for operating leases
Year ended
December 31,
2023
4.49 years
5.54%
December 31,
2023
$
9,167
The discount rate was determined based on the estimated collateralized borrowing rate of the Group, adjusted to the specific lease term and
location of each lease.
Maturities of operating lease liabilities were as follows:
Year ending December 31,
2024
2025
2026
2027
2028 and thereafter
Total lease payments
Less - imputed interest
Present value of lease liabilities
F-29
$
$
$
$
5,905
5,397
4,690
4,206
31,011
51,209
(11,927)
39,282
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:- LEASES (Cont.)
AUDIOCODES LTD.
In November 2022, the Company entered into a new lease agreement in Park Naymi, which is located near Messubim Junction in Israel (the
"New Lease Agreement"). The New Lease Agreement will replace the current lease agreement in Israel which is originally scheduled to expire in
January 2024 and was extended until April 2024. The Company recognized additional ROU assets and lease liabilities related to the current lease
agreement in the amount of $1,355. Pursuant to the New Lease Agreement, the Company leases from the landlord an approximately 10,000
square foot facility (the "Premises"). The lease of the Premises, which is still under construction, commenced in July 2023. The initial lease term
under the New Lease Agreement is for seven years. The Company additionally holds options under the New Lease Agreement to extend the lease
term for additional periods of five years.At the commencement date, the Company recognized ROU assets and lease liabilities related to the New
Lease Agreement in the amount of $25,810.
The Group as a lessor:
Revenue from sales-type leases is presented on a gross basis when the Group enters into a lease to realize value from a product that it would
otherwise sell in its ordinary course of business. The product has no residual value.
At the commencement date of sales-type leases for the year ended December 31, 2023 and 2022, the Group recognized $15,937 and $19,802 of
product revenue respectively. As of the commencement date of sales-type leases for the year ended December 31, 2023 and 2022, the Group
recognized $4,178 and $2,152 cost of product revenue respectively. The Group's short -term net investment in a lease receivable as of December
31, 2023 and 2022, were $8,367 and $7,972 respectively and are presented within trade receivables in the consolidated balance sheets. The
Group's long -term net investment in a lease receivable as of December 31, 2023 and 2022, were $16,798 and $13,099 respectively and are
presented within long -term trade receivables in the consolidated balance sheets.
The following table illustrates the Group's future sales-type lease receipts as of December 31, 2023:
Year ending December 31,
2024
2025
2026
2027
2028 and thereafter
Total future minimum receipts
Less - unearned interest income
Total
F-30
$
$
$
$
8,367
7,528
5,130
2,577
1,563
25,165
(1,076)
24,089
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES
a.
Purchases commitments:
AUDIOCODES LTD.
1. The Group is obligated under certain agreements with its suppliers to purchase specified items of excess inventory which are
expected to be utilized in the following two years, mainly in 2024. As of December 31, 2023, non-cancelable purchase obligations
were approximately $13,978.
2.
In addition, the Group is obligated under certain agreements with its suppliers to purchase software as a service (SaaS) subscription
services which are expected to be utilized during 2024 until 2026. As of December 31, 2023, non - cancelable purchase obligations
were approximately $19,700.
b.
Royalty commitment to the IIA:
Under the research and development agreements of the Company and its Israeli subsidiaries with the IIA and pursuant to applicable
laws, the Company and its Israeli subsidiaries were required to pay royalties at the rate of 1.3%-5% on sales to end customers of
products developed with funds provided by the IIA, up to an amount equal to 100% of the IIA 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 were obligated to repay the IIA for the grants
received only to the extent that there are sales of the funded products.
As of December 31, 2023, and 2022, the Company's other Israeli subsidiaries have a contingent obligation to pay royalties to the IIA in
the amount of approximately $21,250 and $20,112, respectively.
c.
Royalty commitments to third parties:
The Group has entered into technology licensing fee agreements with third parties. Under the agreements, the Group has incorporated
third parties’ technology into its products and agreed to pay the third parties royalties, based on sales of relevant products. Royalties are
calculated on a quarterly basis. Such royalties being payable either quarterly or through a pre-buy of production licenses when
necessary.
d.
Contingent investments commitments:
The Group may be obligated under certain agreements with respect to Secured Bridge Loan Fund to invest an additional amount of up
to approximately $1,400 if called upon by the fund.
NOTE 11:- SHAREHOLDERS’ EQUITY
a.
Treasury stock:
During the year ended December 31, 2014, the Company’s Board of Directors approved a share repurchase program to repurchase up to
$3,000 of its ordinary shares (the “Share Repurchase Program”), which is the amount that the Company could repurchase under Israeli
law without further approval from an Israeli court. During the nine years ended December 31, 2022, the Company received Israeli court
approvals to repurchase up to an additional $311,000 of its ordinary shares. In addition, in each of January 2023, June 2023 and
December 2023, the Company received court approval to repurchase up to an additional $25,000 , $25,000 and $20,000, respectively of
its ordinary shares (the “Permitted Amount”). The most recent court approvals also permit the Company to declare a dividend of any
part of the Permitted Amount during the approved validity period. The current approval is valid through June 18, 2024.
F-31
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- SHAREHOLDERS’ EQUITY (Cont.)
AUDIOCODES LTD.
As of December 31, 2023, pursuant to the Company’s Share Repurchase Program, the Company had repurchased a total of 34,104,830
of its ordinary shares at a total cost of $236,003 (of which 1,794,931 of its ordinary shares were repurchased during the year ended
December 31, 2023 for aggregate consideration of $18,259).
b.
Cash Dividends:
On February 7, 2023, the Company declared a cash dividend of $0.18 per share. The dividend, which was in the aggregate amount of
approximately $5.7 million, was paid on March 7, 2023 to all of the Company’s shareholders of record as of February 21, 2023.
On August 1, 2023, the Company declared a cash dividend of $0.18 cents per share. The dividend, which was in the aggregate amount
of approximately $5.7 million was paid on August 31, 2023 to all of the Company's shareholders of record on August 17, 2023. See
Note 17 for cash dividends declared and paid subsequent to December 31, 2023.
c.
Employee and Non-Employee Share Option Plan:
In 2008, the Company’s Board of Directors approved the 2008 Equity Incentive Plan (as amended, 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, 2023, the total number of shares authorized for future grant under the Plan is 1,729,170.
Options granted under the Plan expire seven years from the date of grant, and options that are forfeited or cancelled before expiration,
become available for future grants.
The following is a summary of the Company’s stock option activity and related information for the year ended December 31, 2023:
Options outstanding at beginning of year
Changes during the year:
Granted
Exercised
Forfeited
Options outstanding at end of year
Options exercisable at end of year
Weighted
average
exercise
price
$ 10.74
Number
of options
361,343
Weighted
average
remaining
contractual
term (in
years)
2.54
Aggregate
intrinsic
value
$ 2,786
$ 10.90
20,000
(115,543) $
6.95
(500) $ 11.61
265,300
$ 12.40
234,925
$ 11.99
2.48
2.05
$
$
450
427
The weighted average grant-date fair value of options granted during the years ended December 31, 2023, 2022 and 2021 was $3.98, $8.99 and
$10.64, 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.
F-32
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 11:- SHAREHOLDERS’ EQUITY (Cont.)
AUDIOCODES LTD.
The total intrinsic value of options exercised in the years ended December 31, 2023, 2022 and 2021 was $378, $2,878 and $9,281, respectively.
The options for employees outstanding as of December 31, 2023 have been separated into ranges of exercise prices, as follows:
Range of
exercise
price
$
$
$
5.00-6.62
7.08-10.9
11.52-30.76
Number of
options
outstanding
as of
December 31,
2023
Weighted
average
remaining
contractual
life (in
years)
4,125
132,800
128,375
265,300
0.26
2.34
2.70
2.48
$
$
$
$
Weighted
average
exercise
price
6.18
9.05
16.06
12.40
Number of
options
exercisable
as of
December 31,
2023
Weighted
average
exercise price
of exercisable
options
4,125
112,800
118,000
234,925
$
$
$
$
6.18
8.72
15.32
11.99
The following is a summary of the Company’s RSU activity and related information for the year ended December 31, 2023:
RSUs outstanding at beginning of year
Changes during the year:
Granted
Vested
Forfeited
RSUs outstanding at end of year
Number of
shares
1,186,809
589,042
(497,597)
(46,375)
1,231,879
$
$
$
$
$
Weighted
average grant
date fair value
27.76
11.19
26.85
23.87
20.35
As of December 31, 2023, there was a total of $10,657 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 2.68 years. The total fair value of
the Company’s RSU vested during the years 2023, 2022 and 2021 was $13,363, $12,079 and $8,165, respectively.
NOTE 12:- TAXES ON INCOME
a.
Israeli taxation:
1.
Measurement of taxable income in 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”):
F-33
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- TAXES ON INCOME (Cont.)
AUDIOCODES LTD.
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.
In January 2011, an amendment to the Investment Law came into effect (the “Amendment”). According to the Amendment, the
benefit tracks in the Investment Law were modified, and a flat tax rate applies to the Company’s income subject to the
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% for a preferred enterprise located in development area A).
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%).
Amendment 73 also prescribes special tax tracks for technological enterprises, which are subject to regulations that were issued
by the Minister of Finance in May 2017. The new tax tracks under Amendment 73 are as follows: Preferred Technological
Enterprise (“PTE”) - an enterprise for which total consolidated revenues of its parent company and all subsidiaries are less than
NIS 10 billion. A PTE, as defined in the Investment Law, which is located in the center of Israel, will be subject to tax at a rate
of 12% on profits deriving from intellectual property (in development area A - a tax rate of 7.5%).
Beginning in January 2020 and with respect to the Company’s taxable income from 2020 onwards, the Company elected to
apply the terms of the PTE status under the Investments Law.
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, that at least 90% of the income of which in a given tax year exclusive of income from specified
government loans, capital gains, interest and dividends, is derived from an industrial enterprise owned by it. An industrial
enterprise is defined as an enterprise whose major activity in a given tax year is industrial production activity.
Management believes that the Company is currently qualified as an “industrial company” under the Encouragement Law and,
as such, is entitled to tax benefits, including: (i) deduction of purchase of know-how and patents and/or right to use a patent
over an eight-year period; (ii) the right to elect, under specified conditions, to file a consolidated tax return with additional
related Israeli industrial companies and an industrial holding company; (iii) accelerated depreciation rates on equipment and
buildings; and (iv) expenses related to a public offering on the Tel Aviv Stock Exchange Ltd. and on recognized stock markets
outside of Israel, such as Nasdaq, are deductible in equal amounts over three years.
Eligibility for benefits under the Encouragement Law is not subject to receipt of prior approval from any governmental
authority. The Company believes that the Israeli Tax Authority will agree that the Company qualifies and will continue to
qualify as an industrial company, or that the benefits described above will be available to the Company in the future.
F-34
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- TAXES ON INCOME (Cont.)
4.
Tax Benefits for Research and Development:
AUDIOCODES LTD.
Section 20a to the Israeli Tax Ordinance allows, under certain conditions, a tax deduction for research and development
expenses, including capital expenses, for the year in which they are paid. Such expenses must relate to scientific research in
industry, agriculture, transportation, or energy, and must be approved by the relevant Israeli government ministry, determined
by the field of research. Furthermore, the research and development must be for the promotion of the company’s business and
carried out by or on behalf of the company seeking such tax deduction. However, the amount of such deductible expenses is
reduced by the sum of any funds received through government grants for the finance of such scientific research and
development projects. Expenses incurred in scientific research that is not approved by the relevant Israeli government ministry
will be deductible over a three-year period starting from the tax year in which they are paid. The Company believes that it is
eligible for the abovementioned benefit for the majority of its research and development expenses.
5.
Tax rates:
Taxable income of the Israeli companies is subject to a corporate tax rate of 23% in the years ended December 31, 2023, 2022
and 2021.
The Company is eligible for tax benefits as a PTE as mentioned in 2 above.
The deferred tax balances as of December 31, 2023 have been calculated based on the PTE effective tax rate (see also 2 above).
b.
U.S. taxation:
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) (H.R. 1) was signed into law. This Act includes, among other things, a
permanent reduction to the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, and requires immediate taxation
of accumulated, unremitted non-U.S. earnings.
The TCJA also enacted new tax provisions beginning in 2018, including, but not limited to: (i) creating a new provision designed to tax
global intangible low tax income (“GILTI”); (ii) generally eliminating U.S. federal taxes on dividends from foreign subsidiaries; (iii)
eliminating the corporate alternative minimum tax (“AMT”); (iv) creating the base erosion anti-abuse tax (“BEAT”); (v) establishing a
deduction for foreign derived intangible income (“FDII”); (vi) repealing domestic production activity deduction; and (vii) establishing
new limitations on deductible interest expense and certain executive compensation.
ASC 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.
The deferred tax balances as of December 31, 2023 and 2022 have been calculated based on the revised tax rates.
The Group has completed the accounting for all the impacts of the TCJA. As part of finalizing the analysis, the Company’s U.S.
subsidiary recorded adjustments that relate to the Transition Tax during the year ended December 31, 2018 and GILTI during the year
ended December 31, 2023. An adjustment in the amount of $644 related to GILTI for the year ended December 31, 2023, was recorded
in such year.
F-35
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- TAXES ON INCOME (Cont.)
AUDIOCODES LTD.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the“CARES Act”) was enacted in the United States in
response to the COVID-19 pandemic. The CARES Act contains temporary taxpayer favorable provisions related to the use of net
operating losses and the deductibility of interest expense, charitable contributions, and qualified improvement property. The Company
does not expect to be materially impacted by the CARES Act.
On December 27, 2020, the Consolidated Appropriations Act (the“CAA”) was enacted in further response to the COVID-19 pandemic,
in combination with omnibus spending for the 2021 federal fiscal year. The CAA extended many of the provisions enacted by the
CARES Act, which did not have a material impact on the Company’s consolidated financial statements for the year ended December 31,
2023. On March 11, 2021, the American Rescue Plan Act of 2021 (the “ARPA”) was enacted in still further response to the COVID-19
pandemic. The Company does not expect the provisions of the ARPA to have a material impact on the Company’s consolidated
financial statements for the year ended December 31, 2023.
c.
Net operating loss carryforward and deferred taxes in respect thereto and in respect of other temporary differences:
As of December 31, 2020, the Company has realized all of its carryforward tax losses in Israel, which can be offset against taxable
income. As of December 31, 2023 the Company recorded a net deferred tax asset of $4,820 in respect of other temporary differences.
As of December 31, 2023, the Company’s Israeli subsidiaries have total available carryforward tax losses of approximately $71,883.
The net operating losses may be offset against taxable income in the future for an indefinite period. The Group does not expect
utilization of such carryforward tax losses and therefore recorded full valuation allowance against the deferred tax assets in respect of
such carryforward tax losses.
The Company’s U.S. subsidiary has total available carryforward tax losses of approximately $22,020 to offset against future U.S.
federal taxable gains. These carryforward tax losses expire between 2024 and 2032. As of December 31, 2023, the Company’s U.S.
subsidiary recorded a deferred tax asset of $1,345 in respect of such carryforward tax losses.
Utilization of U.S. net operating losses may be subject to substantial annual limitations due to the “change 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,
2022
$ 25,434
8,749
2021
$ 31,084
8,563
2023
5,110
9,262
$ 14,372
$ 34,183
$ 39,647
F-36
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- TAXES ON INCOME (Cont.)
e.
Taxes on income are comprised as follows:
Current taxes:
Domestic
Foreign
Deferred tax expense:
Domestic
Foreign
f.
Deferred income taxes:
AUDIOCODES LTD.
Year Ended December 31,
2022
2021
2023
$
$
2,030
2,013
3,707
35
$
819
1,615
4,043
3,742
2,434
(14)
1,563
269
1,706
2,464
998
1,549
1,975
3,462
$
5,592
$
5,717
$
5,896
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 carryforward
Operating lease liabilities
Marketable Securities
Derivatives
Reserves and allowances
Net deferred tax assets before valuation allowance
Less - valuation allowance
Deferred tax asset
Deferred tax liability:
Operating lease ROU assets
Other
F-37
December 31,
2023
2022
$
$
$
$
21,316
4,321
1,409
22
7,292
34,360
(23,897)
10,463
(4,256)
(232)
(4,488)
$
$
$
$
23,807
1,509
1,837
566
7,238
34,957
(24,395)
10,562
(1,489)
(356)
(1,845)
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 12:- 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:
Income before taxes, as reported in the consolidated statements of
operations
Year Ended December 31,
2022
2021
2023
$
14,372
$
34,183
$
39,647
Israeli statutory corporate tax rate
23.0 %
23.0 %
23.0 %
Theoretical tax expense on the above amount at the Israeli statutory
corporate tax rate
Impact of Preferred Technological Enterprise status
Changes in tax reserve for uncertain tax positions
Adjustments for previous years’ taxes
Impact of income tax at rates other than the Israeli statutory
corporate tax rate
Share-based compensation expenses see Note 11c
Losses and timing differences for which valuation allowance was
$
3,304
(608)
47
486
749
1,289
$
$
7,861
(3,031)
90
448
9,118
(3,555)
175
88
(375)
329
453
152
(210)
603
(65)
140
—
(608)
198
—
127
$
5,592
$
5,717
$
5,896
provided
Impact of tax rate change
Other
Actual tax expense
h.
Tax assessments:
The statute of limitations related to tax returns of the Company for all tax years up to and including 2017 has lapsed.
The Company is currently undergoing an income tax audit for the tax years 2018 - 2021.
F-38
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 13:- FINANCIAL INCOME (EXPENSES), NET
AUDIOCODES LTD.
Financial expenses:
Interest
Loss related to non-hedging derivative instruments
Amortization of marketable securities premiums and accretion of discounts,
$
(1,565)
—
$
$
(325)
(6)
net
Exchange rate differences
Other
(1,348)
(205)
(327)
(1,513)
—
(358)
(621)
(12)
(1,387)
(293)
(252)
2023
Year Ended December 31,
2022
2021
Financial income:
Gain related to non-hedging derivative instruments
Exchange rate differences
Gain from financial investments
Interest income
Other
(3,445)
(2,202)
(2,565)
24
—
333
3,036
—
1,325
937
2,804
—
—
3,393
5,066
—
—
—
2,656
32
2,688
Financial income (expenses), net
$
(52)
$
2,864
$
123
NOTE 14:- EARNINGS PER SHARE
Numerator:
Net income
Denominator:
2023
Year Ended December 31,
2022
2021
$
8,780
$
28,466
$
33,751
Denominator for basic earnings per share - weighted average number of
ordinary shares, net of treasury stock
Effect of dilutive securities:
Employee stock options and RSUs
31,400,900
31,849,422
32,703,478
177,813
650,719
1,142,081
Denominator for diluted earnings per share - adjusted weighted average
number of shares
31,578,713
32,500,141
33,845,559
F-39
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 15:- GEOGRAPHIC INFORMATION
AUDIOCODES LTD.
The Group manages its business on the 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, 2023, 2022 and 2021 and long-lived assets including ROU assets as of
December 31, 2023, 2022 and 2021.
Americas, principally the United States
Europe
Eastern Asia
Israel
2023
$
Total
revenues
$ 126,419
78,939
35,352
3,673
Year Ended and as of December 31,
2022
Long-
lived
assets
5,026
290
859
42,451
Total
revenues
$ 139,583
87,679
42,108
5,723
$
Long-
lived
assets
3,588
328
901
14,231
Total
revenues
$ 115,806
88,746
38,988
5,380
2021
$
Long-
lived
assets
977
662
706
20,876
$ 244,383
$
48,626
$ 275,093
$
19,048
$ 248,920
$
23,221
The Group has derived approximately 46% of its revenues for the year ended December 31, 2023 from sales in the United States.
NOTE 16:- DERIVATIVE INSTRUMENTS
The Group enters into hedging 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 two
years. 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.
As of December 31, 2023 and 2022, the Group had a net deferred loss associated with cash flow hedges of $175 and $4,577, respectively,
recorded in other comprehensive income (loss).
As of December 31, 2023 and 2022, the par value of the Group’s outstanding forward and options collar contracts in the amount of $105,000 and
$105,000, respectively, which were designated as payroll. In addition, as of December 31, 2023 and 2022, the Group had $6,500 and $12,500,
respectively, outstanding forward contracts which are not designated as hedging contracts.
F-40
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 16:- DERIVATIVE INSTRUMENTS (Cont.)
AUDIOCODES LTD.
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, 2023 and December 31, 2022, are summarized below:
Foreign exchange forward
and options contracts
Balance sheet
Fair value of foreign exchange forward and options Other payables and accrued expenses
Loss recognized in other comprehensive income
“Other comprehensive income (loss)”
December 31,
2023
2022
$
$
(461) $
(5,143)
(175) $
(4,577)
The effect of derivative instruments in cash flow hedging relationship on income for the years ended December 31, 2023 and 2022, is
summarized below:
Foreign exchange forward
and options contracts
Comprehensive loss from derivatives before
reclassifications
Loss reclassified from accumulated other
comprehensive income (loss)
Comprehensive
Income (loss)
Year Ended
December 31,
2023
2022
“Other comprehensive income (loss)”
$
(2,165) $
(8,979)
“Operating expenses (income)”
$
6,567
$
3,683
NOTE 17:- SUBSEQUENT EVENT
a. On February 6, 2024, the Company declared a cash dividend of $0.18 per share. The dividend, which was in the aggregate amount of
approximately $5.5 million, was paid on March 6, 2024 to all of the Company's shareholders of record as of February 20, 2024.
b. Subsequent to December 31, 2023, the Company repurchased additional 301,937 of its ordinary shares for an aggregate consideration of
$3,584.
F-41
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Exhibit 2.1
As of December 31, 2023, AudioCodes Ltd., or the Company, had the following class of securities registered under Section 12(b) of the Securities
Exchange Act of 1934, as amended: ordinary shares, nominal value NIS 0.01 per share. The Company’s ordinary shares are listed on the Nasdaq Global Select
Market and on the Tel-Aviv Stock Exchange under the trading symbol “AUDC”.
DESCRIPTION OF SHARE CAPITAL
This description summarizes relevant provisions of the Israeli Companies Law, 5759-1999, or the Companies Law. The following summary does not
purport to be complete and is subject to, and is qualified in its entirety by reference to, the applicable provisions of the Companies Law and the Company’s
articles of association, a copy of which is incorporated by reference as an exhibit to the Annual Report on Form 20-F of which this Exhibit 2.1 is a part. The
Company encourages you to read its articles of association and the applicable provisions of the Companies Law for additional information.
Authorized 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 20, 2024, we had 30,324,284 ordinary shares outstanding (which does not include 34,406,682
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
In general, shareholders may amend our articles of association by a resolution adopted at a shareholders meeting by the holders of 50% of the voting
power represented at the meeting in person or by proxy and voting thereon. The amendment of certain provisions of our articles of association requires an
increased voting threshold. For example, the approval of amendments to the provisions concerning business combinations with certain shareholders requires
the approval of holders of 85% of our outstanding voting shares. Additionally, amendments to the provisions concerning (i) the procedure according to which
shareholders may propose items to include in the agenda of a general meeting of the shareholders and (ii) the role and composition of the board of directors,
including the method of appointment of its members, require the approval sixty-six and two-thirds percent (66 2/3%) of the voting power represented at the
meeting in person or by proxy and voting thereon.
Qualification of Directors
No person shall be disqualified to serve as a director by reason of his or her not holding shares of the Company or by reason of his or her having served
as a director in the past.
Dividends
Under the Companies Law, a company may make “distributions”, as such term is defined in the Companies Law (which definition includes the
payment of dividends and a company’s repurchase of its outstanding shares) only out of its profits as determined for statutory purposes, unless court approval
is granted for such despite the lack of statutory profits. There is a unified statutory test for the payment of dividends and a company’s repurchase of its
outstanding shares. In 2023, we received court approval to pay dividends (and repurchase our shares) up to certain ceilings, despite the lack of statutory
profits. The current approval is valid until June 18, 2024. We may seek further approvals to repurchase our shares and to continue to pay dividends. As we are
a Nasdaq-listed company, court approval is not required for our repurchase of our shares, provided that we notify our creditors of the proposed repurchase and
allow such creditors an opportunity to initiate a court proceeding to review the repurchase. If within 30 days such creditors do not file an objection, then we
may proceed with the repurchase. In each case, we are only permitted to make the distribution if our board of directors and, if applicable, the court, determines
there is no reasonable concern that such distribution will prevent us from satisfying our existing and foreseeable obligations as they become due. The amount
of any dividend to be distributed among shareholders is based on the nominal value of their shares.
Voting Rights and Powers
Unless any shares have special rights as to voting, every shareholder has one vote for each share held of record.
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 articles of association, we may, from time to time, by a resolution approved by the holders of a simple majority of the
voting power represented at the meeting in person or by proxy and voting thereon, provide for shares with such preference rights,
deferred rights or conversion rights, or any other special rights or limitations as may be stipulated in such resolution.
If at any time our share capital is divided into different classes of shares, we may modify or abrogate the rights attached to any class, unless otherwise
provided by the articles of association, by a resolution approved by the holders of a simple majority of the voting power represented at the meeting in person
or by proxy and voting thereon, subject to the consent in writing of the holders of a simple majority of the issued shares of that class (unless otherwise
provided by law or by the terms of issue of the shares of that class).
The provisions of our articles of association relating to general meetings also apply, mutatis mutandis, to any separate general meeting of the holders of
the shares of a particular class.
The creation or issuance of shares of any class, including a new class, shall not be deemed to alter the rights and privileges attached to previously issued
shares of that class or of any other class (unless otherwise provided by our articles of association, including the terms of issue of the shares of any class).
Shareholder Meetings
An annual meeting of shareholders is to be held once a year, within 15 months after the previous annual meeting. The annual meeting may be held in
Israel or outside of Israel, as determined by the board of directors.
The board of directors may, whenever it thinks fit, convene a special shareholders meeting. The board of directors must convene a special shareholders
meeting at the request of:
● at least two directors;
● at least one-quarter of the directors in office; or
● 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.
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 or on our website.
Notice of a meeting of shareholders must specify the type of meeting, the place and time of the meeting, the agenda, a summary of the proposed
resolutions, the majority required to adopt the proposed resolutions, and the record date for the meeting. The notice must also include the
address and telephone number of our registered office, and a list of times at which the full text of the proposed resolutions may be examined at the registered
office.
The accidental omission to give notice of a meeting to any shareholder, or the non-receipt of notice sent to such shareholder, does not invalidate the
proceedings at the meeting.
Limitations on Foreign Shareholders to Hold or Exercise Voting Rights
There are no limitations on foreign shareholders in our articles of association. Israeli law restricts the ability of citizens of countries that are in a state of
war with Israel to hold shares of Israeli companies.
Fiduciary Duties; Approval of Transactions under Israeli Law
Fiduciary duties. 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.
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 chairman 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.
Duties of Shareholders
Under the 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
Companies Law also provides that a breach of the duty of fairness will be governed by the laws governing breach of contract; however, the 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.
English Summary Translation of Building and Tenancy Lease Agreement, dated June 14, 2023, by and between MAY A.B. NADLAN LTD (“MAY”),
Migdal Group Insurance & Finance Migdal Makefet Pension Funds and Provident Funds Ltd, PEL-HAMAGEN HOUSE LTD (sides 2-4:
“Migdal”), and AudioCodes Ltd.
Exhibit 4.21
(Summary of a Document Originally in Hebrew)
Building and Tenancy Lease Agreement, dated June 14, 2023 (the “Lease Agreement”), by and between MAY A.B. NADLAN LTD, Migdal Group
Insurance & Finance Migdal Makefet Pension Funds and Provident Funds Ltd, PEL-HAMAGEN HOUSE LTD. (“Lessor”), and AudioCodes Ltd.
(“AudioCodes”).
Agreement regarding the building and lease of a storage facility for AudioCodes in Or Yehuda, Israel.
Leased Property: Main premises consists of approximately 989 square meters (the “Main Premises”) and additional space consisting of approximately
129 square meters (the “Additional Premises”), as well as an additional eight marked parking spaces (the “Marked Parking Spaces”, and together with
the Main Premises and the Additional Premises, the “Leased Premises”).
Commencement and Lease Period: Upon completion and delivery of the building according to Plans (as contemplated by the Lease Agreement), from
the date of delivery, for the Lease Term (as defined below). AudioCodes has the option to extend the Lease Agreement for one additional period of 48
months (with nine months’ notice). The extension period for the Additional Premises is 48 months. AudioCodes also has the option to extend the Lease
Agreement for three more periods consisting of 24 months per period (with six months' notice) (the “Option Period”).
Payments; Price: For the Main Premises, the price consists of 58 NIS per square meter per calendar month (plus VAT). The price for the Marked
Parking Spaces consists of 550 NIS (plus VAT) per space in the parking area. AudioCodes will be exempt from the obligation to pay rent only from the
delivery day of the Leased Premises until November 30, 2023.
All the above prices exclude all taxes, including VAT, and are linked thereafter to changes in the Israeli Consumer Price Index as of April 2023 (plus
VAT).
Additional Payments: The Building Management Company shall be paid 14 NIS per square meter and 84 NIS per Marked Parking Space per calendar
month, linked to changes in the Israeli Consumer Price Index as of March 2023 (plus VAT).
Rent Increases: A rent increase may occur at the time of exercise of each of the Option Periods. There is a maximum increase of 3% for the additional
space per each Option Period and 5% for the Main Premises and Marked Parking Spaces.
Term: 72 months (the “Lease Term”). AudioCodes doesn't have the option to terminate the Lease Agreement prior to the expiration of such term.
Restrictions on Use: AudioCodes is permitted to conduct its business and use the Leased Premises for storage and/or for any use permitted by law, the
urban building scheme, and the building permit.
Planning and Executing of Final Works: AudioCodes will prepare the interior design of the Leased Premises at its own expense, subject to the
approval of the Lessor. The plans will be approved by the Lessor, including corrections, no later than 14 days from the date of submission of finishing
works by AudioCodes. AudioCodes will be entitled to start the final works from the rental start date and undertakes to terminate them no later than
October 15, 2023. AudioCodes is not allowed to conduct any construction works that requires an additional building permit or changing any existing
permit. AudioCodes undertakes to deliver an independent bank guarantee from a contractor on its behalf (the “Bank Guarantee”). The Bank Guarantee
will be valid for the entire period of the final works and 14 days thereafter. The amount of the Bank Guarantee will be 50,000 NIS (plus VAT).
Occupancy of the Rented Property: AudioCodes must deliver notice to the Lessor seven days before occupancy of the rented property commences.
Occupancy is contingent on presentation of all required permits.
Security Deposit: AudioCodes is required to provide the Lessor with the Bank Guarantee in the amount equivalent to four months’ of rent plus
management fees (plus VAT) linked to changes in the Israeli Consumer Price Index as of April 2023 (plus VAT).
* * * * *
Name of Subsidiary
AudioCodes Inc.
LIST OF SUBSIDIARIES OF AUDIOCODES LTD.
Place of Incorporation
Delaware, USA
Exhibit 8.1
Exhibit 12.1
I, Shabtai Adlersberg, certify that:
CERTIFICATION PURSUANT TO
SECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002
1.
2.
3.
4.
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 27, 2024
/s/ SHABTAI ADLERSBERG
Shabtai Adlersberg
President and 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.
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 27, 2024
/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., or the Company, on Form 20-F for the period ending December 31, 2023 as filed with the
Securities and Exchange Commission on the date hereof, or the Report, I, Shabtai Adlersberg, President and 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 27, 2024
/s/ SHABTAI ADLERSBERG
Shabtai Adlersberg
President and 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., or the Company, on Form 20-F for the period ending December 31, 2023 as filed with the
Securities and Exchange Commission on the date hereof, or 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 27, 2024
/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:
(1) Registration Statement (Form F-3ASR No. 333-238867) of AudioCodes Ltd., and
(2) Registration Statements (Form S-8 Nos. 333-11894, 333-13268, 333-105473, 333-144823, 333-144825, 333-160330, 333-170676, 333-13378, 333-
190437, 333-210438, 333-230388 and 333-264535) pertaining to the equity incentive plans of of AudioCodes Ltd. of our reports dated March 27,
2024, 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 (Form 20-F) for the year ended December 31, 2023.
Tel Aviv, Israel
March 27, 2024
/s/ KOST FORER GABBAY AND KASIERER
A member of EY Global
EXHIBIT 15.1
CLAWBACK POLICY
AMENDMENTS TO THE COMPENSATION POLICY
Section 10 of the Compensation Policy shall be hereby amended and restated as follows:
10. Compensation Recovery (“Clawback”)
10.1 For purposes of this Section 10, the following terms shall have the following meanings:
Exhibit 97.1
“Applicable Recovery Period” means the three completed fiscal years immediately preceding the Calculation Date for a Material
Financial Accounting Restatement. In addition, in the event AudioCodes has changed its fiscal year: (i) any transition period of less than
nine months occurring within or immediately following such three completed fiscal years shall also be part of such Applicable Recovery
Period; and (ii) any transition period of nine to 12 months will be deemed to be a completed fiscal year.
“Applicable Rules” means, collectively: (i) the Companies Law; (ii) any rules or regulations adopted by NASDAQ pursuant to Rule 10D-1
under the Exchange Act; (iii) any applicable rules or regulations promulgated by the SEC pursuant to Section 10D of the Exchange Act;
and (iv) any other applicable rules or standards adopted by the SEC or any national securities exchange on which AudioCodes’
securities are listed from time to time.
“Calculation Date” means, with respect to a Material Financial Accounting Restatement, the earlier to occur of: (i) the date the Board of
Directors or the Audit Committee of the Board of Directors concludes, or reasonably should have concluded, that AudioCodes is required
to prepare the Material Financial Accounting Restatement; or (ii) the date a court, regulator or other legally authorized body directs
AudioCodes to prepare the Material Financial Accounting Restatement.
“Covered Person” means any Executive Officer. A person’s status as a Covered Person with respect to Erroneously Awarded
Compensation shall be determined as of the time of receipt of such Erroneously Awarded Compensation regardless of such person’s
current role or status with AudioCodes (e.g., if a person began service as an Executive Officer after the beginning of an Applicable
Recovery Period, that person would not be considered a Covered Person with respect to Erroneously Awarded Compensation received
before the person began service as an Executive Officer, but would be considered a Covered Person with respect to Erroneously
Awarded Compensation received after the person began service as an Executive Officer where such person served as an Executive
Officer at any time during the performance period for such Erroneously Awarded Compensation).
“Effective Date” means October 25, 2023.
“Erroneously Awarded Compensation” means the amount of any Incentive-Based Compensation received by a Covered Person on or
after the Effective Date and during the Applicable Recovery Period that exceeds the amount that otherwise would have been received by
the Covered Person had such compensation been determined based on the restated amounts in the Material Financial Accounting
Restatement, computed without regard to any taxes paid. Calculation of Erroneously Awarded Compensation with respect to Incentive-
Based Compensation based on share price or total shareholder return, where the amount of Erroneously Awarded Compensation is not
subject to mathematical recalculation directly from the information in a Material Financial Accounting Restatement, shall be based on a
reasonable estimate of the effect of the Material Financial Accounting Restatement on the share price or total shareholder return upon
which the Incentive-Based Compensation was received, and AudioCodes shall maintain documentation of the determination of such
reasonable estimate and provide such documentation to NASDAQ in accordance with the Applicable Rules. Incentive-Based
Compensation is deemed received, earned or vested when the Financial Reporting Measure is attained, not when the actual payment,
grant or vesting occurs.
“Exchange Act” means the United States Securities Exchange Act of 1934, as amended.
“Financial Reporting Measures” mean measures that are determined and presented in accordance with the accounting principles used in
preparing AudioCodes’s financial statements, any measures that are derived wholly or in part from such measures (including, for
example, a non-GAAP financial measure), and share price and total shareholder return.
“Incentive-Based Compensation” means any compensation provided, directly or indirectly, by AudioCodes or any of its subsidiaries that
is granted, earned, or vested based, in whole or in part, upon the attainment of a Financial Reporting Measure and any equity-based
compensation provided by AudioCodes or any of its subsidiaries, including, without limitation, stock options, restricted stock awards,
restricted stock units and stock appreciation rights.
“Material Financial Accounting Restatement” means a restatement of previously issued financial statements of AudioCodes due to the
material noncompliance of AudioCodes with any financial reporting requirement under the securities laws, including any required
restatement to correct an error in previously-issued financial statements that is material to the previously-issued financial statements or
that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.
“NASDAQ” means the Nasdaq Stock Market LLC.
“SEC” means the United States Securities and Exchange Commission.
10.2 The Board of Directors believes that it is in the best interests of the Company and its shareholders to create and maintain a culture that
emphasizes integrity and accountability. The Board of Directors has therefore adopted the provisions set forth under this Section 10, sets forth
the circumstances and procedures under which AudioCodes shall recover Erroneously Awarded Compensation from Covered Persons in
accordance with the Applicable Rules.
10.3 In the event AudioCodes is required to prepare a Material Financial Accounting Restatement, AudioCodes shall recover reasonably
promptly from the applicable Executive Officers all Erroneously Awarded Compensation with respect to such Material Financial Accounting
Restatement; provided, that, AudioCodes may elect not to recover Erroneously Awarded Compensation pursuant to this Policy if the
Compensation Committee determines that recovery would be impracticable, and one or more of the following conditions, together with any
further requirements set forth in the Applicable Rules, are met: (i) the direct expense paid to a third party, including outside legal counsel, to
assist in enforcing this Policy would exceed the amount to be recovered, and AudioCodes has made a reasonable attempt to recover such
Erroneously Awarded Compensation; (ii) recovery would likely cause an otherwise tax-qualified retirement plan to fail to be so qualified under
applicable regulations; or (iii) in the event of a Material Financial Accounting Restatement required due to changes in the applicable financial
reporting standards (as determined by the Company’s independent auditor).
10.4 To the extent that, pursuant to this Policy, AudioCodes is entitled to recover any Erroneously Awarded Compensation that is received by a
Covered Person, the gross amount received (i.e., the amount the Covered Person received, or was entitled to receive, before any deductions
for tax withholding or other payments) shall be returned by the Covered Person. For purposes of this Policy, when compensation is deemed to
be “granted,” “earned” or “vested,” the date on which a restatement shall be deemed to be required, and the type of restatement for which this
provision shall apply, shall be as provided in the Applicable Rules.
10.5 The Compensation Committee shall determine, in its sole discretion, the method for recovering Erroneously Awarded Compensation
hereunder, which may include, without limitation, any one or more of the following: (i) requiring reimbursement of cash Incentive-Based
Compensation previously paid; (ii) seeking recovery of any gain realized on the vesting, exercise, settlement, sale, transfer or other disposition
of any equity-based awards; (iii) cancelling or rescinding some or all outstanding vested or unvested equity-based awards; (iv) adjusting or
withholding from unpaid compensation or other set-off; (v) cancelling or offsetting against planned future grants of equity-based awards; and/or
(vi) any other method permitted by applicable law or contract.
10.6 Notwithstanding the foregoing, a Covered Person will be deemed to have satisfied such person’s obligation to return Erroneously Awarded
Compensation to AudioCodes if such Erroneously Awarded Compensation is returned in the exact same form in which it was received;
provided, that, equity withheld to satisfy tax obligations will be deemed to have been received in cash in an amount equal to the tax withholding
payment made.
10.7 This Policy shall be interpreted in a manner that is consistent with the Applicable Rules and any other applicable law. The Compensation
Committee shall take into consideration any applicable interpretations and guidance of the SEC in interpreting this Policy, including, for
example, in determining whether a financial restatement qualifies as a Material Financial Accounting Restatement hereunder. Any provision of
the Applicable Rules required by the SEC or NASDAQ, as the case may be, shall be deemed to comply with this Policy. To the extent the
Applicable Rules require recovery of Incentive-Based Compensation in additional circumstances besides those specified above, nothing in this
Policy shall be deemed to limit or restrict the right or obligation of AudioCodes to recover Incentive-Based Compensation to the fullest extent
required by the Applicable Rules.
10.8 This Policy shall be binding and enforceable against all Executive Officers and, to the extent required by the Applicable Rules, their
beneficiaries, heirs, executors, administrators, or other legal representatives. Any right of recovery under this Policy is in addition to, and not in
lieu of, any other remedies or rights of recovery that may be available to AudioCodes under applicable law, regulation, or rule pursuant to the
terms of any policy of AudioCodes or any provision in any employment agreement, equity award agreement, compensatory plan, agreement, or
other arrangement. AudioCodes shall file this Policy and, in the event of a Material Financial Accounting Restatement, will disclose information
related to such Material Financial Accounting Restatement in accordance with applicable law, including, for the avoidance of doubt, the
Applicable Rules.
10.9 Notwithstanding anything to the contrary set forth in any agreement with, or the organizational documents of, AudioCodes or any of its
subsidiaries, Covered Persons are not and shall not be entitled to indemnification for Erroneously Awarded Compensation or for any claim or
losses arising out of or in any way related to Erroneously Awarded Compensation recovered under this Policy.
10.10 The Board of Directors and the Compensation Committee are each authorized to interpret and construe this Section 10 and to make all
determinations necessary, appropriate, or advisable for the administration of the Applicable Rules. It is intended that this Policy be interpreted in
a manner that is consistent with the requirements of the Applicable Rules. Nothing in this Section 10 derogates from any other “clawback” or
similar provisions regarding disgorging of profits imposed on Executive Officers by virtue of any applicable securities laws or other laws,
regulations or listing standards.
* * * * * *