TABLE OF CONTENTS
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7
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7
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7
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7
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A.
[Reserved]
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7
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B.
Capitalization and Indebtedness
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7
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C.
Reasons for Offer and Use of Proceeds
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7
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D. Risk
Factors
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7
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32
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A.
History and Development of Allot
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32
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B.
Business Overview
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32
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C.
Organizational Structure
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41
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D.
Property, Plant and Equipment
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42
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42
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42
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A.
Operating Results
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42
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B.
Liquidity and Capital Resources
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47
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C.
Research and Development, Patents and Licenses
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49
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D.
Trend Information
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49
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E.
Critical Accounting Estimates
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49
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54
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A.
Directors and Senior Management
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54
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B.
Compensation of Officers and Directors
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59
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C.
Board Practices
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61
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D.
Employees
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67
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E.
Share Ownership
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68
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71
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A.
Major Shareholders
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71
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B.
Record Holders
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72
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C.
Related Party Transactions
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72
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D.
Interests of Experts and Counsel
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72
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72
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A.
Consolidated Financial Statements and Other Financial
Information.
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72
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B.
Significant Changes
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73
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73
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73
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A.
Share Capital
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73
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B.
Memorandum and Articles of Association
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73
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C.
Material Contracts
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77
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D.
Exchange Controls
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78
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E.
Taxation
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78
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F.
Dividends and Paying Agents
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88
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G.
Statement by Experts
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88
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H.
Documents on Display
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88
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I.
Subsidiary Information
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89
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89
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90
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90
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90
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90
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A.
Material Modifications to the Rights of Security Holders
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90
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B. Use
of Proceeds
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90
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90
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91
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91
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91
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91
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92
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92
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92
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92
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93
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93
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93
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93
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PRELIMINARY NOTES
Terms
As used herein, and unless the context suggests otherwise, the
terms “Allot,” “Company,” “we,” “us” or “ours” refer to Allot
Ltd.
Cautionary Note Regarding Forward-Looking Statements
In addition to historical facts, this annual report on Form 20-F
contains forward-looking statements within the meaning of Section
27A of the U.S. Securities Act of 1933, as amended (the “Securities
Act”), Section 21E of the U.S. Securities Exchange Act of 1934, as
amended (the “Exchange Act”), and the safe harbor provisions of the
U.S. Private Securities Litigation Reform Act of 1995. We have
based these forward-looking statements on our current expectations
and projections about future events. Forward-looking statements
include information concerning our possible or assumed future
results of operations, business strategies, financing plans,
competitive position, industry environment, potential growth
opportunities, potential market opportunities and the effects of
competition. Forward-looking statements include all statements that
are not historical facts and can be identified by terms such as
“anticipates,” “believes,” “could,” “seeks,” “estimates,”
“expects,” “intends,” “may,” “plans,” “potential,” “predicts,”
“projects,” “should,” “will,” “would” or similar expressions that
convey uncertainty of future events or outcomes and the negatives
of those terms. These statements include but are not limited
to:
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statements regarding projections of capital
expenditures;
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statements regarding competitive pressures;
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statements regarding expected revenue growth;
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statements regarding the expected growth in demand of our
products;
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statements regarding trends in mobile networks, including the
development of a digital lifestyle, over-the-top applications, the
need to manage mobile network traffic and cloud computing, among
others;
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statements regarding our ability to develop technologies to
meet our customer demands and expand our product and service
offerings;
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statements regarding the acceptance and growth of our services
by our customers;
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statements regarding the expected growth in the use of
particular broadband applications;
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statements as to our ability to meet anticipated cash needs
based on our current business plan;
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statements as to the impact of the rate of inflation and the
political and security situation on our business;
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statements regarding the price and market liquidity of our
ordinary shares;
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statements as to our ability to retain our current suppliers
and subcontractors; and
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statements regarding our future performance, sales, gross
margins, expenses (including share-based compensation expenses) and
cost of revenues.
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These statements may be found in the sections of this annual report
on Form 20-F entitled “ITEM 3: Key Information—Risk Factors,” “ITEM
4: Information on Allot,” “ITEM 5: Operating and Financial Review
and Prospects,” “ITEM 10: Additional Information—Taxation—United
States Federal Income Taxation—Passive Foreign Investment Company
Considerations” and elsewhere in this annual report, including the
section of this annual report entitled “ITEM 4: Information on
Allot—Business Overview—Overview” and “ITEM 4: Information on
Allot—Business Overview—Industry Background,” which contain
information obtained from independent industry sources. Actual
results could differ materially from those anticipated in these
forward-looking statements due to various factors, including all
the risks discussed in “ITEM 3: Key Information—Risk Factors” and
elsewhere in this annual report.
All forward-looking statements in this annual report reflect our
current views about future events and are based on assumptions and
are subject to risks and uncertainties that could cause our actual
results to differ materially from future results expressed or
implied by the forward-looking statements. Many of these factors
are beyond our ability to control or predict. You should not put
undue reliance on any forward-looking statements. Unless we are
required to do so under U.S. federal securities laws or other
applicable laws, we do not intend to update or revise any
forward-looking statements.
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.
[Reserved]
B.
Capitalization and Indebtedness
Not applicable.
C. Reasons
for Offer and Use of Proceeds
Not applicable.
D. Risk
Factors
Summary of Risk Factors
Our business involves a high degree of risk. You should consider
carefully the risks and uncertainties described below, together
with the financial and other information contained in this annual
report and our other filings with the U.S. Securities and Exchange
Commission (the “SEC”). If any of the following risks actually
occur, our business, financial condition and results of operations
would suffer. In this case, the trading price of our ordinary
shares would likely decline and you might lose all or part of your
investment. This report also contains forward-looking statements
that involve risks and uncertainties. Our results of operations
could materially differ from those anticipated in these
forward-looking statements, as a result of certain factors
including the risks described below and elsewhere in this report
and our other filings with the SEC. These risks are not the only
ones we face. Additional risks that we currently do not know about
or that we currently believe to be immaterial may also impair our
business operations.
Below is a high-level overview of the risks that we and those in
our industry face, and is intended to enhance the readability and
accessibility of our disclosures. These risks include, but are not
limited to:
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general economic and business conditions, including
fluctuations of interest and inflation rates, which may affect
demand for our technology and solutions;
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the effects of fluctuations in currency on our results of
operation and financial condition;
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our ability to achieve profitability, such as through keeping
pace with advances in technology and achieving market acceptance
and increasing the functionality of our products and offering
additional features and products;
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the impact of the telco operator’s Go To Market strategy and
implementation efforts, on the success of a Revenue Share deal of
our Security-as-a-service (“SECaaS”) Solution;
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the impacts of new market and technology trends on our
enterprise market;
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our reliance on our network intelligence solutions for
significant revenues;
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impacts to our revenues and operational risk as a result of
making sales to large service providers;
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technological risks, including network encryption, live
network failures and software or hardware errors;
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our ability to retain and recruit key personnel and maintain
satisfactory labor relations;
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supply chain interruption and the ability, and lead time, of
our suppliers to provide certain hardware due to the global
semiconductor shortage;
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our dependence on third parties for products that make up a
material portion of our business;
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the ability of our suppliers to provide, or refusal of our
customers to implement, the single or limited sources from which
certain hardware and software components for our products are
made;
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sales disruptions or costs arising from a loss of rights to
use the third-party solutions we integrate with our products;
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our ability to increase sales of Allot Secure products;
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our ability to comply with international regulatory regimes
wherever we conduct business, including governmental requirements
and initiatives related to the telecommunication industry and data
privacy;
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potential misuse of our products by governmental or law
enforcement customers;
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risks related to our proprietary rights and information,
including our ability to protect the intellectual property embodied
in our technology, to defend against third-party infringement
claims, and protect our IT systems from disruptions;
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risks related to our ordinary shares, including volatile share
prices and tax consequences for U.S. shareholders;
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our status as a foreign private issuer and related exemptions
with respect thereto;
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exposure to unexpected or uncertain tax liabilities or
consequences as a result of changes to fiscal and tax
policies;
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conditions and requirements as a result of being incorporated
in Israel, including economic volatility and obligations to perform
military service;
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costs and business impacts of complying with the requirements
of the Israeli government grants received for research and
development expenditures;
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costs and business impacts of litigation and other legal and
regulatory proceedings encountered in the course of business;
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our ability to successfully identify, manage and integrate
acquisitions; and
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other factors as described in the section below.
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Economic and External Risks
Unfavorable or unstable economic conditions in the markets in which
we operate could have a material adverse effect on our business,
financial condition or operating results.
In recent years, economies worldwide have demonstrated instability.
Negative economic conditions in the global economy or certain
regions such as the European Market, from which we derived 34% of
our revenues in 2022, could cause a decrease in spending on the
types of products and services that we offer.
Additionally, if the worldwide economy remains unstable or further
deteriorates, enterprises, telecommunication carriers and service
providers in affected regions may significantly reduce or postpone
capital investments, which could result in reductions in sales of
our products or services, longer sales cycles, slower adoption of
new technologies and increased price competition in such regions.
Such circumstances would have a material adverse effect on our
results of operations and cash flows.
Further, because a substantial portion of our operating expenses
consists of salaries, we may not be able to reduce our operating
expenses in line with any reduction in revenues and, therefore, may
not be able to continue to generate increased revenues and manage
our costs to achieve profitability.
The global semiconductor chip shortage could delay or disrupt the
ability of our suppliers to manufacture and deliver certain
hardware that is necessary to our operations.
The global semiconductor chip supply shortage has had, and continues to have,
wide-ranging effects across our industry. The shortage has been
reported since early 2021 and has caused challenges in the
manufacturing industry and impacted our supply chain and production
as well. While the semiconductor chip shortage has begun to
improve, we still face uncertainties and our ability to
source the components that use semiconductor chips may be adversely
affected in the future. Component delivery lead times are expected
to increase, which may cause delays in our production and increase
the cost to obtain components with available semiconductor chips.
To the extent this semiconductor chip shortage continues, we may
experience delays, increased costs, and an inability to fulfill
engineering design changes or customer demand, each of which could
adversely impact our results of operations.
Our international operations expose us to the risk of fluctuations
in currency exchange rates.
Our revenues are generated primarily in U.S. dollars and a major
portion of our expenses are denominated in U.S. dollars. As a
result, we consider the U.S. dollar to be our functional currency.
A significant portion of our revenues are also generated in Euros.
Other significant portions of our expenses are denominated in
Israeli shekel (ILS) and, to a lesser extent, in Euros and other
currencies. Our ILS-denominated expenses consist principally of
salaries and related personnel expenses. We anticipate that a
material portion of our expenses will continue to be denominated in
ILS. In the past years, we have experienced material fluctuations
between the ILS and the U.S. dollar and we anticipate that the ILS
will continue to fluctuate against the U.S dollar in the future. In
2022, the ILS depreciated by approximately 11.6% against the U.S.
dollar, while in 2021 the ILS appreciated by approximately 3.4%
against the U.S. dollar. In 2022, the Euro depreciated by
approximately 5.8% against the U.S. dollar, and in 2021 the Euro
depreciated by approximately 7.7% against the U.S. dollar. As the
U.S dollar weakens against the ILS, we are exposed to negative
impact on our results of operations. Moreover, if the U.S. dollar
strengthens against the Euro, our results of operations generated
by revenue in the EUR may be negatively impacted.
We translate sales and other results denominated in foreign
currency into U.S. dollars for our financial statements. During
periods of a strengthening dollar, our reported international sales
and earnings have been, and could continue to be, reduced because
foreign currencies may translate into fewer U.S. dollars.
We use derivative financial instruments, such as foreign exchange
forward contracts, in an effort to mitigate the risk of changes in
foreign exchange rates on forecasted cash flows. We may not
purchase derivative instruments adequately to insulate ourselves
from foreign currency exchange risks. Volatility in the foreign
currency markets may make hedging our foreign currency exposures
challenging. In addition, because a portion of our revenue is not
earned in U.S. dollars, fluctuations in exchange rates between the
U.S. dollar and the currencies in which such revenue is earned may
have a material adverse effect on our results of operations and
financial condition. We could be adversely affected when the U.S.
dollar strengthens relative to the local currency between the time
of a sale and the time we receive payment, which would be collected
in the devalued local currency. Accordingly, if there is an adverse
movement in one or more exchange rates, we might suffer significant
losses and our results of operations may otherwise be adversely
affected. Uncertainty in global market conditions has resulted in
and may continue to cause significant volatility in foreign
currency exchange rates which could increase these risks. As our
international operations expand, our exposure to these risks also
increases.
The invasion of Ukraine by Russia, and the related disruptions to
the global economy and financial markets, has affected and could
continue to adversely affect our operations in Ukraine and Belarus,
as well as our business, financial condition and results of
operations as a whole.
We have engaged with two subcontractors in Ukraine and Belarus to
support our research and development activities. The Russian
invasion of Ukraine in February 2022 and sanctions on Belarus have
had a minimal impact on the operations of our subcontractors thus
far. However, we may experience interruptions or delays in the
services they provide to us in the future.
In response to the conflict, the United States, the European Union,
Japan and the United Kingdom, among others, have announced targeted
economic sanctions on Russia, the regions of Donetsk and Luhansk,
certain Russian citizens and enterprises, including financial
measures such as freezing Russia’s central bank assets and limiting
its ability to access its dollar reserves. The continuation of the
conflict may trigger a series of additional economic and other
sanctions enacted by the United States and other countries, as well
as counter responses by the governments of Russia or other
jurisdictions, which could adversely affect the global financial
markets generally, levels of economic activity, and increase
financial markets volatility. The potential impact of bans,
sanction programs and boycotts on our business is uncertain at the
current time due to the fluid nature of the military conflict and
international responses to it, but it could result in a material
adverse effect on our business, financial condition, and results of
operations. In addition, the potential impacts include supply chain
and logistics disruptions, financial impacts including volatility
in commodity prices, foreign exchange rates and interest rates,
inflationary pressures on raw materials and energy, heightened
cybersecurity threats and other restrictions.
Risks Related to our Business and Results of Operations
We have a history of losses and may not be able to achieve or
maintain profitability in the future.
We have a history of net losses in all fiscal years since our
inception, other than in 2006 and 2011. We had a net loss of $32
million in 2022 and $15 million in 2021. In the future, we intend
to continue to invest significantly in research and development and
sales and marketing, which we believe will contribute to our future
growth. We can provide no assurance that we will be able to achieve
or maintain profitability, and we may incur losses in the future if
we do not generate sufficient revenues.
Our inability to streamline operations and improve cost
efficiencies could result in the contraction of our business and
the implementation of significant cost cutting measures.
We have undertaken, and may continue to undertake, efforts to
streamline operations and improve cost efficiencies. We may not
realize, in full or in part, the anticipated benefits, savings and
improvements in our operating results from these efforts due to
unforeseen difficulties, delays or unexpected costs. If we are
unable to realize the expected operational efficiencies and cost
savings, our operating results and financial condition would be
adversely affected. We also cannot guarantee that we will not have
to undertake additional workforce reductions in the future.
Furthermore, our workforce reductions may be disruptive to our
operations. For example, our workforce reductions could yield
unanticipated consequences, such as attrition beyond planned staff
reductions, increased difficulties in our day-to-day operations and
reduced employee morale. In addition, while positions have been
eliminated, certain functions necessary to our reduced operations
remain, and we may be unsuccessful in distributing the duties and
obligations of departed employees among our remaining employees. We
may also discover that the reductions in workforce and cost cutting
measures will make it difficult for us to pursue new opportunities
and initiatives and require us to hire qualified replacement
personnel, which may require us to incur additional and
unanticipated costs and expenses. Moreover, there is no assurance
we will be successful in our efforts. Our failure to successfully
accomplish any of the above activities and goals may have a
material adverse impact on our business, financial condition, and
results of operations.
Our future growth and prospects depend significantly on our ability
to grow revenues from the recurring revenue share
Security-as-a-service offering.
We generated 6% of our revenues in 2022 and 3% of our revenues in
2021 from our SECaaS offering. While we continue to forecast
significant future expansion of our SECaas business, the growth of
our SECaaS recurring revenue model has been slower than originally
anticipated. We will need to expand the number of recurring
security revenue deals and the end user penetration within existing
customers to achieve the goals that we have set for our business.
This will involve a number of steps. Initially, we need to persuade
Communication Service Providers (CSPs) as to the benefits that
Allot Secure can offer them in terms of driving additional revenue.
Those CSPs, with our support, will then need to persuade their
customers, consumers and small and medium-sized businesses, to
subscribe for security services. We expect that we will need to
demonstrate the value that our services offer and add new features
to both (i) retain customers in the face of competition and (ii) to
capitalize on opportunities where CSPs currently using our
competitors’ products are considering a change. We face significant
challenges in growing our security business and our failure to do
so would adversely impact our future growth and prospects.
Our revenues and business may be adversely affected if we do not
effectively compete in the markets in which we operate, or expand
into new markets.
We compete against large companies in a rapidly evolving and highly
competitive sector of the networking technology and security
markets, which offer, or may offer in the future, competing
technologies, including partial or alternative solutions to
operators’ and enterprises’ challenges, and which, similarly to us,
intensely pursue the largest service providers (referred to as Tier
1 operators) as well as large enterprises. Our ability to
effectively compete in these markets may be limited since our
competitors may have greater financial resources, significant
market share and established relationships with operators and
distribution channels.
Our Deep Packet Inspection (DPI) technology enabled offerings face
significant competition from router and switch infrastructure
companies that integrate functionalities into their platforms,
addressing some of the same types of issues that our products are
designed to address.
Our security products are offered to operators and are deployed in
their networks, enabling them to provide security services to their
end customers. Such products face significant competition from
companies that directly offer to end customers security
applications to be installed on their devices; companies that
approach that directly offer cloud security products to the
business enterprise sector through distribution channels; and
companies that offer security products bundled with other products.
By offering our security products to operators that provide
security services to both business enterprises and individual end
customers, we aim to expand the reach of our products. However,
this business model may prove to be slower to market or less
effective than our competitors’ models, in which case our business
and growth prospects may be harmed.
Certain of our current direct competitors are substantially larger
than we are and have significantly greater financial, sales and
marketing, technical, manufacturing and other resources. As the
intelligent broadband solutions market has grown, including the
markets for DPI enabled solutions for mobile networks and for
security products, new competitors have entered and may continue to
enter the market. This competition has contributed to a slowing
growth of DPI bids for CSPs. Furthermore, our market is subject to
industry consolidation, as companies attempt to maintain or
strengthen their positions in our evolving industry. Some of our
current and potential competitors have made acquisitions or have
announced new strategic alliances designed to position them to
provide many of the same products and services that we provide to
both the service provider and enterprise markets, such as Procera’s
acquisition of Sandvine.
If our competitors announce new products, services or enhancements
that better meet the needs of customers or changing industry
requirements, offer alternative methods to achieve customer
objectives or implement faster go to market strategies, if our
business model proves less effective than those of our competitors,
if new competitors enter the market, or if industry consolidation
results in stronger competitors with wider range of product
offerings and greater financial resources, our ability to
effectively compete may be harmed, which could have a material
adverse effect on our business, financial condition or results of
operations.
In addition to enhancing our presence in existing markets, we will
need to continue to expand our global reach to enter new markets
and build local delivery and support teams to serve customers in
new territories.
Our revenues and business will be harmed if we do not keep pace
with changes in broadband applications, network security threats
and with advances in technology, or if we do not achieve widespread
market acceptance, including through significant investments.
We will need to invest heavily in the continued development of our
technology in order to keep pace with rapid changes in
applications, increased broadband network speeds, network security
threats and with our competitors’ efforts to advance their
technology. Our ability to develop and deliver effective product
offerings depends on many factors, including identifying our
customers’ needs, technical implementation of new services and
integration of our products with our customers’ existing network
infrastructure. While we plan to continue introducing innovative
products, we cannot provide any assurance that new products we
introduce will achieve the level of market acceptance that we
target. Designers of broadband applications and distributors of
various network security threats that our products identify, manage
or mitigate are using increasingly sophisticated methods to avoid
detection and management and/or mitigation by network
operators.
Even if our products successfully identify a particular
application, it is sometimes necessary to distinguish between
different types of traffic belonging to a single application.
Accordingly, we face significant challenges in ensuring that we
identify new applications and new versions of current applications
as they are introduced, without impacting network performance,
especially as networks become faster. This challenge is increased
as we seek to expand sales of our products to new geographic
territories because the applications vary from country to country
and region to region.
The network equipment market is characterized by rapid
technological progress, frequent new product introductions, changes
in customer requirements and evolving industry standards. To
compete, we need to achieve widespread market acceptance.
Alternative technologies could achieve widespread market acceptance
and displace the technology on which we have based our product
architecture. Our business and revenues will be adversely affected
if we fail to develop enhancements to our products, in order to
keep pace with changes in broadband applications, network security
threats and advances in technology. We can give no assurance that
our technological approach will achieve broad market acceptance or
that other technology or devices will not supersede our technology
and products.
Additionally, as the adoption of 5G continues to expand, we will
need to adapt the functionality of our products to comply with the
design and standards prescribed by the 3rd Generation Partnership
Project (the 3GPP Organization), which is responsible for the
industry standardization effort and requires significant
investment. Our business may be affected if we are unable to adapt
our existing products in a quick and timely manner or successfully
develop and introduce solutions supporting 5G networks. In
addition, in 4G/LTE networks, Allot provides a Traffic Detection
Function (TDF) element of the core network. According to the recent
network design specifications, published by the 3GPP Organization,
in 5G networks this TDF function will be merged within the User
Plane Function (UPF), which is provided by major NEP (Network
Equipment Provider) competitors. This change in network
architecture may jeopardize Allot’s ability to sell a standalone
TDF function, which may have a material adverse impact on our
business and financial results.
Our revenues and business from the enterprise market may be
adversely affected by new market and technology trends, including
public cloud adoption and the transition to 5G networks.
Our business from the enterprise market may depend on new market
and technology trends. For example, some enterprises are
implementing a new network architecture, transitioning their
datacenter infrastructure to public clouds (such as AWS, Azure, and
Google), in which most of the data traffic is sent directly to and
from the public cloud. In such designs, Allot’s products deployed
at the central location of the enterprise datacenter will have less
traffic capacity to manage and will provide only partial visibility
into the enterprise’s traffic. This may erode the value provided by
Allot’s solutions and reduce amount of revenues derived from the
enterprise market. Additionally, some enterprises might decide to
outsource their network operation to a public cloud, which would
diminish the need for Allot’s products. Due to these factors, we do
not anticipate additional growth in the enterprise market.
Our revenues and business may be adversely affected due to decline
in revenues and profits of CSPs.
A substantial amount of our revenues are currently generated from
CSPs. Many of these CSPs are facing declining revenues and profits
due to commoditization of the voice and data services they provide
and limited success in introduction of the new services for the
consumers. In addition, many CSPs are seeing a rise in operational
expenses due to the global energy crisis, which may affect their
budget allocation for new projects. This might impact their ability
to continue to purchase our products and services for the prices we
charge or will be unable to purchase these products and services
entirely. The outcome of such could result in a decline in our
revenues and profits and adversely affect our business.
The growth of aging receivables and a deterioration in the
collectability of these accounts could materially and adversely
affect our results of operations.
We provide for doubtful debts principally based upon the aging of
accounts receivable, in addition to collectability of specific
customer accounts, our history of doubtful debts, and the general
condition of the industry. As of December 31, 2022, we had past due
receivables of $10.1 million related to sales of our products to
resellers in two African countries and one Latin American country.
The revenue related to those sales was recognized in 2022 upon
signing the agreement with resellers and delivery of the products.
We subsequently learned that the cash flows of some of these
resellers were impacted by a failure to receive payments from end
customers which in turn affected their ability to meet the payment
terms to which they agreed with us. We have assessed as of the date
of this annual report on Form 20-F that these amounts remain
collectible; however, if the resellers fail to pay their debt, we
may ultimately be required to recognize some or all of these
amounts as bad debts and write them off. Any such outcome could
materially and adversely impact our results of operations and our
share price.
We depend on our network intelligence solutions for the substantial
majority of our revenues.
In the past few years, we have increased sales of our security
products. However, sales of our network intelligence solutions,
which provide service providers and governmental customers with
visibility and control of their networks, continue to account for a
major portion of our revenues, and accounted for 77% of our total
revenue in 2022. If we are unable to increase these sales, or
compensate for them by sales of security products, our business
will suffer. In addition, service providers may choose embedded or
integrated solutions using routers and switches from larger
networking vendors over a standalone solution that we offer. Any
factor adversely affecting our ability to sell, or the pricing of
or demand for, our network intelligence solutions would severely
harm our ability to generate revenues and could have a material
adverse effect on our business.
We depend on one or more significant customers and the loss of any
such significant customer or a significant decrease in business
from any such customer could harm our results of operations.
In 2022, we derived 8% of our total revenue from our largest
customer and 7% of our total revenue from our second largest
customer. In 2021, we derived 11% of our total revenue from our
largest customer and 9% of our total revenue from our second
largest customer. The loss of any significant customer or a
significant decrease in business from any such customer could have
a material adverse effect on our revenues, results of operations
and financial condition.
Sales of our products to large service providers can involve a
lengthy sales cycle, which may impact the timing of our revenues
and result in us expending significant resources without making any
sales.
We may incur significant expenses without generating any sales. As
of December 31, 2022, only 52% of our SECaaS sales contracts signed
by customers have generated revenues. Our management views
realization of revenue from signed contracts as a primary challenge
for our current business model and failure to do so could adversely
affect our profitability.
Beginning in late 2022, we shifted our primary sales strategy to
target large, strategic accounts, while implementing minimum
revenue thresholds or customer assurances for our small to medium
sized accounts. While we believe this new strategy will generate
greater revenue and help us achieve profitability sooner, it may
decrease our market share. Additionally, there is inherent risk in
implementing a new business plan successfully. If we are unable to
secure large, strategic accounts, the economic harm to our business
will be exacerbated due to this strategic shift.
Our sales cycles to large service providers, including carriers,
mobile operators and cable operators, are generally lengthy because
these end-customers consider our products to be critical equipment
and undertake significant testing to assess the performance of our
products within their networks. In particular, beginning in 2022,
DPI deals took longer to close than in the past, at least in part
due to macroeconomic conditions and tighter expense controls by
CSPs. Furthermore, many of our product and service arrangements
with our customers provide that the final acceptance of a product
or service may be specified by the customer. As a result, we often
invest significant time from initial contact with a large service
provider until it decides to incorporate our products into its
network, and we may not be able to recognize the revenue from a
customer until the acceptance criteria have been satisfied. We have
in the past, and may in the future, cancelled certain contracts
that we later anticipate are unlikely to launch projects and
generate revenues.
We may also expend significant resources in attempting to persuade
large service providers to incorporate our products into their
networks without success. Even after deciding to purchase our
products, the initial network deployment of our products by a large
service provider may last up to one year and in certain exceptional
instances up to two years. If a competitor succeeds in convincing a
large service provider to adopt that competitor’s product, it may
be difficult for us to displace the competitor because of the cost,
time, effort and perceived risk to network stability involved in
changing solutions.
In addition, in our deals based on a revenue share model (and
determined by the number of end subscribers using our solution),
the cycle from the upfront investments by our company and the
revenues stream, is very long.
The complexity and scope of the solutions we provide to larger
service providers are increasing, and such larger projects entail
greater operational risk and an increased chance of failure.
The complexity and scope of the solutions and services we provide
to larger service providers are increasing. The larger and more
complex such projects are, the greater the operational risks
associated with them. These risks include, but are not limited to,
the failure to meet all the requirements of service providers, the
failure to fully integrate our products into the service provider’s
network or with third-party products, our dependence on
subcontractors and partners and on effective cooperation with
third-party vendors for the successful and timely completion of
such projects. If we encounter any of these risks, we may incur
higher costs in order to complete the project and may be subject to
contractual penalties resulting in lower profitability. In
addition, the project may demand more of our management’s time than
was originally planned, and our reputation may be adversely
impacted.
Continued salary increases of research and development personnel
could adversely affect our ability to recruit such employees and
could have an adverse effect on our business and revenues.
The current ongoing increase in salaries of research and
development personnel could have an adverse effect on our ability
to recruit such suitable individuals as well as adversely affect
our ability to meet the ongoing research and development related
requirements of the market and our customers.
Risks Related to Our Technology and Products
Our technology faces challenges due to increased network
encryption.
Our DPI, analytics and security products rely on the ability to
read, understand and analyze the nature of Internet traffic. Due to
an increase in network encryption, our ability to read, understand
and analyze the traffic transmitted becomes impaired and may reduce
or eliminate our ability to provide our customers with the
classification of the traffic and the necessary tools and
capabilities that they might require.
We need to continue to increase the functionality of our products
and offer additional features and products to maintain or increase
our profitability.
The commoditization of DPI technology and the introduction of
competitive features and services may result in a decrease of the
average sale prices of our DPI technology enabled products.
The market in which we operate is highly competitive and unless we
continue to enhance the functionality of our products, add
additional features and offer additional products, our
competitiveness may be harmed.
We seek to offset this risk by enhancing our products by offering
higher system speeds, additional features, such as advanced Quality
of Experience (QoE) management functionality, and support for
additional applications and enhanced reporting tools. We also
continuously endeavor to assure our solutions comply with
contemporary network and software architectures such as, but not
limited to, virtualized network services (NFV), containerized
deployments and 5G networks compliance.
Our products offer customers additional tools to increase the
efficiency of their networks or to help them offer additional
services to their end customers and derive additional revenues from
their end customers. The industry and market for our products are
still developing and are affected, among others, by trends and
changes in internet broadband traffic, including changes in methods
used by various content providers and broadband applications and
evolution of network security threats.
We cannot provide any assurance that demand for our additional
features and products will continue or grow, or that we will be
able to generate revenues from such sales at the levels we
anticipate or at all. Any inability to sell or maintain our
additional features and products may lead to commercial disputes
with our customers and increased spending on technical solutions,
any of which may negatively impact our results of operations.
A failure of our products may adversely affect the operation of our
customers’ live networks or the quality and scope of service to our
customers and their end users, including, specifically with regard
to security protection which could harm our reputation, brand
position, and financial condition.
Our products are, generally, installed in line as part of our
customers’ networks and provide a wide range of services that our
customers may offer to their own customers. We endeavor to avoid
any interruption to the regular operation of our customers’
networks, any reduction of quality of services or failure to
provide the quality and/or scope of services to users, including,
by performing certain tasks during predetermined maintenance
windows, and implementing a system bypass, in the event of
malfunctions. In addition, we offer security protection services
offered by our customers to their end users at a certain level and
terms of performance. However, in certain cases, a failure of our
products or failure of our products to perform in accordance with
the performance levels to which we may be committed, may result in
our customers experiencing loss of functionality, denial of service
and access, interruption of live traffic on our customers’
networks, loss of security protection or inability to provide
similar services to our customers’ end users. Such failure of our
products, may cause disputes with our customers, adversely affect
our reputation, lead to loss of revenues and potential legal
exposure.
Our products are highly technical and any undetected software or
hardware errors in our products could have a material adverse
effect on our operating results.
Our products are complex and are incorporated into broadband
networks, which are a major source of revenue for service providers
and support critical applications for subscribers and enterprises.
Due to the highly technical nature of our products and variations
among customers’ network environments, we may not detect product
defects until our products have been fully deployed in our
customers’ networks. Regardless of whether warranty coverage exists
for a product, we may be required to dedicate significant technical
resources to repair any defects. If we encounter significant
errors, we could experience, among other things, loss of major
customers, cancellation of orders, increased costs, delay in
recognizing revenues and damage to our reputation. We could also
face claims for product liability, tort or breach of warranty.
Defending a lawsuit, regardless of its merit, is costly and may
divert management’s attention. In addition, if our business
liability insurance is inadequate or future coverage is unavailable
on acceptable terms or at all, our financial condition could be
harmed.
Demand for our DPI technology enabled products depends, in part, on
the rate of adoption of bandwidth-intensive broadband applications,
and the impact multiple applications may have on network
speed.
Our DPI technology enabled products are used by service providers
and enterprises to monitor and manage bandwidth-intensive
applications that cause congestion in broadband networks and impact
the quality of experience for users. Demand for our products is
driven particularly by growth in applications, which are highly
sensitive to network delays and therefore require efficient network
management. If the rapid growth in the adoption of such
applications does not continue, the demand for our products may be
adversely impacted.
Demand for our security products depends, in part, on continued
evolution of on-line threats as well as on operators’ interest in
providing security services to their end customers.
Our security products are used by service providers to offer
security services to their end customers, comprising both business
enterprises as well as individual end customers. The demand for
these services depends highly on continued evolution and increase
of online threats. In the event that such threats decrease, that
end customers are unwilling to incur the costs of security services
and/or that ISPs do not continue to pursue security services to
their end customers as a revenue source, demand for our security
products may be materially adversely impacted.
Risks Related to Our Dependence on Third Parties
We depend on third parties to market, sell, and install our
products and to provide initial technical support for our products
for a material portion of our business.
We depend on third-party channel partners, such as distributors,
resellers, original equipment manufacturers (OEMs), and system
integrators, to market and sell a material portion of our products
to end-customers. In 2022, approximately 58% of our revenues were
derived from channel partners. In some cases, our channel partners
are also responsible for installing and providing initial customer
support for our products, with our continuous technical assistance.
In the majority of the cases, the partners are responsible for the
initial customer support (Tier 1 support), while we act as the
escalation level. As a result, we depend on the ability of our
channel partners to successfully market and sell our products to
these end-customers. We can give no assurance that our channel
partners will market our products effectively, receive and fulfill
customer orders for our products on a timely basis or continue to
devote the resources necessary to provide us with effective sales,
marketing and technical support. In addition, our channel partners
may experience disruptions in, or be prevented from, conducting
business activities as a result of macroeconomic factors, which
could have a material adverse effect on our results of operations.
Any failure by our channel partners to provide adequate initial
support to end-customers could result in customer dissatisfaction
with us or our products, which could result in a loss of customers,
harm our reputation and delay or limit market acceptance of our
products. Our products are complex and it takes time for a new
channel partner to gain experience in the operation and
installation of these products. Therefore, it may take a long
period of time before a new channel partner can successfully
market, sell and support our products if an existing channel
partner ceases to sell our products. Additionally, our agreements
with channel partners are generally not exclusive and our channel
partners may market and sell products that compete with our
products. Our agreements with our distributors and resellers are
usually for an initial one-year term and following the expiration
of this term, can be terminated by either party. We can give no
assurance that these agreements will continue to remain in effect.
If we are unable to maintain our relationships with existing
channel partners and to develop relationships with new channel
partners in key markets our profitability and results of operations
may be materially adversely affected.
We integrate into or bundle various third-party solutions with our
products and may integrate or offer additional third-party
solutions in the future. If we lose the right to use such
solutions, our sales could be disrupted and we would have to spend
additional capital to replace such components.
We integrate various third-party solutions into our products and
offer third-party solutions bundled with our products. We may
integrate or offer additional third-party solutions in the future.
Sales of our products could be disrupted if such third-party
solutions were either no longer available to us or no longer
offered to us on commercially reasonable terms. In either case, we
would be required to spend additional capital to either source
alternative third-party solutions, redesign our products to
function with alternate third-party solutions or develop substitute
components ourselves. As a result, our sales may be delayed and/or
adversely affected and we might be forced to limit the features
available in our current or future product offerings, which could
have a material adverse effect on our business.
We currently depend on a limited number of subcontractors to
integrate, assemble, store and service, as well as provide hardware
and warranty support for, our Service Gateway platform. If any one
of these subcontractors experiences delays, disruptions, quality
control problems or a loss in capacity, our operating results could
be adversely affected.
We currently depend on a limited number of subcontractors, such as
Flex (Israel) Ltd. (previously Flextronics (Israel) Ltd.), Malam
Team and Arrow Electronics, to integrate, assemble, test, store,
package and prepare for shipment our various Service Gateway,
Network Management and Enterprise platforms. If any of these
subcontractors experience delays, disruptions or quality control
problems in manufacturing or integrating our products or if we fail
to effectively manage our relationships with them, product
shipments may be delayed and our ability to deliver certain
products to customers could be adversely affected.
Certain hardware and software components for our products come from
single or limited sources and we could lose sales if these sources
fail to satisfy our supply requirements or if our customers refuse
to implement components from certain sources.
We obtain certain hardware components used in our products from
single or limited sources.
Although such hardware components are off-the-shelf items, because
our systems have been designed to incorporate these specific
hardware components, any change to these components due to an
interruption in supply chains or our inability to obtain such
components on a timely basis may require engineering changes to our
products before substitute hardware components could be
incorporated. Such changes could be costly and could result in lost
sales particularly to our traffic management systems. The
agreements with our suppliers do not contain any minimum supply
commitments. If we or our contract manufacturers fail to obtain
components in sufficient quantities when required, our business
could be harmed.
We obtain certain software components of our security products from
a few limited sources, depending primarily on our customers’
preferences. In the event that we are no longer able to source such
software components from a particular source, and our customers
refuse to implement components from our alternative sources, we may
be required to identify an alternative source from which we do not
currently acquire such software or develop such software ourselves.
This may result in disputes with our customers and/or cancellation
or delay of orders, which may materially adversely affect our
business.
Our suppliers also sell products to our competitors and may enter
into exclusive arrangements with our competitors, stop selling
their products or components to us at commercially reasonable
prices or refuse to sell their products or components to us at any
price. Our inability to obtain sufficient quantities of
single-source or limited-sourced components or to develop
alternative sources for components or products would harm our
ability to maintain and expand our business.
Legal, Regulatory and Compliance Risks
We are subject to certain regulatory regimes that may affect the
way that we conduct business internationally, and our failure to
comply with applicable laws and regulations could materially
adversely affect our reputation and result in penalties and
increased costs.
We are subject to a complex system of laws and regulations related
to international trade, including economic sanctions and export
control laws and regulations. We also depend on our distributors
and agents outside of Israel for compliance and adherence to local
laws and regulations in the markets in which they operate. It is
our policy not to make direct or indirect prohibited sales of our
products, including into countries sanctioned under laws to which
we are subject, and to contractually limit the territories into
which our channel partners may sell our products. None of our
contracts with channel partners authorize or contemplate any
activities with sanctioned countries, and we do not intend to
authorize any channel partner to engage in activities with those
countries in the future. Nevertheless, over ten years ago one of
our channel partners sold certain of our products (designed for the
enterprise market) outside of its contractually designated
territory, including into a sanctioned country, and we subsequently
determined that our contract management protocol for authorizing
channel partner sales was not adequately followed in that instance.
Although we are not aware of any channel partner making indirect
sales to entities or individuals in sanctioned countries in 2022,
there is no guarantee that our channel partners will not make such
indirect sales in the future, which could result in material
adverse impact on our reputation and lead to penalties and
increased costs. Though we have not had a material impact to date,
we can provide no assurance that new or existing measures will not
have a material impact in the future.
We are also subject to the U.S. Foreign Corrupt Practices Act and
may be subject to similar worldwide anti-bribery laws that
generally prohibit companies and their intermediaries from making
improper payments to government officials for the purpose of
obtaining or retaining business. Some of the countries in which we
operate have experienced governmental corruption to some degree
and, in certain circumstances, strict compliance with anti-bribery
laws may conflict with local customs and practices. Despite our
compliance and training programs, we cannot be certain that our
procedures will be sufficient to ensure consistent compliance with
all applicable international trade and anti-corruption laws, or
that our employees or channel partners will strictly follow all
policies and requirements to which we subject them. Any alleged or
actual violations of these laws may subject us to government
scrutiny, investigation, debarment, and civil and criminal
penalties, which may have an adverse effect on our results of
operations, financial condition and reputation.
As with many DPI products, some of our products may be used by
governmental or law enforcement customers in a manner that is, or
that is perceived to be, incompatible with human rights.
We cannot always verify whether our customers are using our
products in a lawful or ethical manner. It is possible that some of
our governmental or law enforcement customers have used our
products in a manner that is incompatible with, or that is
perceived to be incompatible with, human rights. In some
circumstances, governmental customers may desire to surveil their
citizenry and may use our products to achieve those ends. For
example, some foreign governments use internet infrastructure to
undermine democratic values through surveillance of and control
over online communications between political activists. Any misuse
of our products by our governmental or law enforcement customers,
or allegations of misuse, may damage our reputation, business and
results of operations.
Demand for our products may be impacted by government regulation of
the internet and telecommunications industry.
Service providers are subject to government regulation in a number
of jurisdictions in which we sell our products. There are several
existing regulations and proposals in the United States, Europe and
elsewhere for regulating service providers’ ability to prioritize
applications in their networks. Some advocates for regulating this
industry claim that collecting premium fees from certain
“preferred” applications would distort the market for Internet
applications in favor of larger and better-funded content
providers. They also claim that this would impact end-users who
already purchased broadband access only to experience response
times that differ based on content provider. Some opponents believe
that content providers who support bandwidth-intensive applications
should be required to pay service providers a premium in order to
support further network investments.
On December 14, 2017, the United States Federal Communications
Commission (the “FCC”) announced that it voted to repeal the Open
Internet Report and Order on Remand, Declaratory Ruling, and Order
(the Open Internet Order). The Open Internet Order was issued by
the FCC and went into effect on June 12, 2015. The Open Internet
Order set forth rules, grounded, among others, on Title II of the
Communications Act of 1934; the Open Internet Order regulated both
fixed and mobile Internet Service Providers (ISPs) and prohibited
them, subject to reasonable network management, from blocking
and/or throttling of lawful content, applications, services, or
non-harmful devices, and from unreasonably interfering or
disadvantaging of (i) end users’ ability to select, access service
of the lawful Internet content, applications, services, or devices
of their choice or (ii) edge providers’ ability to make lawful
content, applications, services, or devices available to end users.
The Open Internet Order also prohibited paid prioritization of
content. The repeal largely reversed the Open Internet Order,
including the classification of broadband Internet service as a
telecommunications service, which is subject to certain common
carrier regulations, and restored the regulatory framework that
preceded the Open Internet Order. Because our products allow ISPs
to identify network traffic and facilitate traffic management, the
reinstatement of this traditional regulatory framework has not, to
date, affected but may in the future affect ISP’s demand for
certain of our products. The repeal of the Open Internet Order was
upheld by a federal appeals court in October 2019, however, the
repeal does not preclude state and local governments from enacting
their own net neutrality rules and certain U.S. states have already
implemented net neutrality protections which could impact our
operations.
On April 30, 2016, Regulation (EU) 2015/2120 of the European
Parliament and of the Council came into effect, setting forth the
first EU-wide Net Neutrality (“Open Internet”) rules. Under these
rules, blocking, throttling and discrimination of internet traffic
by ISPs is prohibited in the EU, with three exceptions: (i)
compliance with legal obligations; (ii) integrity of the network;
and (iii) congestion management in exceptional and temporary
situations. Outside these exceptions, there can be no
prioritization of traffic within an internet access service.
However, equal treatment permits reasonable day-to-day traffic
management according to objectively justified technical
requirements, and which must be independent of the origin or
destination of the traffic and of any commercial considerations.
These rules also allow internet access providers, as well as
content and applications providers, to offer special services with
specific quality requirements (provided the Open Internet is not
negatively affected by the provision of these services). Such
specialized services cannot be a substitute to internet access
services can only be provided if there is sufficient network
capacity to provide them in addition to any internet access service
and must not be to the detriment of the availability or general
quality of internet access services for end-users.
Such regulation of both fixed and mobile ISPs, in European Economic
Area (EEA) Member States, may limit ISPs’ ability to manage,
prioritize and monetize their network. Additionally, these
regulations may attract growing public debate and attention of
regulators in other jurisdictions we operate in. Demand from
service providers, in affected jurisdictions, for the traffic
management and subscriber management features of our products may
be adversely affected by such regulations. To date, we have not
experienced any material decrease in demand for these features;
however, a decrease in demand in the future could adversely impact
sales of our products and could have a material adverse effect on
our business, financial condition or results of operations.
Our failure to comply with data privacy laws may expose us to
reputational harm and potential regulatory actions and fines.
Strict data privacy laws regulating the collection, transmission,
storage and use of employee data and consumers’
personally-identifying information applicable to ISPs are evolving
in the US, European Union and other jurisdictions in which we sell
our products. For example, in the US, legislation has in recent
years been proposed regarding restrictions on the use of
geolocation information collected by mobile devices without
consumer consent and California’s California Consumer Privacy Act,
which grants expanded rights to access and delete personal
information and opt out of certain personal information sharing,
among other things, became effective on January 1, 2020. Similarly,
the General Data Protection Regulation (“GDPR”), enforcement of
which began on May 25, 2018, creates a range of new compliance
obligations, increases financial penalties for non-compliance and
extends the scope of the EU data protection law to all companies
established in the EEA, and all companies established outside the
EEA that either: (a) offer goods or services to individuals in the
EEA; or (b) monitor the behavior of individuals in the EEA. The
GDPR imposes a strict data protection compliance regime and
includes enhanced rights for individuals. It applies to the
collection, use, retention, security, processing, transfer and
deletion of personally identifiable information of individuals, and
creates a range of new compliance obligations. Implementation of,
and compliance with, the GDPR has increased, and could continue to
increase, our cost of doing business. In addition, the GDPR may be
interpreted or applied in a manner that is unforeseen by, or
adverse to, us. Violations of the GDPR may result in significant
fines (up to four percent of worldwide annual turnover or EUR 20.0
million, whichever is greater) and reputational harm. Such
regulations have increased our compliance and administrative burden
significantly and require us to invest resources and management
attention in order to update our IT systems to meet the new
requirements, including those related to recordkeeping of personal
identifiable information and segregation of duties.
The GDPR and other privacy and data protection laws may be
interpreted and applied differently from country to country and may
create inconsistent or conflicting requirements. Such regulations
increase our customers’ compliance and administrative burden
significantly and may require us to adapt certain of our products,
as well as our support and maintenance services, if necessary, to
different requirements in EEA Member States, as well as in the US,
in order to allow our customers in such jurisdictions, to comply
with such regulations. There is also no assurance that we will be
able to adapt our products and/or our support and maintenance
services sufficiently in order to allow our customers in various
jurisdictions to comply with such regulatory requirements in each
jurisdiction.
As data protection and privacy-related laws and regulations
continue to evolve, these changes may result in increased
regulatory and public scrutiny, escalating levels of enforcement
and sanctions and increased costs of compliance. Therefore, we may
be required to modify the features and functionalities of certain
of our products, in a manner that is less attractive to customers.
Such adjustments of our products, if required, may require
extensive financial investments and may take long periods of time,
leading to delay in sales cycles, deployment of our products and
recognition of related revenues. Furthermore, we may be required to
adjust the geographical and operational structure of our Customer
Success department, if required, and this may entail extensive
financial investments in providing support and maintenance
services.
Risks Related to Our Intellectual Property and Proprietary
Information
If we are unable to successfully protect the intellectual property
embodied in our technology, our business could be materially
adversely affected.
Know-how relating to networking protocols, building carrier-grade
systems, identifying applications and developing and maintaining
security products is an important aspect of our intellectual
property. It is our practice to have our employees sign appropriate
non-compete agreements when permitted under applicable law. These
agreements prohibit our employees who cease working for us from
competing directly with us or working for our competitors for a
limited period of time. The enforceability of non-compete clauses
in certain jurisdictions in which we operate may be limited. Under
the current laws of some jurisdictions in which we operate, we may
be unable to enforce these agreements and it may thereby be
difficult for us to restrict our competitors from gaining the
expertise our former employees gained while working for us.
Further, to protect our know-how, we customarily require our
employees, distributors, resellers, software testers and
contractors to execute confidentiality agreements or agree to
confidentiality undertakings when their relationship with us
begins. Typically, our employment contracts also include clauses
regarding assignment of intellectual property rights for all
inventions developed by employees and non-disclosure of all
confidential information. We cannot provide any assurance that the
terms of these agreements are being observed and will be observed
in the future. Because our product designs and software are stored
electronically and thus are highly portable, we attempt to reduce
the portability of our designs and software by physically
protecting our servers through the use of closed networks, which
prevent external access to our servers. We cannot be certain,
however, that such protection will adequately deter individuals or
groups from wrongfully accessing our technology. Monitoring
unauthorized use of intellectual property is difficult and some
foreign laws do not protect proprietary rights to the same extent
as the laws of the United States. We cannot be certain that the
steps we have taken to protect our proprietary information will be
sufficient. In addition, to protect our intellectual property, we
may become involved in litigation, which could result in
substantial expenses, divert the attention of management, or
materially disrupt our business, all of which could adversely
affect our revenue, financial condition and results of
operations.
We also aim to protect our intellectual property with patent
protection. As of December 31, 2022 we had a patent portfolio
consisting of 28 patent families, including 32 issued U.S. patents,
2 U.S. patents that have recently been allowed but not issued, 3
reissued U.S. patents 2 pending U.S. patent applications, and 30
patents issued in Canada, Israel and several European
jurisdictions. There can be no assurance that:
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current or future U.S. or foreign patents applications will be
approved;
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our issued patents will protect our intellectual property and
not be held invalid or unenforceable if challenged by
third-parties;
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we will succeed in protecting our technology adequately in all
key jurisdictions in which we or our competitors operate;
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the patents of others will not have an adverse effect on our
ability to do business; or
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others will not independently develop similar or competing
products or methods or design around any patents that may be issued
to us.
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Any failure to obtain patents, inability to obtain patents with
claims of a scope necessary to cover our technology or the
invalidation of our patents may weaken our competitive position and
may adversely affect our revenues.
We use certain “open source” software tools that may be subject to
intellectual property infringement claims, the assertion of which
could impair our product development plans, interfere with our
ability to support our clients or require us to pay licensing
fees
Certain of our products contain open source code, and we may use
more open source code in the future. Open source code is the type
of code that is covered by a license agreement that permits the
user to copy, modify and distribute the software without cost,
provided that users and modifiers abide by certain licensing
requirements. The original developers of the open source code
provide no warranties on such code. As a result of our use of open
source software, we could be subject to suits by parties claiming
ownership of what we believe to be open source code, and we may
incur expenses in defending claims that we did not abide by the
open source code license. If we are not successful in defending
against such claims, we may be subject to monetary damages or be
required to remove the open source code from our products. Such
events could disrupt our operations and the sales of our products,
which would negatively impact our revenues and cash flow. In
addition, under certain conditions, the use of open source code to
create derivative code may obligate us to make the resulting
derivative code available to others at no cost. If we are required
to publicly disclose the source code for such derivative products
or to license our derivative products that use an open source
license, our previously proprietary software products would be
available to others, including our customers and competitors
without charge. While we endeavor to ensure that no open source
software is used in a way which may require us to disclose the
source code to our related product, such use could inadvertently
occur. If we were required to make our software source code freely
available, our business could be seriously harmed. The use of such
open source code may ultimately subject some of our products to
unintended conditions so that we are required to take remedial
action that may divert resources away from our development
efforts.
Disruption to our IT systems could adversely affect our reputation
and have a material adverse effect on our business and results of
operations.
Risks related to cybersecurity and privacy, including the
activities of criminal hackers, hacktivists, state-sponsored
intrusions, industrial espionage, employee malfeasance and human or
technological error, are constantly evolving. Computer hackers and
others routinely attempt to breach the security of companies,
governmental agencies, technology products, services and
systems.
Our IT systems contain personal, financial and other information
that is entrusted to us by our customers and employees as well as
financial, proprietary and other confidential information related
to our business, and we rely on said systems to manage our
business, operations and research and development. If these IT
systems are compromised as a result of cyber-attacks or
cyber-related incidents, it could result in the loss or
misappropriation of sensitive data or other disruption to our
operations. Although we have a cybersecurity program designed to
protect and preserve the integrity of our information technology
systems, we have experienced and expect to continue to experience
cyber-attacks of our IT systems or networks (such as limited
phishing, ransomware and malware activities identified by us in the
past, which were mitigated). Although none of these cyber-attacks
nor breaches that have been of a minor nature, has had a material
effect on our operations or financial condition, due to our
security measures and awareness, we cannot guarantee that any such
incidents would not materially harm our business in the
future.
If our IT systems are compromised as a result of cyber-attacks or
cyber-related incidents, it could result in the loss or
misappropriation of sensitive data or other disruption to our
operations. It could also disrupt our electronic communications
systems and thus our ability to conduct our business operations,
our ability to process customer orders and electronically deliver
products and services and our distribution channels.
Additionally, as a provider of network intelligence and security
solutions for mobile and fixed service providers, an actual or
perceived cyber-attack, breach of security or theft of personal
data store by us, regardless of whether the cyber-attack, breach or
theft is attributable to the failure of our products, could
adversely affect the market’s perception of the efficacy of our
solutions, and current or potential customers may look to our
competitors for alternative solutions. A breach of our systems may
also lead defects and security vulnerabilities to be introduced
into our software, thereby damaging the reputation and perceived
reliability and security of our products and services and
potentially making the data systems of our customers vulnerable to
further data loss and cyber incidents.
Despite our investments in risk prevention and contingencies, data
protection, prevention of intrusions, access control systems and
other security measures, we can provide no assurance that our
current IT systems are fully protected against third-party
intrusions, viruses, hacker attacks, information or data theft or
other similar threats. Any such security breach, whether actual or
alleged, could result in system disruptions or shutdowns and/or
destruction, alteration, theft or unauthorized disclosure of
confidential information. Even when an actual or attempted security
breach is detected, the full extent of the breach may not be
determined for some time. An increasing number of companies have
disclosed security breaches of their IT systems and networks, some
of which have involved sophisticated and highly targeted attacks.
We believe such incidents are likely to continue, and we are unable
to predict the direct or indirect impact of these future attacks on
our business.
We may be subject to claims of intellectual property infringement
by third parties that, regardless of merit, could result in
litigation and our business, operating results or financial
condition could be materially adversely affected.
There can be no assurance that we will not receive communications
from third parties asserting that our products and other
intellectual property infringe, or may infringe their proprietary
rights. We are not currently subject to any proceedings for
infringement of patents or other intellectual property rights and
are not aware of any parties that intend to pursue such claims
against us except for an initial approach from a competitor
asserting a potential infringement which we strongly refute. Any
such claim, regardless of merit, could result in litigation, which
could result in substantial expenses, divert the attention of
management, cause significant delays and materially disrupt the
conduct of our business. As a consequence of such claims, we could
be required to pay substantial damage awards, develop
non-infringing technology, enter into royalty-bearing licensing
agreements, stop selling our products or re-brand our products. If
it appears necessary, we may seek to license intellectual property
that we are alleged to infringe. Such licensing agreements may not
be available on terms acceptable to us or at all. Litigation is
inherently uncertain and any adverse decision could result in a
loss of our proprietary rights, subject us to significant
liabilities, require us to seek licenses from others and otherwise
negatively affect our business. In the event of a successful claim
of infringement against us and our failure or inability to develop
non-infringing technology or license the infringed or similar
technology, our business, operating results or financial condition
could be materially adversely affected.
Risks Related to Our Ordinary Shares
The share price of our ordinary shares has been and may continue to
be volatile.
The market price of our ordinary shares has been volatile in the
past and may continue to be volatile. Our quarterly financial
performance is likely to vary in the future, and may not meet our
expectations or the expectations of analysts or investors, which
may lead to additional volatility in our share price. Many factors
could cause the market price of ordinary shares to fluctuate
substantially, including, but not limited to:
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announcements or introductions of technological innovations,
new products, product enhancements or pricing policies by us or our
competitors;
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winning or losing contracts with service providers;
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disputes or other developments with respect to our or our
competitors’ intellectual property rights;
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announcements of strategic partnerships, joint ventures,
acquisitions or other agreements by us or our competitors;
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recruitment or departure of key personnel;
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regulatory developments in the markets in which we sell our
products;
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our future repurchases, if any, of our ordinary shares
pursuant to our current share repurchase program and/or any other
share repurchase program which may be approved in the future;
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our sale of ordinary shares or other securities;
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changes in the estimation of the future size and growth of our
markets;
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market conditions in our industry, the industries of our
customers and the economy as a whole;
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a failure to meet publicly announced guidance or other
expectations; or
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equity awards to our directors, officers and employees.
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Share price fluctuations may be exaggerated if the trading volume
of our ordinary shares is too low. The lack of a trading market may
result in the loss of research coverage by securities analysts.
Moreover, we can provide no assurance that any securities analysts
will initiate or maintain research coverage of our company and our
ordinary shares. If our future quarterly operating results are
below the expectations of securities analysts or investors, the
price of our ordinary shares would likely decline. Securities class
action litigation has often been brought against companies
following periods of volatility.
Our shareholders do not have the same protections afforded to
shareholders of a U.S. company because we have elected to use
certain exemptions available to foreign private issuers from
certain corporate governance requirements of the Nasdaq Stock
Market (“Nasdaq”).
As a foreign private issuer, we are permitted under Nasdaq Rule
5615(a)(3) to follow Israeli corporate governance practices instead
of Nasdaq requirements that apply to U.S. companies. As a condition
to following Israeli corporate governance practices, we must
disclose which requirements we are not following and describe the
equivalent Israeli law requirement. We must also provide Nasdaq
with a letter from our Israeli outside counsel, certifying that our
corporate governance practices are not prohibited by Israeli law.
As a result of these exemptions, our shareholders do not have the
same protections as are afforded to shareholders of a U.S.
company.
We currently follow Israeli home country practices with regard to
the quorum requirement for shareholder meetings and shareholder
approval of equity compensation plans requirements. As permitted
under the Israeli Companies Law, 5759-1999, or the Companies Law,
our articles of association provide that the quorum for any meeting
of shareholders shall be the presence of at least two shareholders
present in person or by proxy who hold at least 25% of the voting
power of our shares instead of 33% of our issued share capital (as
prescribed by Nasdaq’s rules). We do not seek shareholder approval
for (i) equity compensation plans in accordance with the
requirements of the Companies Law, which does not reflect the
requirements of Rule 5635(c), (ii) the issuance of securities that
would result in a change of control, which does not reflect the
requirements of Rule 5635(b), and (iii) certain private issuances
of securities representing more than 20% of our outstanding shares
or voting power at below market prices, which does not reflect the
requirements of Rule 5635(b).
In the future, we may also choose to follow Israeli corporate
governance practices instead of Nasdaq requirements with regard to,
among other things, the composition of our board of directors,
compensation of officers, director nomination procedures and quorum
requirements at shareholders’ meetings. In addition, we may choose
to follow Israeli corporate governance practice instead of Nasdaq
requirements to obtain shareholder approval for certain dilutive
events. Accordingly, our shareholders may not be afforded the same
protection as provided under Nasdaq corporate governance rules.
Following our home country governance practices, as opposed to the
requirements that would otherwise apply to a U.S. company listed on
Nasdaq, may provide less protection than is accorded to investors
of domestic issuers. See “ITEM 16G: Corporate Governance.”
As a foreign private issuer, we are not subject to the provisions
of Regulation FD or U.S. proxy rules and are exempt from filing
certain Exchange Act reports.
As a foreign private issuer, we are exempt from the rules and
regulations under the Exchange Act related to the furnishing and
content of proxy statements, and our officers, directors and
principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of
the Exchange Act. In addition, we are not required under the
Exchange Act to file annual and current reports and financial
statements with the SEC as frequently or as promptly as U.S.
domestic companies whose securities are registered under the
Exchange Act. We are permitted to disclose limited compensation
information for our executive officers on an individual basis and
we are generally exempt from filing quarterly reports with the SEC
under the Exchange Act. Moreover, we are not required to comply
with Regulation FD, which restricts the selective disclosure of
material nonpublic information to, among others, broker-dealers and
holders of a company’s securities under circumstances in which it
is reasonably foreseeable that the holder will trade in the
company’s securities on the basis of the information. These
exemptions and leniencies reduce the frequency and scope of
information and protections to which you may otherwise have been
eligible in relation to a U.S. domestic issuer.
We would lose our foreign private issuer status if (a) a majority
of our outstanding voting securities were either directly or
indirectly owned of record by residents of the United States and
(b) either (i) a majority of our executive officers or directors
were United States citizens or residents, (ii) more than 50% of our
assets were located in the United States or (iii) our business were
administered principally in the United States. Our loss of foreign
private issuer status would make U.S. regulatory provisions
mandatory. The regulatory and compliance costs to us under U.S.
securities laws as a U.S. domestic issuer may be significantly
higher. If we are not a foreign private issuer, we will be required
to file periodic reports and registration statements on U.S.
domestic issuer forms with the SEC, which are more detailed and
extensive than the forms available to a foreign private issuer. We
would also be required to follow U.S. proxy disclosure
requirements, including the requirement to disclose, under U.S.
law, more detailed information about the compensation of our senior
executive officers on an individual basis. We may also be required
to modify certain of our policies to comply with accepted
governance practices associated with U.S. domestic issuers. Such
conversion and modifications will involve additional costs. In
addition, we would lose our ability to rely upon exemptions from
certain Nasdaq corporate governance requirements that are available
to foreign private issuers.
Certain U.S. holders of our ordinary shares may suffer adverse tax
consequences if we or any of our non-US subsidiaries are
characterized as a “controlled foreign corporation,” or a CFC,
under Section 957(a) of the Internal Revenue Code of 1986, as
amended (the “Code”).
A non-U.S. corporation is considered a CFC if more than 50% of (1)
the total combined voting power of all classes of stock of such
corporation entitled to vote, or (2) the total value of the stock
of such corporation, is owned, or is considered as owned by
applying certain constructive ownership rules, including certain
downward attribution rules by United States shareholders who each
own stock representing 10% or more of the vote or 10% or more of
the value on any day during the taxable year of such non-U.S.
corporation (“10% U.S. Shareholder”). Because our group includes
one or more U.S. subsidiaries, certain of our non-U.S. subsidiaries
will be treated as CFCs (regardless of whether or not we are
treated as a CFC). Generally, 10% U.S. Shareholders of a CFC are
required to report annually and include currently in its U.S.
taxable income such 10% U.S. Shareholder’s pro rata share of the
CFC’s “Subpart F income,” “global intangible low-taxed income,” and
investments in U.S. property by CFCs, regardless of whether we make
an actual distribution to such shareholders. “Subpart F income”
includes, among other things, certain passive income (such as
income from dividends, interests, royalties, rents and annuities or
gain from the sale of property that produces such types of income)
and certain sales and services income arising in connection with
transactions between the CFC and a person related to the CFC.
Any individual that is a 10% U.S. Shareholder with respect to a CFC
generally would not be allowed certain tax deductions or foreign
tax credits that would be allowed to a 10% U.S. Shareholder that is
a U.S. corporation. Failure to comply with these reporting
obligations may subject a 10% U.S. Shareholder to significant
monetary penalties and may prevent the statute of limitations with
respect to such shareholder’s U.S. federal income tax return for
the year for which reporting was due from starting. We cannot
provide any assurances that we will assist investors in determining
whether any of our non-U.S. subsidiaries is treated as a CFC or
whether any investor is treated as a 10% U.S. Shareholder with
respect to any such CFC or furnish to any 10% United States
shareholders information that may be necessary to comply with the
aforementioned reporting and tax payment obligations. A United
States investor should consult its tax advisors regarding the
potential application of these rules to an investment in our
ordinary shares.
Your percentage ownership in the Company may be diluted in the
future because of equity awards that have been, or may be, granted
to our directors, officers and employees.
We have adopted equity compensation plans that provide for the
grant of equity-based awards, including restricted units and share
options to our directors, officers, and other employees. As of
February 20, 2023, we had 2,633,616 options and restricted units
outstanding to employees and directors of the Company, and there
were 1,239,744 shares available for future awards under our equity
compensation plans. The vesting of restricted units and granting of
share options are generally contingent upon performance and/or
service conditions. Vesting of those shares of restricted units and
share would dilute the ownership interest of existing shareholders.
Equity awards will continue to be a source of compensation for
employees and directors going forward.
We may fail to meet our publicly announced guidance or other
expectations about our business, which could cause our share price
to decline.
We may provide from time to time guidance regarding our expected
financial and business performance. Correctly identifying key
factors affecting business conditions and predicting future events
is inherently an uncertain process, and our guidance may not
ultimately be accurate and has in the past been inaccurate in
certain respects. Our guidance is based on certain assumptions such
as those relating to anticipated production and sales volumes
(which generally are not linear throughout a given period), average
sales prices, and supplier and commodity costs. If our guidance
varies from actual results due to our assumptions not being met or
the impact on our financial performance that could occur as a
result of various risks and uncertainties, the market value of our
ordinary shares could decline significantly.
Risks Relating to our Indebtedness and Capital Structure
The issuance of ordinary shares upon conversion of the Note (as
defined below) could substantially dilute your investment and could
impede our ability to obtain additional financing.
On February 18, 2022, we issued to Lynrock Lake Master Fund LP a
senior unsecured promissory note in an aggregate principal amount
of $40 million (the “Note”). The Note is convertible into our
ordinary shares at an initial conversion rate of 97.0874 ordinary
shares per $1,000 of the principal amount being converted (based on
an initial conversion price equal to $10.30 per ordinary share).
The conversion price decreases by up to two $1 increments if we
elect to extend the maturity of the Note by up to two successive
years following the initial maturity date of February 14, 2025.
Conversion of the Note would result in dilution to the equity
interests of our other shareholders. We have no control over
whether or when the holder will exercise its right to convert the
Note. We cannot predict the market price of our ordinary shares at
any future date, and therefore cannot predict whether the Note will
be converted. The existence and potentially dilutive impact of the
conversion of the Note may prevent us from obtaining additional
financing in the future on acceptable terms, or at all.
Our indebtedness and liabilities could limit the cash flow
available for our operations, expose us to risks that could
adversely affect our business, financial condition and results of
operations, restrict our ability to incur additional indebtedness
and impair our ability to satisfy our obligations under the
Note.
Our indebtedness could have material adverse consequences for our
security holders and our business, results of operations and
financial condition by, among other things:
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increasing our vulnerability to adverse economic and industry
conditions;
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limiting our ability to obtain additional financing;
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limiting our flexibility to plan for, or react to, changes in
our business;
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diluting the interests of our existing shareholders as a
result of issuing ordinary shares upon conversion of the Note;
and
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placing us at a possible competitive disadvantage with
competitors that are less leveraged than us or have better access
to capital.
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The Note includes financially restrictive covenants that, among
other things, limit our ability to incur additional debt. Without
the consent of the holders of a majority in aggregate principal
amount of the Note, we may not create, incur, assume or be liable
for any indebtedness for borrowed money unless the aggregate
principal amount of such indebtedness does not exceed $5
million.
The Note matures on February 14, 2025, subject to our right to
extend it for two successive years. At maturity, unless converted
or redeemed, we will need to repay the principal amount under the
Note. Our business may not generate sufficient funds, and we may
otherwise be unable to maintain sufficient cash reserves, to pay
amounts due under our indebtedness, including the Note, and our
cash needs may increase in the future.
We may be unable to raise the funds necessary to repurchase the
Note for cash following a change of control, or to pay any cash
amounts due upon redemption or conversion, and our other
indebtedness may limit our ability to repurchase the Note or pay
cash upon its conversion.
In the event of a change of control, the holder of the Note has the
right to require us to convert all or a portion of the Note to
ordinary shares or redeem all (but not less than all) of the
outstanding principal amount of the Note. In the event of such
conversion or redemption in connection with a change of control, we
will also be required to pay to the holder an amount in cash equal
to 6% per annum of the then-outstanding principal amount of the
Note. We may not have enough available cash or be able to obtain
financing at the time we are required to redeem the Note or pay the
cash amounts due upon conversion or redemption. In addition,
applicable law, regulatory authorities and the agreements governing
any future indebtedness may restrict our ability to repurchase the
Note or pay the cash amounts due upon conversion or redemption. Our
failure to repurchase the Note or to pay the cash amounts due upon
conversion or redemption when required will constitute a default
under the Note. A default under the Note could also lead to a
default under agreements governing any future indebtedness, which
may result in that other indebtedness becoming immediately payable
in full. We may not have sufficient funds to satisfy all amounts
due under such other indebtedness and the Note.
Provisions in the Note could delay or prevent an otherwise
beneficial takeover of us.
Certain provisions in the Note could make a third-party attempt to
acquire us more difficult or expensive. For example, if a takeover
constitutes a change of control, then the noteholder will have the
right to convert all or a portion of the Note or redeem all (but
not less than all) of the outstanding principal amount of the Note.
In this case, and in other cases, our obligations under the Note
could increase the cost of acquiring us or otherwise discourage a
third party from acquiring us, including in a transaction that
holders of our ordinary shares may view as favorable.
Risks Relating to our Location in Israel
Conditions in Israel could adversely affect our business.
We are incorporated under Israeli law and our principal offices,
research and development division and manufacturing facilities are
located in Israel. Accordingly, political, economic and military
conditions in Israel directly affect our business. Since the State
of Israel was established in 1948, a number of armed conflicts have
occurred between Israel and its Arab neighbors. Although Israel has
entered into various agreements with Egypt, Jordan and the
Palestinian Authority, there has been an increase in unrest and
terrorist activity, which began in September 2000 and continued
with varying levels of severity throughout 2022. In recent years,
Israel has been engaged in sporadic armed conflicts with Hamas, an
Islamist terrorist group that controls the Gaza Strip, with
Hezbollah, an Islamist terrorist group that controls large portions
of southern Lebanon, and with Iranian-backed military forces in
Syria. In addition, Iran has threatened to attack Israel and may be
developing nuclear weapons. Some of these hostilities were
accompanied by missiles being fired from the Gaza Strip against
civilian targets in various parts of Israel, including areas in
which our employees and some of our consultants are located, and
negatively affected business conditions in Israel. Any hostilities
involving Israel or the interruption or curtailment of trade
between Israel and its trading partners could adversely affect our
operations and financial results.
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
direct damages that are caused by terrorist attacks or acts of war,
we cannot assure you that this government coverage will be
maintained or that it will sufficiently cover our potential
damages. Any losses or damages incurred by us could have a material
adverse effect on our business. Any armed conflicts or political
instability in the region would likely negatively affect business
conditions and could harm our results of operations.
In the past, the State of Israel and Israeli companies have been
subjected to economic boycotts. Several countries still restrict
business with the State of Israel and with Israeli companies. These
restrictive laws and policies may have an adverse impact on our
operating results, financial condition or the expansion of our
business. A campaign of boycotts, divestment and sanctions has been
undertaken against Israel, which could also adversely impact our
business.
Furthermore, the Israeli government is currently pursuing certain
changes to Israel’s judicial system. In response, various
governmental and non-governmental organizations, both within and
outside of Israel, have voiced concerns that the proposed changes
may create actual or perceived political instability, which could
adversely affect the Israeli economy. To the extent such changes
have negative consequences on the Israeli economy, our business,
financial condition, results of operations and prospects may be
harmed.
Our operations may be disrupted by the obligations of personnel to
perform military service.
As of December 31, 2022, we employed 749 people, of whom 314 were
based in Israel. Some of our employees in Israel are obligated to
perform annual military reserve duty in the Israel Defense Forces,
depending on their age and position in the army. Additionally, they
may be called to active reserve duty at any time under emergency
circumstances for extended periods of time. Our operations could be
disrupted by the absence of one or more of our executive officers
or key employees for a significant period due to military service
and any significant disruption in our operations could harm our
business. The full impact on our workforce or business if some of
our executive officers and employees are called upon to perform
military service, especially in times of national emergency, is
difficult to predict.
The tax benefits that are available to us require us to meet
several conditions and may be terminated or reduced in the future,
which would increase our costs and taxes.
Our investment program in equipment at our facility in
Hod-Hasharon, Israel, has been granted Approved Enterprise status
and we are therefore eligible for tax benefits under the Israeli
Law for the Encouragement of Capital Investments, 1959, referred to
as the Investments Law. We have also been granted benefited
enterprise status in prior years, but beginning in 2021, this
status is no longer applicable to us. We expect that the Approved
Enterprise tax benefits will be available to us after we utilize
our net operating loss carry forwards As of December 31, 2022, our
net operating loss carry forwards for Israeli tax purposes amounted
to approximately $81.5 million. To remain eligible for these tax
benefits, we must continue to meet certain conditions stipulated in
the Investments Law and its regulations and the criteria set forth
in the specific certificate of approval. If we do not meet these
requirements, the tax benefits would be canceled and we could be
required to refund any tax benefits and investment grants that we
received in the past. Further, in the future these tax benefits may
be reduced or discontinued. If these tax benefits are cancelled,
our Israeli taxable income would be subject to regular Israeli
corporate tax rates. The standard corporate tax rate in Israel
since the 2018 tax year is 23%.
Effective January 1, 2011, the Investments Law was amended (the
“2011 Amendment”) to revise the criteria for receiving tax
benefits. Under the transition provisions of the 2011 Amendment, a
company may decide to irrevocably implement the 2011 Amendment
while waiving benefits provided under the Investments Law’s prior
benefits programs or to remain subject to the Investments Law’s
prior benefits programs. We have opted not to apply the benefits
under the 2011 Amendment, however, in the future, we may not be
eligible to receive additional tax benefits as were made available
under the Investments Law prior to the 2011 Amendment. The
termination or reduction of these tax benefits would increase our
tax liability, which would reduce our profits. Finally, in the
event of a distribution of a dividend from the abovementioned
tax-exempt income, we would also be subject to income tax on the
amount distributed in accordance with the effective corporate tax
rate which would have been applied had we not enjoyed the
exemption. See “ITEM 10: Additional Information—Taxation—Israeli
Tax Considerations and Government Programs.”
No assurance can be given that we will be eligible to receive
additional tax benefits under the Investments Law in the future.
The termination or reduction of these tax benefits would increase
our tax liability in the future, which would reduce our profits or
increase our losses. Additionally, if we increase our activities
outside of Israel, for example, by future acquisitions, our
increased activities may not be eligible for inclusion in Israeli
tax benefit programs.
The government grants we have received for research and development
expenditures require us to satisfy specified conditions and
restrict our ability to manufacture products and transfer
technologies outside of Israel. If we fail to comply with these
conditions or such restrictions, we may be required to refund
grants previously received together with interest and penalties and
may be subject to criminal charges.
We have received grants from the Israel Innovation Authority
(formerly known as the Office of the Chief Scientist of the
Ministry of Economy) for the financing of a portion of our research
and development expenditures in Israel, pursuant to the provisions
of The Encouragement of Research, Development and Innovation in
Industry Law, 1984, referred to as the Research and Development
Law. In the future we may not receive grants or we may receive
significantly smaller grants from the Israel Innovation Authority,
and our failure to receive grants in the future could adversely
affect our profitability. In 2021, we did not recognize any
material non-royalty-bearing grants from the Israel Innovation
Authority. In 2022, we recognized non-royalty-bearing grants
totaling $0.5 million, representing 1% of our gross research and
development expenditures. In each of the years 2022 and 2021, we
qualified to participate in one non-royalty-bearing research and
development program, funded by the Israel Innovation Authority to
develop generic technology relevant to the development of our
products. Such programs are approved pursuant to special provisions
of the Research and Development Law. In the past three years, we
were eligible to receive grants constituting of up to 53% of
certain research and development expenses relating to these
programs. Although the grants under these programs are not required
to be repaid by way of royalties, the restrictions of the Research
and Development Law described below apply to these programs.
The provisions of the Research and Development Law and the terms of
the Israel Innovation Authority grants prohibit us from
transferring manufacturing products which we originally planned to
manufacture in Israel outside of Israel if they incorporate
technologies funded by the Israel Innovation Authority, and from
transferring intellectual property rights in technologies developed
using these grants, without special approvals from the Israel
Innovation Authority.
Even if we receive approval to manufacture our products outside of
Israel, we may be required to pay an increased total amount of
royalties, which may be up to 300% of the grant amount plus
interest, depending on our manufacturing volume outside Israel.
This restriction may impair our ability to outsource manufacturing
or engage in similar arrangements for those products or
technologies. Know-how developed under an approved research and
development program may not be transferred to any third-parties,
except in certain circumstances and subject to prior approval.
Similarly, even if we receive approval to transfer intellectual
property rights in technologies developed using these grants, we
may be required to repay up to 6 times of the original grants plus
LIBOR interest to the Israel Innovation Authority. In addition, if
we fail to comply with any of the conditions and restrictions
imposed by the Research and Development Law or by the specific
terms under which we received the grants, we may be required to
refund any grants previously received together with interest and
penalties, and we may be subject to criminal charges.
It may be difficult to enforce a U.S. judgment against us, our
officers and directors, or our auditors in Israel or the United
States, or to assert U.S. securities laws claims in Israel or serve
process on our officers and directors or our auditors.
We are incorporated in Israel. The majority of our executive
officers and directors, and our auditors are not residents of the
U.S., and the majority of our assets and the assets of these
persons are located outside the U.S. Therefore, it may be difficult
for an investor, or any other person or entity, to enforce a U.S.
court judgment based upon the civil liability provisions of the
U.S. federal securities laws against us or any of these persons in
a U.S. or Israeli court, or to effect service of process upon these
persons in the United States. Additionally, it may be difficult for
an investor, or any other person or entity, to assert U.S.
securities law claims in original actions instituted in Israel.
Israeli courts may refuse to hear a claim based on a violation of
U.S. securities laws on the grounds that Israel is not the most
appropriate forum in which to bring such a claim. Even if an
Israeli court agrees to hear a claim, it may determine that Israeli
law and not U.S. law is applicable to the claim. If U.S. law is
found to be applicable, the content of applicable U.S. law must be
proved as a fact which can be a time-consuming and costly process.
Certain matters of procedure will also be governed by Israeli law.
There is little binding case law in Israel addressing the matters
described above.
Provisions of Israeli law and our articles of association may
delay, prevent or make undesirable an acquisition of all or a
significant portion of our shares or assets.
Our articles of association contain certain provisions that may
delay or prevent a change of control, including a classified board
of directors. In addition, Israeli corporate law regulates
acquisitions of shares through tender offers and mergers, requires
special approvals for transactions involving significant
shareholders and regulates other matters that may be relevant to
these types of transactions. These provisions of Israeli law could
delay or prevent a change in control and may make it more difficult
for third-parties to acquire us, even if doing so would be
beneficial to our shareholders, and may limit the price that
investors may be willing to pay for our ordinary shares in the
future. Furthermore, Israeli tax considerations may make potential
transactions undesirable to us or to some of our shareholders. See
“ITEM 10: Additional Information—Memorandum and Articles of
Association—Acquisitions under Israeli Law” and “—Anti-Takeover
Measures.”
General Risk Factors
Our financial results may differ materially from any guidance we
may publish from time to time.
We may, from time to time, voluntarily publish guidance regarding
our future performance that represents our management’s estimates
as of the date of relevant release. Any such guidance is based upon
a number of assumptions and estimates that, while presented with
numerical specificity, is inherently subject to significant
business, economic and competitive uncertainties and contingencies,
many of which are beyond our control and are based upon specific
assumptions with respect to future business decisions, some of
which will change. The principal reason that we may release this
data is to provide a basis for our management to discuss our
business outlook with analysts and investors. We do not accept any
responsibility for any projections or reports published by any such
persons. Guidance is necessarily speculative in nature, and it can
be expected that some or all of the assumptions of the guidance
furnished by us will not materialize or will vary significantly
from actual results. Further, our sales during any given quarter
tend to be unevenly distributed as individual orders tend to close
in greater numbers immediately prior to the relevant quarter end
and further. Our revenues from individual customers may also
fluctuate from time to time based on the timing and the terms under
which further orders are received and the duration of the delivery
and implementation of such orders. Therefore, if our projected
sales do not close before the end of the relevant quarter, our
actual results may be inconsistent with our published guidance.
Accordingly, our guidance is only an estimate of what management
believes is realizable as of the date of release. Actual results
will vary from the guidance and the variations may be material.
Investors should also recognize that the reliability of any
forecasted financial data diminishes the farther in the future that
the data is forecast. In light of the foregoing, investors are
urged to consider any guidance we may publish in context and not to
place undue reliance on it.
Our financial condition and results of operations may be harmed by
political events and regulatory developments that could have a
material adverse effect on global economic condition.
Significant political or regulatory developments in the
jurisdictions in which we sell our products, such as those stemming
from the recent change in the presidential administration in the
U.S. or the U.K.’s exit from the E.U., are difficult to predict and
may have a material adverse effect on us. For example, in the
United States, tariffs have recently been imposed on imports from
China, Mexico, Canada and other countries, and there may be further
restrictions on free trade and has increased tariffs on goods
imported into the United States. Changes in U.S. political,
regulatory and economic conditions or in its policies governing
international trade and foreign manufacturing and investment in the
U.S. could materially adversely affect our sales in the U.S.
In the United Kingdom, following the vote to approve an exit from
the E.U., commonly referred to as “Brexit,” the government
officially separated from the E.U. on January 31, 2020. A
transition period ended on December 31, 2020, during which the U.K.
and the E.U. negotiated the terms of the U.K.’s relationship with
the E.U. going forward. With the implementation of the E.U.-U.K.
Trade and Cooperation Agreement beginning on January 1, 2021, it is
still unclear how the deal will impact relationships within the
U.K. and between the U.K. and other countries on many aspects of
fiscal policy, cross-border trade and international relations. The
Trade and Cooperation Agreement could potentially disrupt the free
movement of goods, services and people between the U.K. and the
E.U., undermine bilateral cooperation in key geographic areas and
significantly disrupt trade between the U.K. and the E.U. or other
nations as the U.K. pursues independent trade relations. Because
this is an unprecedented event, it is unclear what long-term
economic, financial, trade, tax and legal implications Brexit would
have and how it would affect the regulation applicable to our
business globally and in the region. The impact on us will depend,
in part, on the outcome of tariff, trade, regulatory and other
negotiations. Brexit could also lead to legal uncertainty and
potentially divergent national laws and regulations as the U.K.
determines which E.U. laws to replace or replicate. In addition,
Brexit may lead other E.U. member countries to consider referendums
regarding their European Union membership. Any of these
developments, along with any political, economic and regulatory
changes that may occur, could cause political and economic
uncertainty in Europe and internationally and could materially
adversely affect our sales in Europe.
We may expand our business or enhance our technology through
acquisitions that could result in diversion of resources and extra
expenses. This could disrupt our business and adversely affect our
financial condition.
Part of our strategy is to selectively pursue partnerships and
acquisitions. We have acquired a number of companies in the past.
The negotiation of acquisitions, investments or joint ventures, as
well as the integration of acquired or jointly developed businesses
or technologies, could divert our management’s time and resources.
Acquired businesses, technologies or joint ventures may not be
successfully integrated with our products and operations and we may
not realize the intended benefits of these acquisitions. We may
also incur future losses from any acquisition, investment or joint
venture. In addition, acquisitions could result in:
| • |
substantial cash expenditures;
|
| • |
potentially dilutive issuances of equity securities;
|
| • |
the incurrence of debt and contingent liabilities;
|
| • |
a decrease in our profit margins; and
|
| • |
amortization of intangibles and potential impairment of
goodwill.
|
Our business may be materially affected by changes to fiscal and
tax policies. Potentially negative or unexpected tax consequences
of these policies, or the uncertainty surrounding their potential
effects, could adversely affect our results of operations and share
price.
As we operate in the global market, we are subject to taxation in
Israel and various jurisdictions in which we conduct our business.
Our tax expenses include the impact of tax exposures in certain
jurisdictions, and may also be affected by adverse changes in the
underlying profitability and financial outlook of our operations or
changes in tax laws, including introduction of unilateral taxation
such as digital services taxes in certain countries, international
tax treaties, guidelines such as the OECD inclusive framework on
BEPS, proposed regimes informally known as Pillar 2 which apply to
large multinational corporations, or EU ATAD I and II, all of which
could lead to an increase in our effective tax rate or to changes
in our valuation allowances against deferred tax assets on our
consolidated balance sheets. Furthermore, we are subject to tax
audits by governmental authorities everywhere we do business. If we
experience unfavorable results from one or more such tax audits,
there could be an adverse effect on our tax rate and therefore on
our net income. Our results of operations may also be affected by
changes in tax laws, tax rates or double tax treaties.
London Interbank Offered Rate (“LIBOR”) and other interest rates
that are indices deemed to be “benchmarks” are the subject of
recent and ongoing national, international and other regulatory
guidance and proposals for reform. Some of these reforms are
already effective, while others are still to be implemented. These
reforms may cause such benchmarks to perform differently than in
the past, or to disappear entirely as in the case of LIBOR, or have
other consequences that cannot be predicted. Any such consequence
could have a material adverse effect on our future debt linked to
such a “benchmark” and our ability to service debt that bears
interest at floating rates of interest.
If the price of our ordinary shares declines, we may be more
vulnerable to an unsolicited or hostile acquisition bid.
We do not have a controlling shareholder. Notwithstanding
provisions of our articles of association and Israeli law, a
decline in the price of our ordinary shares may result in us
becoming subject to an unsolicited or hostile acquisition bid. In
the event that such a bid is publicly disclosed, it may result in
increased speculation regarding our company and volatility in our
share price even if our board of directors decides not to pursue a
transaction. If our board of directors does pursue a transaction,
there can be no assurance that it will be consummated successfully
or that the price paid will represent a premium above the original
price paid for our shares by all of our shareholders.
Additionally, in recent years, U.S. and non-U.S. companies listed
on securities exchanges in the United States have been faced with
governance-related demands from activist shareholders, unsolicited
tender offers and proxy contests. Although as a foreign private
issuer we are not subject to U.S. proxy rules, responding to any
action of this type by activist shareholders could be costly and
time-consuming, disrupting our operations and diverting the
attention of management and our employees. Such activities could
interfere with our ability to execute our strategic plans. In
addition, a proxy contest for the election of directors at our
annual meeting would require us to incur significant legal fees and
proxy solicitation expenses and require significant time and
attention by management and our board of directors. The perceived
uncertainties due to such actions of activist shareholders also
could affect the market price of our securities.
Adverse resolution of litigation may harm our operating results or
financial condition.
We are a party to lawsuits in the normal course of our business.
Litigation can be expensive, lengthy, and disruptive to normal
business operations. Moreover, the results of complex legal
proceedings are difficult to predict. Unfavorable resolution of
lawsuits could have a material adverse effect on our business,
operating results, or financial condition.
ITEM 4:
Information on Allot
A. History and Development of Allot
Our History
Our legal and commercial name is Allot Ltd. We were incorporated on
November 12, 1996. We are a company limited by shares organized
under the laws of the State of Israel. Our principal executive
offices are located at 22 Hanagar Street, Neve Ne’eman Industrial
Zone B, Hod-Hasharon 4501317, Israel, and our telephone number is
+972 (9) 761-9200. We have irrevocably appointed Allot
Communications Inc. as our agent to receive service of process in
any action against us in any United States federal or state court.
The address of Allot Communications Inc. is 1500 District Avenue,
Burlington, MA 01803.
Our website address is www.allot.com. Information contained on, or
that can be accessed through, our website does not constitute a
part of this annual report and is not incorporated by reference
herein. We have included our website address in this annual report
solely for informational purposes. Our SEC filings are available to
you on the SEC’s website at http://www.sec.gov, which contains
reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The
information on that website is not part of this annual report and
is not incorporated by reference herein.
B. Business Overview
Overview
We are a provider of leading innovative security solutions and
network intelligence solutions for mobile, fixed and cloud service
providers as well as enterprises worldwide. For 25 years, our
solutions have been deployed globally for network-based security,
including mobile security, distributed denial of service (“DDoS”)
protection and Internet of Things (“IoT”) security, network and
application analytics, traffic control and shaping, and more. More
recently, we have cultivated a strategic focus on the expansion and
advancement of our SECaaS product offerings.
The Company delivers a unified security service for individual
consumers and small and medium-sized businesses (“SMBs”), at home,
at work and on the go, with the Allot Secure product family. Our
Allot Security Management product is, to our knowledge, the only
platform that unifies security services for mobile, fixed and 5G
converged networks.
Our industry-leading network-based SECaaS solution has previously
achieved up to 50% penetration with some service providers and is
already used by over 20 million subscribers globally. Our
multi-service platforms (AllotSmart) are deployed by over 500
mobile, fixed and cloud service providers and over 1,000
enterprises.
We have a global and diverse customer base composed of mobile and
fixed broadband service providers, cable operators, satellite
service providers, private networks, data centers, governments, and
enterprises such as financial and educational institutions. We have
a strong backlog representing customers’ orders for products and
services not yet recognized as revenues. Backlog is subject to
delivery delays or program cancellations, which are beyond our
control.
With over 20 years of experience empowering service providers and
enterprises to get more out of their networks and to manage them
better, we enable network operators and enterprises to detect
security breaches, to protect their own networks and their users
from attacks, to clearly see and understand their networks from
within, to optimize, innovate and capitalize on every opportunity,
to learn about users and network behaviors, and to improve Quality
of Service (“QoS”) and reduce costs, all while increasing value to
customers and deploying new services faster.
Through our combination of innovative technology, proven know-how
and collaborative approach to industry standards and partnerships,
we deliver solutions that equip service providers with the
capabilities to elevate their role as premier digital services
providers and to expand into new business opportunities. We offer
our customers market leading, proprietary technologies that are
powerful, diverse and scalable. In addition, we have developed
significant industry know-how and expertise through our experience
in designing and implementing use cases with our large customer
base.
We generated total revenues of $122.7 million in the year ended
December 31, 2022, a decrease of 16% over the prior year. In 2022,
23% of our revenues were attributable to security solutions, and
77% of our revenues were attributable to network intelligence
solutions.
Industry Overview
Security Solutions
As the number of networks, applications and network-connected
devices has increased, consumers and SMBs have become increasingly
vulnerable to cyber threats and crime, and communication service
providers (“CSPs”) have begun to encounter complex operational
challenges requiring nuanced solutions.
| • |
Network
Security Threats: As reliance on the
Internet has grown, service providers and enterprise networks have
become increasingly vulnerable to a wide range of security threats,
including DDoS attacks, spambots, malware and other threats. These
attacks are designed to flood the network with traffic that
consumes all available bandwidth, impeding operators’ ability to
provide high quality broadband access to subscribers or preventing
enterprises from using mission-critical applications. These threats
also compromise network and data integrity. We believe service
providers and enterprises can better protect against such attacks
by detecting and neutralizing malicious traffic at very early
stages, before such threats can compromise network integrity and
services.
|
| • |
End-User
Security Threats: Broadband devices and
mobile devices have also become increasingly vulnerable to online
threats, such as malware, ransomware and phishing. Broadband and
mobile device users have limited cyber-security expertise and
therefore present easy targets for cybercriminals. In recent years,
we have seen a growing demand from large and mid-size operators to
offer such security services to their customers—both individual
consumers and small and mid-size businesses. We believe few
consumers download security applications to all of their personal
devices, but CSPs are well positioned to provide security services
because they are the sole providers of access to the network for
their consumers, are capable of blocking attacks before they reach
the consumer and have multiple touch points with consumers as
trusted brands, through ongoing customer support and frequent
communication. Research conducted in partnership with Coleman
Parkes Research in 2022 revealed that 84% of consumers believe that
security solutions should already be on the device or the
responsibility of the devise manufacturer or CSPs. Further, data
provided and developed by Coleman Parkes Research in a separate
research study of consumers’ attitudes toward cybersecurity
revealed that 68% of mobile users are willing to pay an additional
$3 per month for a security service, and that 64% of fixed
broadband users are willing to pay an additional $6 per month for
broadband a security service.
|
Network Intelligence Solutions
The rapid proliferation of broadband networks in recent years has
been driven largely by demand from users for faster and more
reliable access to the Internet and by the increased number and
complexity of broadband applications, as well as the proliferation
of mobile smartphones, tablets and other Internet-connected
devices. As a result of this rapid proliferation, service providers
have been forced to invest heavily in network infrastructure
upgrades and customer support services to maintain the quality of
experience for subscribers. Further, the cost of increasing the
bandwidth in mobile networks is significantly higher than that in
wireline networks, and mobile operators require intelligent
bandwidth management solutions to handle increased data traffic and
the requirement for continuous low-latency transmission. Moreover,
to offset the increased investment and operational costs, CSPs need
to be able to offer premium services to consumers. To offer premium
services, to guarantee high-quality delivery of content and user
experience, to optimize bandwidth utilization and to reduce
operational costs, CSPs need enhanced visibility into and control
of network traffic, including visibility into the type of
applications used on the network and levels of traffic generated by
different subscribers.
Our Security Solutions
Our Security-as-a-Service Market Opportunity
For CSPs offering the Allot solutions as security services to their
subscribers, the Allot SECaaS solutions are offered to the CSPs on
a revenue sharing basis in which both Allot and the operator share
the revenue generated from the operator’s subscribers for the use
of Allot security services.
Our Products
Allot provides a comprehensive security solution, referred to as
Allot Secure 360, to protect network customers, network service
integrity and brand reputation. Allot’s SECaaS solutions enable
operators to secure subscribers against online threats and harmful
content by providing network-based SECaaS to their customers. Allot
Secure 360 provides consumers with a 360-degree security
architecture—complete, end-to-end protection anywhere, against any
cyber threat, and on any device.
Protection for Consumers and SMBs – 360-Degree Security
| • |
Allot
Secure Management (ASM): The Allot Secure
Management platform creates a unified security experience for Allot
security consumers by providing an end-to-end security management
infrastructure that seamlessly communicates with and integrates
each enforcement point—NetworkSecure, HomeSecure, DNSecure,
IoTSecure, EndpointSecure, and BusinessSecure. On-net coverage is
provided through NetworkSecure, HomeSecure, DNSecure, and
IoTSecure, and off-net coverage through EndPoint Secure, and the
ASM solution creates a flexible security architecture of advanced
threat detection technologies in-network, at the consumer-premises
equipment and at the endpoint device with network intelligence
solutions, machine learning and comprehensive personalization
capabilities. The ASM solution delivers a scalable platform that
simplifies security service activation, system awareness, new
enforcement point integration, threat event reporting and handling,
operation and management by the consumer regardless of which
enforcement point is active.
|
|
o |
Allot
NetworkSecure: A multi-tenant
solution that allows the service provider to offer opt-in security
services that allow subscribers to define and enforce safe-browsing
limits (Parental Control) and to prevent incoming malware from
infecting their devices (Anti-Malware). Services are enforced at
the network level, requiring no device involvement or battery
consumption.
|
|
o |
Allot
HomeSecure: A multi-tenant
solution that allows the service provider to offer opt-in security
services that allow subscribers to define and enforce safe-browsing
limits (Parental Control) and to prevent incoming malware from
infecting their devices (Anti-Malware). Services are enforced at
the home router & network level.
|
|
o |
Allot
DNSecure: A multi-tenant
solution that allows the service provider to offer opt-in security
services that allow subscribers to define and enforce safe-browsing
limits (Parental Control) and to prevent incoming malware from
infecting their devices (Anti-Malware). Services are enforced at
the network DNS requests level, requiring no device involvement or
battery consumption.
|
|
o |
Allot
IoTSecure: A multi-tenant
solution that enables CSPs to grant each of its enterprise
customers a dedicated management console for monitoring and
securing their mobile IoT deployments on the CSP
network.
|
|
o |
Allot
BusinessSecure: A multi-tenant
solution that provides a simple, reliable and secure network for
the connected business achieved through a small firmware agent
installed on the business router, supported by the Allot Secure
cloud, and a mobile application. These elements, working in
concert, provide visibility into the network and block both
external and internal attacks.
|
|
o |
EndPoint
Secure: A multi-tenant
solution that functions as an extension of NetworkSecure, securing
the subscribers’ devices while off the Internet, producing seamless
customer protection using market leading malware protection and
controls.
|
|
o |
Allot
Secure Cloud: The Allot Secure cloud
provides to each enforcement point in the security architecture
up-to-date threat intelligence, web categorization and device
fingerprint data. The Allot Secure cloud uses machine learning and
Artificial Intelligence technologies to identify connected devices,
create device-specific profiles and provide anti-virus
screening.
|
Protection for the Carriers
| • |
Allot
DDoS Secure/5G Protect: A solution that
provides attack detection and mitigation services that protect
commercial networks against inbound and outbound Denial of Service
(“DoS”) and DDoS attacks, Zero Day attacks, worms, zombie and
spambot behavior.
|
Integrated Network Intelligence Solutions
In addition to our comprehensive and sophisticated security
offerings, our integrated network intelligence solutions, together
called AllotSmart, provide network visibility and control and allow
mobile, fixed and enterprise operators to elevate their role in the
digital lifestyle ecosystem and expand into new business
opportunities. AllotSmart provides our customers with the potential
to increase their revenues by monetizing network usage through
value-added products and services, implementing value-based
charging and reducing costs by optimizing the delivery and
performance of OTT content and cloud computing services. AllotSmart
also promotes improved customer loyalty by enabling service
providers to offer a selection of service tiers and digital
lifestyle options, empowering customers to personalize their
network experience. In addition, AllotSmart enables
telecommunication providers to comply with a wide range of
regulatory requirements aimed to assist governments with securing
the public. Our products enable both CSPs and our governmental and
law enforcement customers to monitor the content of internet
traffic in order to oversee compliance with legal and law
enforcement requirements.
Centralized Management
The Allot NetXplorer is the management umbrella for our devices,
platforms and solutions, providing a central access point for
network-wide monitoring, reporting, analytics, troubleshooting,
accounting and Quality of Service policy provisioning. Its
user-friendly interface provides our customers with a comprehensive
overview of the application, user, device and network topology
traffic, while its wide variety of reports provide accessible,
detailed analyses of granular traffic data.
Customers
We derive a significant and growing portion of our revenue from
direct sales to large mobile and fixed-line service providers, as
well as government and law enforcement entities. We generate the
remainder of our revenue through a select and well-developed
network of channel partners, generally consisting of distributors,
resellers, OEMs and system integrators. We also endeavor to
increase our sales to enterprises and have adapted the structure of
our sales organization to this end. In 2022, we derived 34% of our
revenues from Europe, 18% from the Americas, 24% from Asia and
Oceania and 24% from the Middle East and Africa. A breakdown of
total revenues by geographic location for 2020, 2021 and 2022 is
set forth in the following table.
|
|
|
Revenues by Location
|
|
|
|
|
($ in thousands)
|
|
|
|
|
2022
|
|
|
%
Revenues
|
|
|
2021
|
|
|
%
Revenues
|
|
|
2020
|
|
|
%
Revenues
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
41,773
|
|
|
|
34
|
%
|
|
$
|
58,414
|
|
|
|
40
|
%
|
|
$
|
94,644
|
|
|
|
70
|
%
|
|
Asia and
Oceania
|
|
|
29,888
|
|
|
|
24
|
%
|
|
|
44,227
|
|
|
|
30
|
%
|
|
|
23,519
|
|
|
|
17
|
%
|
|
Middle East and
Africa
|
|
|
29,285
|
|
|
|
24
|
%
|
|
|
23,568
|
|
|
|
16
|
%
|
|
|
9,628
|
|
|
|
7
|
%
|
|
Americas
|
|
|
21,791
|
|
|
|
18
|
%
|
|
|
19,391
|
|
|
|
14
|
%
|
|
|
8,131
|
|
|
|
6
|
%
|
|
Total Revenues
|
|
$
|
122,737
|
|
|
|
100
|
%
|
|
$
|
145,600
|
|
|
|
100
|
%
|
|
$
|
135,922
|
|
|
|
100
|
%
|
The revenue decrease in Europe in 2021 and 2022 as compared to 2020
was due to an agreement signed in 2019 that accounted for 43% of
our total 2020 revenues. The agreement was for the performance and
implementation of a specific, one-time project and did not contain
any renewal provisions. The revenues from the same contract were 5%
of our total revenues in 2021 and 7% of our revenues in 2022 and
were primarily attributable to ongoing maintenance and service
obligations in connection with the project.
Channel Partners
We market and sell our products to end-customers both by direct
sales and through channel partners, which include distributors,
resellers, OEMs and system integrators. A significant portion of
our sales occur through our channel partners. In 2022,
approximately 58% of our revenues were derived from channel
partners. In some cases, our channel partners are also responsible
for installing and providing initial customer support for our
products, with our continuous technical assistance. In the majority
of the cases, the partners are responsible for the initial customer
support (Tier 1 support), while we act as the escalation level. Our
channel partners are located around the world and address most
major markets. Our channel partners target a range of end-users,
including carriers, alternative carriers, cable operators, private
networks, data centers and enterprises in a wide range of
industries, including government, financial institutions and
education. Our agreements with channel partners that are
distributors or resellers are generally non-exclusive, for an
initial term of one year and automatically renew for successive
one-year terms unless terminated. After the first year, such
agreements may typically be terminated by either party upon ninety
days prior notice.
We offer support to our channel partners. This support includes the
generation of leads through marketing events, seminars and
web-based leads and incentive programs as well as technical and
sales training.
Sales and Marketing
Our product sales cycle varies based on the intended use by the
end-customer. The sales cycle for initial network deployment may
generally last between twelve and twenty-four months for large and
medium service providers, six to twelve months for small service
providers, and one to six months for enterprises. Follow-on orders
and additional deployment of our products usually require shorter
cycles. Large and medium service providers generally take longer to
plan the integration of our solutions into their existing networks
and to set goals for the implementation of the technology.
Beginning in late 2022, we changed our SECaaS sales strategy to
target strategic accounts that have high revenue potential, while
ensuring small to medium sized deals have customer assurances or
minimum revenue threshold. Moving forward, the number of our SECaaS
deals will likely drop, but we anticipate the total sales potential
will remain the same as was expected under the prior SECaaS sales
strategy, and we believe the emphasis on larger customers will help
us achieve profitability sooner.
We focus our marketing efforts on product positioning, increasing
brand awareness, communicating product advantages and generating
qualified leads for our sales organization. We rely on a variety of
marketing communications channels, including our website, trade
shows, industry research and professional publications, the press
and special events to gain wider market exposure.
We have organized our worldwide sales efforts into the following
regions: North America, South America, Europe, the Middle East and
Africa; and Asia and Oceania. We have regional offices in Spain,
Italy, France, Singapore, India, Kazakhstan, Japan, Colombia and
Israel. As of December 31, 2022, our sales and marketing staff,
including product management and business development functions,
consisted of 139 employees.
Service and Technical Support
We believe our technical support and professional services
capabilities are a key element of our sales strategy. Our technical
staff provides project management, delivery, training, support and
professional services, as well as assists in presale activities and
advises channel partners on the integration of our solutions into
end-customer networks. Our basic warranty to end-customers
(directly or through our partners) is three months for software and
twelve months for hardware. Generally, end-customers are also
offered a choice of one year or multi-year customer support
programs when they purchase our products. These customer support
programs can be renewed at the end of their terms. Our end-customer
support plans generally offer the following features:
| • |
unlimited 24/7 access to our global support organization, via
phone, email and online support system, provided by regional
support centers;
|
| • |
expedited replacement units in the event of a warranty
claim;
|
| • |
software updates and upgrades offering new features and
protocols and addressing new and changing network applications;
and
|
| • |
periodic updates of solution documentation, technical
information and training.
|
Our support plans are designed to maximize network up-time and
minimize operating costs. Our customers, including partners and
their end-customers, are entitled to take advantage of our
around-the-clock technical support, which we provide through our
seven support centers located in France, Israel, Singapore, India,
Colombia, Spain and the United States. We also offer our customers
24-hour access to an external web-based technical knowledge base,
which provides technical support information and, in the case of
our channel partners, enables them to support their customers
independently and obtain follow up and support from us.
We also offer particular professional services, such as network
audit, solution design, project management, business intelligence
reports, customer project documentation, integration services,
interoperability testing and training.
The expenditures associated with the technical support staff are
allocated in our statements of comprehensive loss between sale and
marketing expenses and cost of goods sold, based on the roles of
and tasks performed by personnel.
As of December 31, 2022, our technical staff consisted of 188
employees, including 77 technical support persons, 93 deployment
and professional services engineers, 13 documentation and training
persons, and 5 employees related to operations.
Research and Development
Our research and development activities take place primarily in
Israel. We also have research and development activities in Spain
and India. In addition, since 2020 we have been using
subcontractors in Ukraine, Israel and Belarus to source research
and development engineers. We devote a significant amount of our
resources towards research and development in order to introduce
new products and continuously enhance existing products and to
support our growth strategy. We have assembled a core team of
experienced engineers, many of whom are leaders in their particular
field or discipline and have technical degrees from top
universities and have experience working for leading Israeli or
international networking companies. These engineers are involved in
advancing our core technologies, as well as in applying these core
technologies to our product development activities. In previous
years, our research and development efforts have benefited from
non-royalty-bearing grants from the Israel Innovation Authority. As
of December 31, 2022, there are no outstanding royalties due from
us to the Israel Innovation Authority. In 2022, we received
additional grants from the Israel Innovation Authority; however,
these grants do not bear royalties. Under the terms of those
grants, we are required to perform our manufacturing activities
within the state of Israel, as a condition to maintaining these
benefits. The State of Israel does not own any proprietary rights
in technology developed with the Innovation Authority funding and
there is no restriction related to the Israel Innovation Authority
on the export of products manufactured using technology developed
with the Israel Innovation Authority funding (other limitations on
export apply under applicable law). For a description of
restrictions on the transfer of the technology and with respect to
manufacturing rights, please see “ITEM 3: Key Information—Risk
Factors—The government grants we have received for research and
development expenditures require us to satisfy specified conditions
and restrict our ability to manufacture products and transfer
technologies outside of Israel. If we fail to comply with these
conditions or such restrictions, we may be required to refund
grants previously received together with interest and penalties and
may be subject to criminal charges.”
Subcontracting
We subcontract the repair of the hardware components of our legacy
Service Gateway platform to Flex (Israel) Ltd. This strategy
enables us to reduce our fixed costs, focus on our core research
and development competencies and provide flexibility in meeting
market demand. Flex (Israel) Ltd. is contractually obligated to
provide us with certain services based on agreed specifications,
including integration, assembling, testing, storing, packaging and
procuring the raw materials for our devices. We are not required to
provide any minimum orders. Our agreement with Flex (Israel) Ltd.
is automatically renewed annually for additional one-year terms.
Flex (Israel) Ltd. may terminate our agreement with them at any
time during the term upon prior notice. We retain the right to
procure independently any of the components used in our products.
Flex (Israel) Ltd. has affiliates outside of Israel, to which it
can, with the prior consent of the Israel Innovation Authority,
transfer manufacturing of our products if necessary, in which event
we may be required to pay increased royalties to the Israel
Innovation Authority.
We subcontract the integration of our software products with
off-the-shelf hardware platforms provided mainly by Lenovo and
Hewlett Packard Enterprise (HPE). Based on verbal understandings,
Arrow ocs (Israel) performs the integration of the software product
with HPE servers, while Malam-Team (Israel) performs the
integration of such software with Lenovo Servers. Such hardware
components are manufactured in accordance with the design of our
products.
Some of the hardware components of our products are obtained from
single or limited sources. Since our products have been designed to
incorporate these specific components, any change in these
components due to an interruption in supply or our inability to
obtain such components on a timely basis may require engineering
changes to our products before we could incorporate substitute
components. The global semiconductor shortage could increase the
possibility of making such engineering changes, or taking other
remedial measures, as many of our suppliers use semiconductors in
the products we require.
We also purchase off–the-shelf hardware components from single or
limited sources for our security and Traffic Management products.
We carry approximately three to nine months of inventory of key
components. We also work closely with our suppliers to monitor the
end-of-life of the product cycle for integral components, and
believe that in the event that they announce end of life, we will
be able to increase our inventory to allow enough time for
replacing such components. The agreements with our suppliers do not
contain any minimum purchase or supply commitments. Product testing
and quality assurance is performed by our integrators using tests
and automated testing equipment and according to controlled test
documentation we specify. We also use inspection testing and
statistical process controls to assure the quality and reliability
of our products.
Competition
We compete against large companies in a rapidly evolving and highly
competitive sector of the networking technology market, which
offer, or may offer in the future, competing technologies,
including partial or alternative solutions to operators’ and
enterprises’ challenges, and which, similarly to us, intensely
pursue the largest service providers (referred to as Tier 1
operators) as well as large enterprises. Our DPI technology enabled
offerings face significant competition from router and switch
infrastructure companies that integrate functionalities into their
platforms addressing some of the same types of issues that our
products are designed to address. This competition is expected to
intensify as expansion of 5G networks progresses. We do not
anticipate growth in our DPI segment for the 2023 fiscal
year.
Our security products, which are offered to operators and are
deployed in their networks for the purpose of enabling them to
provide security services to their end customers, are subject to
competition from companies which offer security products, based on
different technology and marketing and sales approaches. Generally,
we compete on the basis of product performance, ease of use and
installation, customer support and price.
Our security product offerings face significant competition from
companies that directly approach end customers and offer them
security applications to be installed on their devices; companies
that approach the business enterprise sector through distribution
channels and offer cloud security products; and companies that
offer security products bundled with other products. By offering
our security products to operators that provide security services
to both small and medium size business and individual end
customers, we aim to expand the reach of our products.
See “ITEM 3: Key Information—Risk Factors—Our revenues and business
may be adversely affected if we do not effectively compete in the
markets in which we operate.”
Intellectual Property
Our intellectual property rights are very important to our
business. We believe that the complexity of our products and the
know-how incorporated into them makes it difficult to copy them or
replicate their features. We rely on a combination of
confidentiality and other protective clauses in our agreements,
copyright and trade secrets to protect our know-how. We also
restrict access to our servers physically and through closed
networks since our product designs and software are stored
electronically and thus are highly portable.
We customarily require our employees, subcontractors, customers,
distributors, resellers, software testers, technology partners and
contractors to execute confidentiality agreements or agree to
confidentiality undertakings when their relationship with us
begins. Typically, our employment contracts also include assignment
of intellectual property rights for all inventions developed by
employees, non-disclosure of all confidential information, and
non-compete clauses, which generally restrict the employee for six
months following termination of employment. The enforceability of
non-compete clauses in certain jurisdictions in which we operate
may be limited. See “ITEM 3: Key Information—Risk Factors—If we are
unable to successfully protect the intellectual property embodied
in our technology, our business could be harmed
significantly.”
The communications equipment industry is characterized by constant
product changes resulting from new technological developments,
performance improvements and lower hardware costs. We believe that
our future growth depends to a large extent on our ability to be an
innovator in the development and application of hardware and
software technology. As we develop the next generation products, we
initiated and continuously pursue patent protection for our core
technologies in the telecommunications market. We have and plan to
continue to seek patent protection in our largest markets and our
competitors’ markets, for example in the United States and Europe.
As we continue to spread our business into additional markets, such
as Japan and Australia, we will evaluate how best to protect our
technologies in those markets. We intend to vigorously prosecute
and defend the rights of our intellectual property.
As of December 31, 2022, we had 28 issued U.S. patents, 2 U.S.
patents that have recently been allowed but not issued, 3 U.S.
reissued patents, and 2 pending U.S. patent applications. We expect
to formalize our evaluation process for determining which
inventions to protect by patents or other means. We cannot be
certain that patents will be issued as a result of the patent
applications we have filed.
Government Regulation
Due to the industry and geographic diversity of our operations and
services, our operations are subject to a variety of rules and
regulations, and several government agencies in the United States,
the E.U. and other countries regulate various aspects of our
business. See the following risk factors in “ITEM 3. Key
Information—D. Risk Factors” for more information on regulation
material to our business, financial condition and results of
operations:
| • |
Legal, Regulatory and Compliance Risks—We are subject to
certain regulatory regimes that may affect the way that we conduct
business internationally, and our failure to comply with applicable
laws and regulations could materially adversely affect our
reputation and result in penalties and increased costs.
|
| • |
Legal, Regulatory and Compliance Risks— As with many DPI
products, some of our products may be used by governmental or law
enforcement customers in a manner that is, or that is perceived to
be, incompatible with human rights.
|
| • |
Legal, Regulatory and Compliance Risks—Demand for our products
may be impacted by government regulation of the internet and
telecommunications industry.
|
| • |
Legal, Regulatory and Compliance Risks— Our failure to comply
with data privacy laws may expose us to reputational harm and
potential regulatory actions and fines.
|
| • |
Risks Related to our Ordinary Shares—Our shareholders do not
have the same protections afforded to shareholders of a U.S.
company because we have elected to use certain exemptions available
to foreign private issuers from certain corporate governance
requirements of Nasdaq.
|
| • |
Risks Related to our Ordinary Shares—As a foreign private
issuer, we are not subject to the provisions of Regulation FD or
U.S. proxy rules and are exempt from filing certain Exchange Act
reports.
|
| • |
Risks Related to our Ordinary Shares—Certain U.S. holders of
our ordinary shares may suffer adverse tax consequences if we or
any of our non-U.S. subsidiaries are characterized as a “controlled
foreign corporation,” or a CFC, under Section 957(a) of the
Code.
|
| • |
Risks Related to our Location in Israel —The tax benefits that
are available to us require us to meet several conditions and may
be terminated or reduced in the future, which would increase our
costs and taxes.
|
| • |
Risks Related to our Location in Israel—The government grants
we have received for research and development expenditures require
us to satisfy specified conditions and restrict our ability to
manufacture products and transfer technologies outside of Israel.
If we fail to comply with these conditions or such restrictions, we
may be required to refund grants previously received together with
interest and penalties and may be subject to criminal
charges.
|
| • |
General Risks—Our business may be materially affected by
changes to fiscal and tax policies. Potentially negative or
unexpected tax consequences of these policies, or the uncertainty
surrounding their potential effects, could adversely affect our
results of operations and share price.
|
Additionally, see “ITEM 5: Overview—Government Grants” for a
description of grants received from the Israel Innovation Authority
of the Ministry of Economy and “ITEM 10: Additional
Information—Taxation—United States Federal Income Taxation—Passive
Foreign Investment Company Considerations” for a description of
classification as a “passive foreign investment company,” or a
PFIC, for United States federal income tax purposes.
Internal Cybersecurity
As a provider of innovative network intelligence and security
solutions for mobile and fixed service providers, we are
particularly sensitive about the possibility of cyber-attacks and
data theft. A breach of our system could provide data information
about us and the customers that our solutions protect. Further, we
may be targeted by cyber-terrorists because we are an Israeli
company. We are also aware of the material impact that an actual or
perceived breach of our network may have on the market perception
of our products and services and on our potential liability. In
2022, we believe we have successfully prevented all cyber-attack
and breach attempts, with no impact on our ongoing
operations.
We are focused on instituting new technologies and solutions to
assist in the prevention of potential and attempted cyber-attacks,
as well as protective measures and contingency plans in the event
of an existing attack. For instance, in our internal IT systems, we
employ identity and access controls, next-gen endpoint protection
and other security measures that we believe make our infrastructure
less susceptible to cyber-attacks. We also continuously monitor our
IT networks and systems for intrusions and regularly maintain our
backup and protective systems. We have made certain updates to our
IT infrastructure to enhance our ability to prevent and respond to
such threats and we routinely test the infrastructure for
vulnerabilities.
We conduct periodic trainings for our employees in this respect on
phishing, malware and other cybersecurity risks to the Company. We
also have mechanisms in place designed to ensure prompt internal
reporting of potential or actual cybersecurity breaches, and
maintain compliance programs to address the potential applicability
of restrictions on trading while in possession of material,
nonpublic information generally and in connection with a
cybersecurity breach. Finally, our agreements with third parties
also typically contain provisions that reduce or limit our exposure
to liability.
C. Organizational Structure
As of December 31, 2022, we held directly and indirectly the
percentage indicated of the outstanding capital of the following
subsidiaries:
|
Company
|
|
Jurisdiction of Incorporation
|
|
Percentage
Ownership
|
|
|
Allot
Communications Inc.
|
|
United States
|
|
|
100
|
%
|
|
Allot
Communications Europe SARL
|
|
France
|
|
|
100
|
%
|
|
Allot
Communications (Asia Pacific) Pte. Limited
|
|
Singapore
|
|
|
100
|
%
|
Allot
Communications (UK) Limited (with branches in Italy and
Germany)
|
|
United Kingdom
|
|
|
100
|
%
|
|
Allot
Communications Japan K.K.
|
|
Japan
|
|
|
100
|
%
|
|
Allot
Communications Africa (PTY) Ltd
|
|
South
Africa
|
|
|
100
|
%
|
|
Allot
Communications India Private Ltd
|
|
India
|
|
|
100
|
%
|
|
Allot
Communications Spain, S.L. Sociedad Unipersonal
|
|
Spain
|
|
|
100
|
%
|
Allot
Communications (Colombia) S.A.S
|
|
Colombia
|
|
|
100
|
%
|
|
Allot
MexSub
|
|
Mexico
|
|
|
100
|
%
|
|
Allot
Turkey Komunikasion Hizmeleri limited
|
|
Turkey
|
|
|
100
|
%
|
|
Allot
Australia (PTY) LTD
|
|
Australia
|
|
|
100
|
%
|
* Allot Ltd also holds a branch in Colombia.
D. Property, Plant and Equipment
Our principal administrative and research and development
activities are located in our approximately 65,412 square foot
(6,077 square meter) facilities in Hod-Hasharon, Israel. The leases
for our facilities vary in dates and terms, with the main
facility’s non-stabilized lease expiring in February 2025.
We also lease a total of 7,664 square feet (712 square meters) in
two facilities in Spain, mainly for our sales and research and
development operations in Spain, pursuant to lease agreements. The
lease agreement of our main site in Spain was renewed for one year
in 2022 and we are considering to extend it further subject to
mutually agreed terms.
ITEM 4A:
Unresolved Staff Comments
Not applicable.
ITEM 5: Operating
and Financial Review and Prospects
The information contained in this section should be read in
conjunction with our consolidated financial statements for the year
ended December 31, 2022 and related notes and the information
contained elsewhere in this annual report. Our financial statements
have been prepared in accordance with U.S. generally accepted
accounting principles (“U.S. GAAP”). This discussion contains
forward-looking statements that are subject to known and unknown
risks and uncertainties. As a result of many factors, such as those
set forth under “ITEM 3.D: Risk Factors” and “Cautionary Note
Regarding Forward-Looking Statements,” our actual results may
differ materially from those anticipated in these forward-looking
statements.
A. Operating Results
Overview
We are a leading provider of innovative network intelligence and
security solutions that enable service providers and enterprises to
protect and personalize the digital experience and monetize on
their networks. Our flexible and highly scalable service delivery
framework leverages the intelligence in data networks, enabling
service providers to get closer to their customers, safeguard
network assets and users, and accelerate time-to-revenue for
value-added services. Our customers use our solutions to create
sophisticated policies to monitor network applications, enforce
quality of service policies that guarantee mission-critical
application performance, mitigate security risks and leverage
network infrastructure investments.
We market and sell our products through a variety of channels,
including direct sales and through our channel partners, which
include distributors, resellers, OEMs and system integrators. We
have a diversified end-customer base consisting primarily of
service providers, enterprises, government and law enforcement
entities. The resulting intelligent, content-aware broadband
networks enable our customers to accurately monitor and manage
network traffic per application, subscriber, network topology and
device.
In 2022, the primary drivers of our revenues were the mobile and
fixed markets.
Key measures of our performance
Revenues
We generate revenues from two sources: (1) sales of our network
traffic management systems, our network management application
solutions and platforms, and our security solution to telecom
providers and (2) the provision of maintenance and support services
and professional services, including installation and training. We
generally provide maintenance and support services pursuant to a
maintenance and support program, which may be purchased by
customers at the time of product purchase or on a renewal
basis.
We recognize revenue under the core principle that transfer of
control of our products or services to our customers should be
reflected by an amount that represents the consideration we expect
to receive in revenue. As such, we identify a contract with a
customer, identify the performance obligations in the contract,
determine the transaction price, allocate the transaction price to
each performance obligation in the contract and recognize revenues
when (or as) we satisfy each performance obligation. We typically
grant a one-year hardware and three-month software warranty on all
of our products, or one-year hardware and software warranty to
customers that purchase annual maintenance and support. Typically,
our support contracts with our customers provide hot line support,
warranty, and software updates and upgrades if and when available.
We record a provision for warranty at the time the product’s
revenue is recognized. We estimate the liability of possible
warranty claims based on our historical experience. Warranty claims
have to date been immaterial to our results of operations.
Maintenance and support revenues are recognized on a straight-line
basis over the term of the applicable maintenance and support
agreement. See “—Critical Accounting Policies and Estimates—Revenue
Recognition” below.
Geographical
breakdown. See “—Operating
Results—Results of Operations—Revenues.” for the geographic
breakdown of our revenues by percentage for the years ended
December 31, 2021 and 2022.
Cost of revenues and gross margins
Our products’ cost of revenues consists primarily of costs of
materials, manufacturing services and overhead, warehousing and
product testing. Our services’ cost of revenues consists primarily
of salaries and related personnel costs for our customer success
staff. In 2022, our gross margin decreased compared to 2021 due to
a decrease in revenues mainly attributable to delays in a number of
our large projects. In 2021, our gross margin decreased compared to
2020, mainly due to a one-time favorable product mix in 2020.
We believe that measuring our products’ cost of revenues and gross
margins is helpful to understand our financial statements and
results of operations because it enables the investors to evaluate
the company’s effectiveness in its operations. In addition, our
management team uses these metrics to monitor the company’s
performance.
Operating expenses
Research
and development. Our research and
development expenses consist primarily of salaries and related
personnel costs, costs for subcontractor services, depreciation,
rent and costs of materials consumed in connection with the design
and development of our products. We expense all of our research and
development costs as they are incurred. Our net research and
development expenses are comprised of gross research and
development expenses offset by financing through grants from the
Israel Innovation Authority and Spain Tax Authority. Such
participation grants are recognized at the time at which we are
entitled to such grants on the basis of the costs incurred and
included as a deduction of research and development expenses (see
“—Government Grants” below). We believe that significant investment
in research and development, including hiring high quality research
and development personnel, is essential to our future
success.
Sales
and marketing. Our sales and marketing
expenses consist primarily of salaries and related personnel costs,
travel expenses, costs associated with promotional activities such
as public relations, conventions and exhibitions, rental expenses,
depreciation and commissions paid to third parties, promote our
brand, establish new marketing channels and expand our presence
worldwide.
General
and administrative. Our general and
administrative expenses consist of salaries and related personnel
costs, rental expenses, costs for professional services, credit
loss expenses and depreciation. General and administrative expenses
also include costs associated with corporate governance, VAT and
other tax expenses and regulatory compliance, compliance with the
rules implemented by the SEC, Nasdaq and the TASE and premiums for
our director and officer liability insurance.
Approved Enterprise
Our facilities in Hod-Hasharon, Israel have been granted Approved
Enterprise status under the Encouragement of Capital Investments
Law, 1959, and enjoy certain tax benefits under this program. We
intend to utilize these tax benefits after we utilize our net
operating loss carry forwards. As of December 31, 2022, our net
operating loss carry forwards for Israeli tax purposes totaled
approximately $81.5 million. Income derived from other sources,
other than through our “Approved Enterprise” status, during the
benefit period will be subject to the regular corporate tax
rate.
Government Grants
Our research and development efforts have been financed, in part,
through grants from the Israel Innovation Authority under our
approved plans in accordance with the Research and Development Law.
In 2021 and 2022, we received grants from the Israel Innovation
Authority through non-royalty bearing programs.
Factors Affecting Our Performance
Our business, financial position and results of operations, as well
as the period-to-period comparability of our financial results, are
significantly affected by a number of factors, some of which are
beyond our control, including:
Customer
concentration. The revenues derived
from our largest customer in each of the past three years were 8%,
11% and 43% of our total revenues in 2022, 2021 and 2020,
respectively. The revenues derived from our second largest customer
amounted to 7%, 9% and 11% of our total revenues for 2022, 2021 and
2020, respectively. The revenues from our largest customer in 2020
were for a one-time delivery of products, including AllotSmart
products and related services, which will not recur in subsequent
years, although will be subject to ongoing maintenance revenues.
While we have some visibility into the likely scope of the
customers’ projects, our relationships are conducted solely on a
purchase order basis and we do not have any commitment for future
purchase orders from these customers. The loss of any of such third
parties could harm our results of operations and financial
condition.
Size
of end-customers and sales cycles. We have a global,
diversified end-customer base consisting primarily of service
providers, enterprises, government and law enforcement entities.
The deployment of our products by small and midsize enterprises and
service providers can be completed relatively quickly. Large
service providers take longer to plan the integration of our
solutions into their existing networks and to set goals for the
implementation of the technology. Sales to large service providers
are therefore more complicated as they involve a relatively larger
number of network elements and solutions. We are seeking to obtain
further significant customers in the large service provider market
that would positively impact our future performance, but could
decrease our market share. The longer sales cycles associated with
the increased sales to large service providers of our platforms may
increase the unpredictability of the timing of our sales and may
cause our quarterly and annual operating results to fluctuate if a
significant customer delays its purchasing decision and/or defers
an order. Furthermore, longer sales cycles may result in delays
from the time we increase our operating expenses and make
investments in inventory to the time that we generate revenue from
related product sales.
Average
selling prices. Our performance is
affected by the selling prices of our products. We price our
products based on several factors, including manufacturing costs,
the stage of the product’s life cycle, competition, technical
complexity of the product, and discounts given to channel partners
in certain territories. We typically are able to charge the highest
price for a product when it is first introduced to the market. We
expect that the average selling prices for our products will
decrease over each product’s life cycle as our competitors
introduce new products. In order to maintain or increase our
current prices, we expect that we will need to enhance the
functionality of our existing products by offering higher system
speeds, additional products and features, such as additional
security functions, supporting additional applications and
providing enhanced reporting tools. We also from time to time
introduce enhanced products, typically higher-end models that
include new architecture and design and new capabilities. Such
enhanced products typically increase our average selling price. To
further offset such declines, we sell maintenance and support
programs for our products, and as our customer base and number of
field installations grow, our related service revenues are expected
to increase.
Cost
of revenues and cost reductions. Our cost of revenues as
a percentage of total revenues was 30.6% for 2021 and 32.5% for
2022. Our products use off-the-shelf components and typically the
prices of such components decline over time. However, the
introduction and sale of new or enhanced products and services may
result in an increase in our cost of revenues. We make a continuous
effort to identify cheaper components of comparable performance and
quality. We also seek improvements in engineering and manufacturing
efficiency to reduce costs. Our products incorporate features that
are purchased from third parties. In addition, new products usually
have higher costs during the initial introduction period. We
generally expect such costs to decline as the product matures and
sales volume increases. The introduction of new products may also
involve a significant decrease in demand for older products. Such a
decrease may result in a devaluation or write-off of such older
products and their respective components. The growth of our
customer base is usually coupled with increased service revenues
primarily resulting from increased maintenance and support. In
addition, the growth of our installed base with large service
providers may result in increased demand for professional services,
such as training and installation services. An increase in demand
for such services may require us to hire additional personnel and
incur other expenditures. However, these additional expenses,
handled efficiently, may be utilized to further support the growth
of our customer base and increase service revenues. In 2022, our
cost of revenues decreased due to a decrease in revenues mainly
attributable to delays in a number of our large projects. In 2021,
our cost of revenues increased due to an increase in
revenues.
Currency
exposure. A majority of our
revenues in previous years and a substantial portion of our
expenses are denominated in the U.S. dollar. However, a significant
portion of our revenues is incurred in currencies other than the
U.S. dollar, for example in Euros. In addition, a significant
portion of our expenses, associated with our global operations,
including personnel and facilities-related expenses, are incurred
in currencies other than the U.S. dollar; this is the case
primarily in Israel and to a lesser extent in other countries in
Europe, Asia, Africa and Latin America. Consequently, a decrease in
the value of the U.S. dollar relative to local currencies will
increase the dollar cost of our operations in these countries. A
relative decrease in the value of the U.S. dollar would be
partially offset to the extent that we generate revenues in such
currencies. In order to partially mitigate this exposure, we have
decided in the past and may decide from time to time in the future
to enter into hedging transactions. We may discontinue hedging
activities at any time. As such decisions involve substantial
judgment and assessments primarily regarding future trends in
foreign exchange markets, which are very volatile, as well as our
future level and timing of cash flows of these currencies, we
cannot provide any assurance that such hedging transactions will
not affect our results of operations when they are realized. See
Note 5 to our consolidated financial statements included elsewhere
in this annual report for further information. Also see “ITEM 11:
Quantitative and Qualitative Disclosure About Market
Risk.”
Interest
rate exposure. We have a significant
amount of cash that is currently invested primarily in interest
bearing vehicles, such as bank time deposits and available for sale
marketable securities. These investments expose us to risks
associated with interest rate fluctuations See “ITEM 11:
Quantitative and Qualitative Disclosure About Market
Risk.”
Results of Operations
The following table sets forth our statements of operations as a
percentage of revenues for the periods indicated:
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Year Ended December 31,
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2021
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2022
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Revenues:
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|
|
|
|
|
|
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Products
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60.6
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|
|
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49.7
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Services
|
|
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39.4
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|
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50.3
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|
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Total revenues
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|
|
100
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|
|
|
100
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|
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Cost of revenues:
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|
|
|
|
|
|
|
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Products
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|
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21.7
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|
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17.4
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Services
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|
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8.9
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|
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15.1
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|
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Total cost of revenues
|
|
|
30.6
|
|
|
|
32.5
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|
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Gross
profit
|
|
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69.4
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|
|
|
67.5
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Operating expenses:
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|
|
|
|
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Research and development, net
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32.3
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|
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40.6
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Sales
and marketing
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35.9
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40.2
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General and administrative
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10.4
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|
|
|
13
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|
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Total
operating expenses
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|
|
78.6
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|
|
|
93.8
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Operating loss
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|
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9.3
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|
|
|
26.2
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Financing income, net
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|
0.2
|
|
|
|
1.7
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|
|
Loss
before income tax expense
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|
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9.1
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|
|
|
24.5
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|
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tax
expense
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|
1.3
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|
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1.5
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Net
loss
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|
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10.3
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26.1
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Revenues
See “ITEM 4B: Information on Allot—Business Overview—Customers” for
the geographic breakdown of our revenues by percentage for the
years ended December 31, 2020, 2021 and 2022.
Year Ended December 31, 2022 Compared to Year Ended December 31,
2021
Products.
Product revenues decreased by $27.2 million, or 31%, to $61 million
in 2022 from $88.2 million in 2021. The decrease in revenues in
2022 was mainly attributable to delays experienced in a number of
our large projects.
Services.
Service revenues increased by $4.4 million, or 7.7%, to $61.8
million in 2022 from $57.4 million in 2021. The increase was mainly
attributed to an increase in SECaaS services and support and
maintenance.
Product revenues comprised 49.7% of our total revenues in 2022, a
decrease of 10.9% compared to 2021 while the services revenues
portion of total revenues comprised 50.3% of our total revenues in
2022, an increase by 10.9%.
Cost of revenues and gross margin
Products.
Cost of product revenues decreased by $10.3 million, or 32.6%, to
$21.3 million in 2022 from $31.6 million in 2021. Product gross
margin increased slightly to 65% in 2022 from 64.2% in
2021.
Services.
Cost of services revenues increased by $5.5 million, or 42.3%, to
$18.5 million in 2022 from $13 million in 2021. Services gross
margin decreased to 70% in 2022 from 77.4% in 2021. This decrease
is mainly attributed to a one-time write off in 2022.
Total gross margin decreased from 69.4% in 2021 to 67.5% in
2022.
Operating expenses
Research
and development. Gross research and
development expenses increased by $3.3 million, or 7%, to $50.6
million in 2022 from $47.3 million in 2021. The increase in our
research and development expenses is mainly attributable to our
increase in payroll-related and subcontractors’ expenses. Gross
research and development expenses as a percentage of total revenues
increased to 41.3% (40.6%, net) in 2022 from 32.5% (32.3%, net) in
2021.
Sales
and marketing. Sales and marketing
expenses decreased by 2.9 million, or 5.5%, to $49.4 million in
2022 from $52.3 million in 2021. The decrease is primarily
attributable to a decrease in payroll-related expenses. Sales and
marketing expenses as a percentage of total revenues increased to
40.2% in 2022 from 35.9% in 2021.
General
and administrative. General and
administrative expenses increased by $0.8 million, or 5.5%, to $16
million in 2022 from $15.1 million in 2021. The increase is
primarily attributable to an increase in payroll-related expenses
and doubtful debts expenses. General and administrative expenses as
a percentage of revenues increased to 13% in 2022 from 10.4% in
2021.
Financial
income, net. In 2022 we had $2.1
million financial income, net. In 2021, we had $0.3 million
financial income, net. The change in 2022 was mainly attributed to
an increase in interest income and income from exchange rate
fluctuation.
Income
tax expense. Income tax expense in
both 2022 and 2021 was $1.9 million.
For a discussion of our operating results for the fiscal year ended
December 31, 2021 as compared to the fiscal year ended December 31,
2020, see “ITEM 5. Operating and Financial Review and
Prospects—Operating Results” of our Annual Report on Form 20-F for
the fiscal year ended December 31, 2021, which was filed with the
SEC on March 22, 2022.
B. Liquidity and Capital Resources
As of December 31, 2022, we had $12.3 million in cash and cash
equivalents, $4.3 million available for sale marketable securities,
and $69.8 million in short-term deposits and restricted deposits.
As of December 31, 2022, our working capital, which we calculate by
subtracting our current liabilities from our current assets, was
$91.2 million.
Based on our current business plan, we believe that our existing
cash balances will be sufficient to meet our anticipated cash needs
for working capital and capital expenditures for at least the next
twelve months. If our estimates of revenues, expense or capital or
liquidity requirements change or are inaccurate and are
insufficient to satisfy our liquidity requirements, we may seek to
sell additional equity or arrange additional debt financing. In
addition, we may seek to sell additional equity or arrange debt
financing to give us financial flexibility to pursue attractive
acquisitions or investment opportunities that may arise in the
future.
Operating Activities
Net cash used in operating activities in 2022 was $32.6 million.
Net cash used in operating activities consisted mainly of a net
loss of $32 million, depreciation, amortization and impairment of
intangible assets of $7.4 million, $9.2 million of share-based
compensation expense, an increase of $2.2 million in inventory, a
decrease of $0.4 million in employees and payroll accruals, an
increase of $11.6 million in trade receivables, an increase of $7.7
million in trade payables, a decrease of $1.7 million in other
payables and accrued expenses, an increase of $0.1 million in other
receivables and prepaid expenses, a decrease of $10 million in
deferred revenues and $1.1 million related to other operating
activities. The change in employees and payroll accruals, trade
payables and other receivables and prepaid expenses was mainly due
to advanced payments to suppliers and payroll-related items
occurring in 2021.
During 2021, we had $8.4 million in cash and cash equivalents from
operating activities. Net cash used in operating activities
consisted mainly of a net loss of $15 million, depreciation,
amortization and impairment of intangible assets of $5.6 million,
$8 million of share-based compensation expense, a decrease of $1.5
million in inventory, an increase of $0.5 million in employees and
payroll accruals, an increase of $16.8 million in trade
receivables, an increase of $1.9 million in trade payables, a
decrease of $1.6 in other payables and accrued expenses, a decrease
of $4.9 million in other receivables and prepaid expenses, an
increase of $1.6 million in deferred revenues and $1.1 million
related to other operating activities. The change in employees and
payroll accruals, trade payables and other receivables and prepaid
expenses was mainly due to advanced payments to suppliers and
payroll-related items.
Investing Activities
Net cash used for investing activities in 2022 was $6.5 million,
primarily attributable to proceeds from investments in short-term
deposits of $7.8 million, the purchase of property and equipment of
$5.6 million, and other activities, including acquisitions, of $0.5
million. The above changes were partially offset by the redemption
or sale of marketable securities of $7 million and a decrease in
restricted deposits of $0.4 million.
Net cash provided by investing activities in 2021 was $6.3 million,
primarily attributable to proceeds from investment in short-term
deposits of $13.5 million, the purchase of property and equipment
of $7.6 million and an increase in restricted deposits of $0.4
million. The above changes were partially offset by the redemption
or sale of marketable securities of $15.1 million.
We expect that our capital expenditures will total approximately
$5.3 million in 2023. We anticipate that these capital expenditures
will be primarily related to purchase of equipment of SECaaS deals
and to further investments in lab equipment for research and
development and customer success as well as IT
infrastructure.
Financing Activities
Net cash provided by financing activities in 2022 was $39.7
million, which was mainly attributable to the issuance of
convertible debt in February 2022.
Net cash provided by financing activities in 2021 was $2.8 million,
which was mainly attributable to the issuance of share capital
through the exercise of share options.
For a discussion of our liquidity and capital resources for the
fiscal year ended December 31, 2020, see “ITEM 5. Operating and
Financial Review and Prospects—Liquidity and Capital Resources” of
our Annual Report on Form 20-F for the fiscal year ended December
31, 2021, which was filed with the SEC on March 22,
2022.
On February 18, 2022, we issued to Lynrock Lake Master Fund LP a
senior unsecured promissory note, convertible into our ordinary
shares, with an aggregate principal amount of $40 million. The note
will mature on February 14, 2025, subject to the Company’s option
to extend the maturity date by one year up to two times. The
closing balance of the convertible note as of December 31, 2022 was
$39.6 million (calculated by subtracting the $0.4 million issuance
expense from the gross principal amount of $40 million).
Material Cash Requirements
Our material cash requirements as of December 31, 2022, and any
subsequent interim period, primarily include our capital
expenditures, lease obligations and purchase obligations.
Our capital expenditures primarily consist of purchases of lab
equipment, computers and peripheral equipment, office furniture and
equipment, leasehold improvements and SECaaS equipment. Our capital
expenditures were $7.6 million in 2020, $7.6 million in 2021 and
$5.6 million in 2022. We will continue to make capital expenditures
to meet the expected growth of our business.
Our lease obligations consist of the commitments under the lease
agreements for our group facilities and motor vehicles. The group
facilities are leased under several lease agreements with various
expiration dates. Our leasing expense was $3.3 million in 2020,
$3.1 million in 2021 and $3.8 million in 2022.
Our purchase obligations consist primarily of commitments for our
operating activities. Our operating expenses were $105 million
in 2020, $115 million in 2021 and $115 million in 2022. More than
70% of the Company’s operating expenses are attributable to salary
expenses.
We intend to fund our existing and future material cash
requirements with our existing cash balance. We will continue to
make cash commitments, including capital expenditures, to support
the growth of our business.
Other than as discussed above, we did not have any significant
capital and other commitments or long-term obligations as of
December 31, 2022.
C. Research and Development, Patents and Licenses
In 2020, 2021 and 2022, we received non-royalty bearing grants from
the Israel Innovation Authority. However, the terms of the grants
require us to comply with the IIA’s restrictions and obligations as
set out below.
| • |
Local
Manufacturing Obligation. We must manufacture
the products developed with these grants in Israel. We may
manufacture the products outside Israel only if we receive prior
approval from the IIA (such approval is not required for the
transfer of up to 10% of the manufacturing capacity in the
aggregate, in which case a notice must be provided to the IIA and
not objected to by the IIA within 30 days of such
notice).
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| • |
Know-How
Transfer Limitation. We have certain
limitations on our ability to transfer know-how funded by the IIA.
Approval of any transfer of IIA funded know-how to another Israeli
company will be granted only if the recipient abides by the
provisions of the Innovation Law and related regulations. Transfer
of IIA funded know-how outside of Israel requires prior approval of
the IIA and may be subject to payments to the IIA.
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| • |
Change
of Control. We must notify the IIA
in respect of any change in the ownership of our shares. In respect
of any non-Israeli citizen, resident or entity that, among other
things, (i) becomes a holder of 5% or more of our share capital or
voting rights, (ii) is entitled to appoint one or more of our
directors or our chief executive officer or (iii) serves as one of
our directors or as our chief executive officer (including holders
of 25% or more of the voting power, equity or the right to nominate
directors in such direct holder, if applicable) are required to
obtain an undertaking to comply with the rules and regulations
applicable to the grant programs of the IIA.
|
Approval to manufacture products outside of Israel or consent to
the transfer of IIA funded know-how, if requested, is within the
discretion of the IIA. Furthermore, the IIA may impose conditions
on any arrangement under which it permits us to transfer IIA funded
know-how or manufacturing out of Israel.
As of December 31, 2022, we had 28 issued U.S. patents, two U.S.
patents that have recently been allowed but not issued, three U.S.
reissued patents, and two pending U.S. patent applications. We
expect to formalize our evaluation process for determining which
inventions to protect by patents or other means. We cannot be
certain that patents will be issued as a result of the patent
applications we have filed.
D. Trend Information
See “ITEM 5: Operating and Financial Review and Prospects”
above.
E. Critical Accounting Estimates
The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and
expenses and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. These estimates
and judgments are subject to an inherent degree of uncertainty and
actual results may differ. Our significant accounting policies are
more fully described in Note 2 to our consolidated financial
statements included elsewhere in this annual report. Certain of our
accounting policies are particularly important to the portrayal of
our financial position and results of operations. In applying these
critical accounting policies, our management uses its judgment to
determine the appropriate assumptions to be used in making certain
estimates. Those estimates are based on our historical experience,
the terms of existing contracts, our observance of trends in our
industry, information provided by our customers and information
available from other outside sources, as appropriate. With respect
to our policies on revenue recognition and warranty costs, our
historical experience is based principally on our operations since
we commenced selling our products in 1998. Our estimates are
primarily guided by observing the following critical accounting
policies:
| • |
Allowance for credit losses;
|
| • |
Accounting for share-based compensation;
|
| • |
Impairment of goodwill and long lived assets;
|
| • |
Contingent liabilities; and
|
| • |
Contingent Consideration.
|
Because each of the accounting policies listed above requires the
exercise of certain judgments and the use of estimates, actual
results may differ from our estimations and as a result would
increase or decrease our future revenues and net income.
Revenue
recognition. The Company generates
revenues mainly from selling its products along with related
maintenance and support services. At times, these arrangements may
also include professional services, such as installation services
or training. Some of the Company’s product sales are through
resellers, distributors, OEMs and system integrators, all of whom
are considered end-users. The Company also generates revenues from
services, in which the Company provides network filtering and
security services to its customers.
The Company adopted accounting standards codification 606, “Revenue
from Contracts with Customers” (“ASC 606”), effective on January 1,
2018. The Company recognizes revenue under the core principle that
transfer of control to the Company’s customers should be depicted
in an amount reflecting the consideration the Company expects to
receive. As such, the Company identifies a contract with a
customer, identifies the performance obligations in the contract,
determines the transaction price, allocates the transaction price
to each performance obligation in the contract and recognizes
revenues when (or as) the Company satisfies a performance
obligation.
Most of the Company’s contracts usually include combinations of
products and services, that are capable of being distinct and
accounted for as separate performance obligations.
The products are distinct as the customer can derive the economic
benefit of it without any professional services, updates or
technical support. The Company allocates the transaction price to
each performance obligation based on its relative standalone
selling price out of the total consideration of the contract. For
support, the Company determines the standalone selling prices based
on the price at which the Company separately sells a renewal
support contract on a stand-alone basis. For professional services,
the Company determines the standalone selling prices based on the
price at which the Company separately sells those services on a
stand-alone basis. If the standalone selling price is not
observable, the Company estimates the standalone selling price by
taking into account available information such as geographic or
regional specific factors, internal costs, profit objectives, and
internally approved pricing guidelines related to the performance
obligation.
Product revenue is recognized at a point in time when the
performance obligation is being satisfied. Maintenance and support
related revenues are deferred and recognized on a straight-line
basis over the term of the applicable maintenance and support
agreement. Professional services are usually recognized at a point
in time when the performance obligation is being satisfied.
The Company also enters into service contracts, in which the
Company provides SECaaS solutions to operators, which the Company
considers as its customers. The Company’s SECaaS solutions are
offered to operators on a Revenue Share business model, where both
the Company and the operator share the revenue generated from the
operator’s subscribers. Most of the Company’s SECaaS contracts
contain a single performance obligation comprised of series of
distinct goods and services satisfied over time. The contracts
consideration is based on usage by the operator’s subscribers. As
such, the Company allocates the variable consideration in those
contracts to distinct service periods in which the service is
provided and recognizes revenue for each distinct service
period.
Provision
for returns. We provide a provision
for product returns based on its experience with historical sales
returns. Such provisions amounted to $0.1 million and $0.2 million
as of December 31, 2022 and 2021, respectively.
Allowance
for credit losses. Trade receivables are
recorded and carried at the original invoiced amount which was
recognized as revenues less an allowance for any potential
uncollectible amounts. The Company makes estimates of expected
credit losses for the allowance for credit losses and allowance for
unbilled receivables based upon its assessment of various factors,
including historical experience, the age of the trade receivable
balances, credit quality of its customers, current economic
conditions, reasonable and supportable forecasts of future economic
conditions, and other factors that may affect its ability to
collect from customers. The estimated credit losses allowance is
recorded as general and administrative expenses on the Company’s
consolidated statements of income (loss).
Accounting
for share-based compensation. We account for
share-based compensation in accordance with Accounting Standards
Codification No. 718, “Compensation - Stock Compensation” (“ASC No.
718”) that requires companies to estimate the fair value of
equity-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as an expense over the
requisite service periods in our consolidated statement of
comprehensive loss. We recognize compensation expense for the value
of its awards granted based on the straight-line method over the
requisite service period of each of the awards, net of estimated
forfeitures. ASC No. 718 requires forfeitures to be estimated at
the time of the grant and revised in subsequent periods if actual
forfeitures differ from those estimates. The expected annual
pre-vesting forfeiture rate affects the number of vested RSUs. The
pre-vesting rate ranged between 0% and 30% in the years 2022, 2021
and 2020. In connection with the grant of options and RSUs, we
recorded total share-based compensation expenses of $8 million in
2021 and $9.2 million in 2022. In 2022, $1.1 million, $3.2 million,
$3 million and $1.9 million of our share-based compensation expense
resulted from cost of revenue, research and development expenses,
net, sales and marketing expenses and general and administrative
expenses, respectively, based on the department in which the
recipient of the option grant was employed. As of December 31,
2022, we had an aggregate of $12.6 million of unrecognized
share-based compensation remaining to be recognized over a weighted
average vesting period of 2 years.
Inventoriesare
stated at the lower of cost or market value. Inventory write-offs
are provided to cover risks arising from slow-moving items,
technological obsolescence, excess inventory and discontinued
products. Inventory write-off expenses in 2022 and 2021 totaled
$0.9 million and $4.6 million, respectively.
Marketable
securities. We account for our
investments in marketable securities using Accounting Standards
Codification No. 320, “Investments – Debt and Equity Securities”
(“ASC No. 320”).
We determine the appropriate classification of marketable
securities at the time of purchase and evaluate such designation as
of each balance sheet date. We classify all of our investments in
marketable securities as available for sale. Available for sale
securities are carried at fair value, with unrealized gains and
losses reported in “accumulated other comprehensive income (loss)”
in shareholders’ equity. Realized gains and losses on sales of
investments are included in earnings and are derived using the
specific identification method for determining the cost of
securities. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity.
Such amortization together with interest and dividends on
securities are included in financial income, net, if any.
As of December 31, 2022, we held available for sale marketable
securities of $4.3 million. As of December 31, 2022, the
accumulated unrealized loss recorded in other comprehensive loss
was $0.04 million.
Impairment
of goodwill and long-lived assets.
ASC 350 allows an entity to first assess qualitative factors to
determine whether it is necessary to perform the quantitative
goodwill impairment test. If the qualitative assessment does not
result in a more likely than not indication of impairment, no
further impairment testing is required. If the Company elects not
to use this option, or if the Company determines that it is more
likely than not that the fair value of a reporting unit is less
than its carrying value, then the Company prepares a quantitative
analysis to determine whether the carrying value of reporting unit
exceeds its estimated fair value. If the carrying value of a
reporting unit exceeds its estimated fair value, the Company
recognizes an impairment of goodwill for the amount of this excess,
in accordance with the guidance in FASB Accounting Standards Update
(“ASU”) No. 2017-04, Intangibles - Goodwill and Other (Topic 350),
Simplifying the Test for Goodwill Impairment, which we adopted as
of January 1, 2020.
The Company operates in one operating segment, and this segment
comprises its only reporting unit. The Company has performed an
annual impairment analysis as of December 31, 2022 and determined
that the carrying value of the reporting unit was lower than the
fair value of the reporting unit. Fair value is determined using
market value. During the years 2022, 2021 and 2020, no impairment
losses were recorded.
We perform an annual impairment analysis of goodwill at December 31
of each year, or more often as applicable. We operate in one
operating segment, and this segment comprises only one reporting
unit. The provisions of ASC No. 350 require that a two-step
impairment test be performed on goodwill at the level of the
reporting units. In the first step, we compare the fair value of
the reporting unit to its carrying value. If the fair value exceeds
the carrying value of the net assets, goodwill is considered not
impaired, and no further testing is required to be performed. If
the carrying value of the net assets exceeds the fair value, then
we must perform the second step of the impairment test in order to
determine the implied fair value of goodwill. If the carrying value
of goodwill exceeds its implied fair value, then we would record an
impairment loss equal to the difference.
We believe that our business activity and management structure meet
the criterion of being a single reporting unit for accounting
purposes. We performed an annual impairment analysis as of December
31, 2022 and determined that the carrying value of the reporting
unit was lower than the fair value of the reporting unit. Fair
value is determined using market value. During the years ended 2021
and 2022, no impairment losses were recorded.
Intangible assets acquired in a business combination are recorded
at fair value at the date of the acquisition. Following initial
recognition, intangible assets are carried at cost less any
accumulated amortization and any accumulated impairment losses. The
useful lives of intangible assets are assessed to be either finite
or indefinite. Intangible assets that are not considered to have an
indefinite useful life are amortized over their estimated useful
lives. Some of the acquired intangible assets are amortized over
their estimated useful lives in proportion to the economic benefits
realized. This accounting policy results in accelerated
amortization of such customer relationships and backlog as compared
to the straight-line method. All other intangible assets are
amortized over their estimated useful lives on a straight-line
basis.
Property and equipment and intangible assets subject to
amortization are reviewed for impairment in accordance with ASC No.
360, “Accounting for the Impairment or Disposal of Long-Lived
Assets,” whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the assets. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. During the
years ended 2021 and 2022, no impairment losses were
recorded.
Income
taxes. We account for income
taxes in accordance with Accounting Standards Codification No. 740,
“Income Taxes” (“ASC No. 740”). ASC No. 740 prescribes the use of
the liability method, whereby deferred tax asset and liability
account balances are determined based on differences between
financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. We provide a
valuation allowance, if necessary, to reduce deferred tax assets to
their estimated realizable value in the near future, if it is more
likely than not that some portion or all of the deferred tax assets
will not be realized.
In Israel, we have accumulated operating loss carry forwards of
approximately $81.5 million and capital losses of approximately $27
million for tax purposes as of December 31, 2022, which may be
carried forward and offset against ordinary income and capital
gains respectively in the future for an indefinite period. In the
United States, the accumulated losses for U.S. federal income tax
return purposes were approximately $2 million and the accumulated
losses for U.S. state income tax return purposes were approximately
$5 million. The federal accumulated losses for tax purposes expire
between 2026 and 2037. U.S. states have varying rules regarding
expiration of net operating losses. We believe that because of our
history of losses, and uncertainty with respect to future taxable
income, it is more likely than not that the deferred tax assets
regarding the loss carry forwards will not be utilized in the
foreseeable future, and therefore, a valuation allowance was
provided to reduce deferred tax assets to nil. The valuation
allowance attributed to such losses for the year ended December 31,
2022 was $42 million.
ASC No. 740 contains a two-step approach to recognizing and
measuring a liability for uncertain tax positions. The first step
is to evaluate the tax position taken or expected to be taken in a
tax return by determining if the weight of available evidence
indicates that it is more likely than not that, on an evaluation of
the technical merits, the tax position will be sustained on audit,
including resolution of any related appeals or litigation
processes. The second step is to measure the tax benefit as the
largest amount that is more than 50% likely to be realized upon
ultimate settlement.
Contingent
liabilities. We are, from time to
time, involved in claims, lawsuits, government investigations, and
other proceedings arising in the ordinary course of our business.
In making a determination regarding provisions for liability, using
available information, we evaluate the likelihood of an unfavorable
outcome in legal or regulatory proceedings to which we are a party
to and record a loss contingency when it is probable a liability
has been incurred and the amount of the loss can be reasonably
estimated. These subjective determinations are based on the status
of such legal or regulatory proceedings, the merits of our defenses
and consultation with legal counsel. Legal proceedings are
inherently unpredictable and subject to significant uncertainties,
some of which are beyond our control. Should any of these estimates
and assumptions change or prove to have been incorrect, it could
have a material impact on our results of operations, financial
position and cash flows.
Contingent
Consideration. We measure liabilities
related to earn-out payments at fair value at the end of each
reporting period. The fair value was estimated by utilizing the
future potential cash payments discounted to arrive at a present
value amount, based on our expectation. The discount rate was based
on the Monte-Carlo simulation method by taking into account,
forecast future revenues, expected volatility and weighted average
cost of debt.
For more information regarding recently issued accounting
pronouncements see Note 2 to the consolidated financial
statements.
ITEM 6:
Directors, Senior Management and Employees
A. Directors and Senior Management
The following table sets forth the names, ages and positions of our
directors and executive officers as of March 1, 2023:
|
Name
|
|
Age
|
|
Position
|
|
Directors
|
|
|
|
|
|
Yigal
Jacoby(5)
|
|
62
|
|
Chairman of the Board
|
|
Manuel Echanove(5)
|
|
58
|
|
Director
|
|
Itsik
Danziger (5)
|
|
74
|
|
Director
|
|
Efrat
Makov (1)(2)(3)(4)(5)
|
|
54
|
|
Director
|
|
Steven D. Levy (1)(2)(4)(5)
|
|
66
|
|
Director
|
|
Nadav
Zohar (5)
|
|
57
|
|
Director
|
|
Cynthia L. Paul
|
|
50
|
|
Director
|
|
Raffi
Kesten
|
|
69
|
|
Director
|
|
|
|
|
|
|
|
Executive Officers
|
|
|
|
|
|
Erez
Antebi
|
|
64
|
|
Chief
Executive Officer and President
|
|
Ziv
Leitman
|
|
64
|
|
Chief
Financial Officer
|
|
Rael
Kolevsohn
|
|
53
|
|
Vice
President, Legal Affairs, General Counsel and Company
Secretary
|
|
Keren
Rubanenko
|
|
46
|
|
Senior
Vice President, Cyber Security Business Unit
|
|
Assaf
Eyal
|
|
62
|
|
Senior
Vice President, Global Sales
|
|
Vered
Zur
|
|
59
|
|
Vice
President, Marketing
|
|
Mark
Shteiman
|
|
47
|
|
Senior
Vice President Allot Smart Business Unit
|
|
Sarah
Warshavsky-Oberman
|
|
50
|
|
Chief
People Officer
|
|
Noam
Lila
|
|
48
|
|
Senior
Vice President, Customer Success and Operations
|
|
_____________
|
|
(1)
|
Member of our compensation and nomination committee.
|
|
(2)
|
Member of our audit committee.
|
|
(3)
|
Lead
independent director.
|
|
(4)
|
Outside director.
|
|
(5)
|
Independent director under the rules of Nasdaq.
|
Directors
Yigal
Jacoby has served as Chairman
of our board of directors since November 2016. Mr. Jacoby
co-founded our company in 1996, served as our Chief Executive
Officer until 2006 and as a Chairman of our board of directors
until 2008. Prior to co-founding Allot, Mr. Jacoby founded Armon
Networking, a manufacturer of network management solutions in 1992,
and managed it until it was acquired by Bay Networks, a network
hardware vendor, where he served as the General Manager of its
Network Management Division. From 1985 to 1992, Mr. Jacoby held
various engineering and marketing management positions at Tekelec,
a manufacturer of Telecommunication monitoring and diagnostic
equipment. Currently, Mr. Jacoby is an active investor and director
of several Israeli start-up companies. Mr. Jacoby has a B.A., cum
laude, in Computer Science from Technion — Israel Institute of
Technology and a M.Sc. in Computer Science from University of
Southern California.
Manuel
Echanove has served as a director
since July 2017. Prior to his appointment Mr. Echanove served in
various management positions with the Telefonica group, a
multinational telecommunications company, between 1996 and 2012.
During his tenure at Telefonica, Mr. Echanove held various senior
management positions as Commercial General Manager, General
Director of Business Development and General Director of Multimedia
and Brand Business. He also served as General Manager in the
Corporate Strategy area of Telefónica S.A. before leaving
Telefonica in 2012. Prior to joining Telefonica, Mr. Echanove
served in sales and marketing management positions at France
Telecom, British Telecom, each a multinational telecommunications
company, and Data General, a minicomputer firm. Mr. Echanove is
currently the CEO of Wetania Consulting S.L. a management
consulting company, which he founded in 2013. Mr. Echanove has an
Economics and Business Administration degree from the Universidad
Pontificia de Comillas.
Itsik
Danziger has served as a director
since 2011. Prior to his appointment as a director, Mr. Danziger
served as an observer to our board since 2010. Itzhak Danziger
serves as a member of the board of Galil Software, an Israeli
software services company, and as a director of EyeControl and
Jinni Media, privately held technology companies. From 1985 to
2007, Mr. Danziger held various executive positions at Comverse, a
technology companies group that develops and markets
telecommunications systems, including as president of Comverse
Technology Group, as president of Comverse Network Systems and as
chairman of Comverse subsidiary - Starhome. Prior to joining
Comverse, Mr. Danziger held various R&D and management
positions in Tadiran Telecom Division, a privately held
manufacturer of business telecommunications equipment. In the
non-profit sector, Mr. Danziger serves as the chairman of the
Center for Educational Technology (CET), as Vice President and
board member of the New Israel Fund (NIF), a non-profit for social
justice and equality, the chairman of Israel Venture Network (IVN)
- Yozma fund for investments in social businesses and a director in
Israel Venture Network (IVN), a venture philanthropy NGO. Mr.
Danziger was also a member of the National Task Force for the
Advancement of Education in Israel (Dovrat Committee). Mr. Danziger
holds a B.Sc. cum laude and a M.Sc. in electrical engineering from
the Technion - Israel Institute of Technology and an M.A. cum laude
in philosophy and digital culture from Tel Aviv
University.
Efrat
Makov has served as the
lead independent director on our board since 2021. She has served
as a director of Ceragon Networks Ltd since October 2022, iSPAC 1
Ltd. (TASE: ISPC) since July 2021 and B Communications Ltd. (TASE:
BCOM) since November 2019. Ms. Makov previously served as a
director of BioLight Life Sciences Ltd. (TASE: BOLT), an emerging
global ophthalmic company, from April 2011 to July 2020. Ms. Makov
served as a director of Kamada Ltd. (NASDAQ: KMDA), a
plasma-derived biopharmaceutical company, from December 2018 to
December 2019 and of Anchiano Therapeutics Ltd. (NASDAQ: ANCN) (now
known as Chemomab Therapeutics Ltd. (NASDAQ: CMMB)), a
clinical-stage biopharmaceutical company, from September 2018 to
February 2020. Ms. Makov served as the Chief Financial Officer of
Alvarion Ltd. (formerly NASDAQ; TASE: ALVR), a global provider of
autonomous Wi-Fi networks, from April 2007 to December 2010. Ms.
Makov served as the Chief Financial Officer of Aladdin Knowledge
Systems Ltd. (formerly NASDAQ; TASE: ALDN), an information security
leader specializing in authentication, software DRM and content
security, from September 2005 to January 2007, where she was
responsible for the finance, operations, information systems and
human resources functions. Prior to that, Ms. Makov served in
management positions at two Israeli-based public companies,
including as Vice President of Finance at Check Point Software
Technologies Ltd. (NASDAQ: CHKP), a worldwide leader in IT
security, from September 2002 to August 2005. Ms. Makov served as
Director of Finance for NUR Macroprinters Ltd. (formerly NASDAQ:
NURM) (now known as Ellomay Capital Ltd. (NYSE; TASE: ELLO)), from
August 2000 to August 2002. Prior to that, Ms. Makov spent seven
years in public accounting with Arthur Andersen LLP in its New
York, London and Tel Aviv offices. Ms. Makov holds a B.A. degree in
Accounting and Economics from Tel Aviv University and is a
certified public accountant in Israel and the United
States.
Steven
D. Levy has served as an outside
director since 2007. Mr. Levy served as a Managing Director and
Global Head of Communications Technology Research at Lehman
Brothers, a global financial services firm, from 1998 to 2005.
Before joining Lehman Brothers, Mr. Levy was a Director of
Telecommunications Research at Salomon Brothers, an American
investment bank, from 1997 to 1998, Managing Director and Head of
the Communications Research Team at Oppenheimer & Co., a global
full-service brokerage and investment bank from 1994 to 1997 and a
senior communications analyst at Hambrecht & Quist, a
California-based investment bank, from 1986 to 1994. Mr. Levy has
served as a director of PCTEL, a broadband wireless technology
company since 2006 and currently serves as the their Chairman and
served as a director of Edison Properties, a privately held U.S.
real estate company, since 2015. Mr. Levy previously served as a
director of privately held GENBAND Inc., a U.S. provider of
telecommunications equipment. Mr. Levy holds a B.Sc. in Materials
Engineering and an M.B.A., both from the Rensselaer Polytechnic
Institute.
Nadav
Zohar has served as an interim
director since February 2017 and as a director since April 2017.
Mr. Zohar has held the position of Chairman of the LRC Group since
2018. Mr. Zohar served as the head of Business Development of Gett,
an “on demand” transportation service provider from March 2015 and
October 2018. Prior to joining Gett, Mr. Zohar served as Chief
Operating Officer of Delek Global Real Estate PLC, company
description to be added, between 2006 and 2009 and held several
executive positions with Morgan Stanley, a multinational investment
bank and financial services company, between 2001 and 2006, the
last of which was Executive Director, Financial Sponsors Group.
Prior to joining Morgan Stanley, Mr. Zohar served in executive
roles at Lehman Brothers, a global financial services firm, between
1997 and 2001. Mr. Zohar serves as a board member of Matomy Media
Group Ltd. (London Stock Exchange: MTMY), a digital
performance-based advertising company. Mr. Zohar holds a Masters in
Finance (graduated with Merit) from the London Business School and
a LLB in Law (graduated with honors) from the University of
Reading.
Cynthia
L. Paul has served as a director
since December 2022. She is Chief Investment Officer and Chief
Executive Officer of Lynrock Lake LP, an investment management firm
she founded in 2018. Ms. Paul invests across the full capital
structure of public and private companies, employing a long-term,
fundamentally-driven, value-oriented investment strategy, with a
focus on the technology industry. From 2018 until 2021, Ms. Paul
served as a board member, chairperson of the Nomination and
Corporate Governance Committee, a member of the Audit Committee,
and a member of the Compensation Committee of DSP Group, Inc., a
NASDAQ-listed semiconductor company. From 2002 to 2017, Ms. Paul
was a portfolio manager at Soros Fund Management LLC (“SFM”), where
she managed a portfolio across corporate credit, convertible and
equity securities. Ms. Paul served as Chairperson of the Board of
Directors of Conexant Systems, LLC, a semiconductor company, from
2013 until 2017. Ms. Paul joined SFM in 2000 and served as a SFM
representative for the Council on Foreign Relations and on SFM’s
Investment Committee. Prior to joining SFM, she worked at The
Palladin Group in 1999 and at JP Morgan from 1994 to 1999, most
recently as Head of Convertible Research. Ms. Paul graduated from
Princeton University in 1994 with an Independent Major in
Statistics and Operations Research, a Certificate from the
Princeton School of Public and International Affairs, and a
Certificate in Engineering Management Systems. Ms. Paul is an
advisory board member and former board member of AlphaSense Inc., a
SaaS company providing intelligent search to enterprise
customers.
Raffi
Kesten has served as an interim director since May 2022 and as
a director since December 2022. Mr. Kesten served as Chief Business
Officer of Radware Ltd. (NASDAQ: RDWR) since June 2019 until
February 2022, leading all customer-facing functions worldwide as
well as international sales, professional services, sales
engineering and business development, and international sales. Mr.
Kesten has over 30 years of experience in leadership roles at
various technology companies, including Intel ,Vice President of HP
Indigo Division, a division of HP Inc., between 1991 and 1995, as a
Chief Operating Officer and General Manager of Cisco Videoscape
(formerly NDS Group – Prior acquisition) from 1996 to 2015, as Vice
President Video and General Manager Israel of Cisco Videoscape from
2012 to 2015, as Silicon Process Engineer of Intel Corporation from
1982 to 1991, and as a managing partner at Jerusalem Venture
Partners from 2014 to 2018. Mr. Kesten holds a B.S. in chemical
engineering from Ben Gurion University and an Executive M.B.A. from
The Hebrew University, Israel.
Executive Officers
Erez
Antebi has served as our
President and Chief Executive Officer since February 2017. Mr.
Antebi served as the Chief Executive Officer of Gilat Satellite
Networks (NADAQ: GILT), a satellite communications technology and
services provider, between 2012 and 2015. Between 2005 and 2012,
Mr. Antebi also served in several executive roles at Gilat
Satellite Networks. Between 2003 and 2005, Mr. Antebi served as the
Chief Executive Officer of Clariton Networks, a start-up company,
providing services in cellular coverage. Prior to that Mr. Antebi
has served in a variety of roles at Gilat Satellite Networks,
Tadiran, a provider of radio communications for military
applications and for Rafael, Israel Ministry of Defense. Mr. Antebi
currently serves on the advisory boards of HiSky. Mr. Antebi holds
a B. Sc., Electrical Engineering (Communications), Summa Cum Laude,
and a M.Sc., Electrical Engineering (Information Theory), both from
the Technion, Israel.
Ziv
Leitman has served as our Chief
Financial Officer since November 2019. Prior to joining Allot, Mr.
Leitman served as Chief Financial Officer of Powermat Technologies,
a wireless charging pioneer leader, and from 2011 to 2017 as CFO of
Partner Communications, one of Israel’s leading mobile, fixed-line,
Internet and TV service providers. Between 2009 to 2011, he served
as Deputy Chief Executive Officer and Chief Financial Officer of
Paz Oil Company, and between 2002 to 2009, as CFO of Comverse Inc.,
a leading provider of telecommunications products. From 1989 to
2002, Mr. Leitman also held Chief Financial Officer positions at
Discount Investment Corp., Lucent Technologies EIS, Kimberly-Clark
Israel and Optrotech (Orbotech). Mr. Leitman is a Certified Public
Accountant and holds a B.A. in Economics and Accounting and an
M.B.A. in Finance & Information Systems, both from the Tel Aviv
University.
Mark
Shteiman has served as our
Senior Vice President Allot Smart
Business Unit since December 2021. Prior to that Mr.
Shteiman served as our Vice President Product Management since
October 2019. Prior to that Mr. Shteiman served as our Associate
Vice President Product Management from June 2018. Prior to Allot
Mr. Shteiman served as Vice President Product Management at
Kaminario Ltd. a leading All-flash Software-defined storage
company, redefining the future of cloud-scale datacenters, between
2012 and 2015 served as Head of Product, City business unit of AGT
International Ltd., between 2011 and 2013 founded Friendize Me. a
SaaS Social E-commerce company and served as its Chief Executive
Officer, between 2009 and 2011 as Vice President, Products at
Gigafone Ltd., between 2006 and 2008 as VP Product Management NGM
at Neustar, between 2000 – 2006 he held a number of positions at
Followap a leading mobile instant messaging (IM) and
interoperability provider for mobile telecom operators and internet
service providers, during 2000 held a position in the Israeli
Defense Forces and between 1996 – 1998 served as a software
developer at Aitech Defense Systems. Mr. Shteiman holds a B.Sc in
Computer Science from the Technion, Israel.
Rael
Kolevsohn joined our company in
2014 and serves as our Vice President Legal Affairs, General
Counsel, and Company Secretary. Prior to joining us, he served as
Vice President and General Counsel of Radvision Ltd. from 2007 to
2014. From 1998 to 2007, Mr. Kolevsohn served as General Counsel
and Vice President of Gilat Satellite Networks Ltd. after joining
Gilat as Legal Counsel. From 1994 to 1998, he completed his legal
internship and worked as an attorney at the Tel Aviv law firm of
Yossifof, Amir Cohen & Co. Mr. Kolevsohn is a member of the
Israel Bar Association and holds an LL.B. degree, with honors, from
the Hebrew University in Jerusalem.
Assaf
Eyal has served as our Senior
Vice President, Global Sales since June 2021. Over the last 25
years, Mr. Eyal held leadership roles in sales, marketing and
customer service. Most recently, he served as SVP APAC at
Drivenets. Prior to Drivenets, Mr. Eyal was Executive VP, Cyber
Security for Enterprise at Cognyte (NASDAQ:VRNT), President
Commercial Division & Corporate VP at Gilat (NASDAQ: GILT),
President & CEO at Ultrashape Medical and EVP at Nur
Macroprinters. Additionally, Mr. Eyal worked at Orbotech Ltd.,
(NASDAQ: ORBK, now a KLA company) for over 17 years in various
management positions in the United States, Hong Kong and Israel.
Mr. Eyal holds an M.Sc in Management and B.Sc in
Engineering.
Vered
Zur has served as our Vice
President, Marketing since April 2017. Prior to joining us, Ms. Zur
served as Chief Marketing Officer of Electra Ltd. (TASE: ELECTRA),
a leading supplier of electric appliances. Between 2011 and 2014,
Ms. Zur served as VP global Sales Operations and Business
enablement of Amdocs (NASDAQ: DOX), a provider of software and
services to communications and media companies. Between 2005 and
2011, Ms. Zur served as VP Customer Marketing of Comverse (Xura), a
company that provided telecommunications software. Prior to that
Ms. Zur served in various marketing roles at telecommunications
companies and advertising agencies. Ms. Zur holds a B.A. in
Behavioral Science from the Ben-Gurion University and a M.B.A from
the Edinburgh Business School, Heriot-Watt University.
Keren
Rubanenko has served as our Senior
Vice President, Cyber Security Business Unit since December 2021.
Prior to that Ms. Rubanenko served as our Senior Vice President,
Allot Smart Business Unit, since November 2020. Prior to that Ms.
Rubanenko served as our Senior Vice President, Customer Success
since November 2018. Prior to joining Allot, Ms. Rubanenko was Vice
President, Customer Success at RADCOM, Vice President, R&D and
Operations Surveillance Solutions at Nice Systems between 2011 and
2015, between 1999 and 2011, Ms. Rubanenko held a number of senior
positions at Comverse Technologies including serving as Associate
VP and General Manager, Voice Product Unit. Ms. Rubanenko holds a
B.A. in Business Administration.
Sarah
Warshavsky-Oberman has served as our Chief
People Officer since May 2022. Prior to joining Allot, Mrs.
Warshavsky-Oberman served as a VP of HR for National Instruments
Corp. (NASDAQ: NATI) from 2021 to 2022. Mrs. Warshavsky-Oberman
served as global VP of HR for Optimalplus, a global software
startup company, from 2018 until its acquisition by National
Instruments Corp. in May 2020. Between 2014 and 2018, Mrs.
Warshavsky-Oberman served as the Global HR strategic programs lead
at Teva pharmaceuticals. From 2010 to 2014, she served in different
HR roles for Micron Technology Inc. During the years 1996-2010,
Mrs. Warshavsky-Oberman worked for Intel/Numonyx and served in
various positions, including production and engineering roles. Mrs.
Warshavsky-Oberman holds M.B.A. from Tel Aviv
University.
Noam
Lila has served as our Senior
Vice President, Customer Success and Operations since January 2021.
Prior to that time, Mr. Lila served as our Assistant Vice
President, APAC Customer Success from February 2019. Prior to
joining Allot, Mr. Lila accumulated over 20 years of experience in
the telecommunications industry, holding various executive
positions at Amdocs and Comverse. Most recently, he was Vice
President of Services at Amdocs located in Australia, Vice
President of APAC CS at Comverse located in Japan, VP of IT &
SCM at Comverse, AVP of EMEA CS at Comverse and others. Throughout
his career, Mr. Lila lead hundreds of projects deployment and
transformation programs to Tier 1 customers and some with value of
more than $100 million (USD) each.
Board Diversity
The table below provides certain information regarding the
diversity of our board of directors as of December 26, 2022.
|
|
Country of
Principal Executive Offices:
|
|
|
|
|
Disclosure
Prohibited under Home Country Law
|
|
Total Number of
Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Part
II: Demographic Background
|
|
Underrepresented Individual in Home Country Jurisdiction
|
|
|
|
|
Did Not
Disclose Demographic Background
|
|
B. Compensation of Officers and Directors
The aggregate compensation paid to or accrued on behalf of our
directors and executive officers as a group during 2022 consisted
of approximately $3.6 million in salary, fees, bonus, commissions
and directors’ fees, including amounts we expended for automobiles
made available to our officers, but excluding equity based
compensation, dues for professional and business associations,
business travel and other expenses, and other benefits commonly
reimbursed or paid by companies in Israel. This amount includes
approximately $0.6 million set aside or accrued to provide pension,
severance, retirement or similar benefits or expenses.
In 2022, we paid or accrued to the chairman of the board of
directors, Mr. Yigal Jacoby, an annual fee of ILS 358,000
(approximately $106,805 USD). During such time we paid our
directors, Itzhak Danziger, Nadav Zohar, Efrat Makov and Manuel
Echanove ILS 76,065 (approximately $22,680 USD), ILS 82,815
(approximately $24,693 USD), ILS 99,315 (approximately $29,613 USD)
and ILS 78,315 (approximately $23,351 USD), respectively, and we
paid or accrued to each of our outside directors, Steven Levy,
Raffi Kesten and Cynthia Paul, as permitted by the Companies Law,
an annual fee of ILS 100,815 (approximately $30,060 USD), ILS
54,525 (approximately $16,258 USD), and ILS 4,435 (approximately
$1,322 USD), respectively. We also paid ILS 69,690 (approximately
$20,780 USD) to Miron (Ronnie) Kenneth, a director who departed
during the 2022 fiscal year. The above fees for each of our
directors (other than Yigal Jacoby) have included a per-meeting
attendance fee of ILS 3,750 (approximately $1,118 USD) for any
meeting he or she attended in person and ILS 2,250 (approximately
$671 USD) for a meeting he or she attended by conference call or
similar means. Our directors are also typically granted upon
election a total of 20,000 equity based awards, which vest over a
period of not less than three years, and 10,000 RSUs, as of every
third annual general meeting following the respective director’s
initial election.
During 2022, our executive officers and directors received, in the
aggregate, 295,000 RSUs under our equity incentive plans.
Compensation of our Five Most Highly Compensated Office
Holders
Summary Compensation Table
For so long as we qualify as a foreign private issuer, we are not
required to comply with the proxy rules applicable to U.S. domestic
companies, including the requirement applicable to U.S. domestic
companies to disclose the compensation of certain executive
officers on an individual, rather than an aggregate, basis.
Nevertheless, the regulations promulgated under the Companies Law
require us to disclose the annual compensation of our five most
highly compensated directors and officers on an individual, rather
than on an aggregate, basis.
The table and summary below outline the compensation granted to our
five most highly compensated office holders during or with respect
to the year ended December 31, 2022. We refer to the five
individuals for whom disclosure is provided herein as our “Covered
Executives.”
For purposes of the table and the summary below, “compensation”
includes base salary, discretionary and non-equity incentive
bonuses, equity-based compensation, payments accrued or paid in
connection with retirement or termination of employment, and
personal benefits and perquisites such as car, phone and social
benefits paid to or earned by each Covered Executive during the
year ended December 31, 2022.
|
Name and Principal Position(1)
|
|
Salary
($)
|
|
|
Bonus and
Commission
($)(2)
|
|
|
Equity-Based
Compensation
($)(3)
|
|
|
All Other
Compensation
($)(4)
|
|
|
Total
($)
|
|
|
Erez
Antebi, President and Chief Executive Officer
|
|
|
286,244
|
|
|
|
-
|
|
|
|
421,586
|
|
|
|
74,169
|
|
|
|
781,998
|
|
|
Assaf
Eyal, Senior Vice President, Global Sales
|
|
|
286,244
|
|
|
|
107,223
|
|
|
|
244,205
|
|
|
|
102,675
|
|
|
|
740,347
|
|
|
Keren
Rubanenko, Senior Vice President,
Cyber Security Business Unit
|
|
|
261,555
|
|
|
|
-
|
|
|
|
373,351
|
|
|
|
103,835
|
|
|
|
738,741
|
|
|
Ziv Leitman,
Chief Financial Officer
|
|
|
286,244
|
|
|
|
-
|
|
|
|
325,898
|
|
|
|
83,492
|
|
|
|
695,634
|
|
|
Mark Shteiman,
Senior Vice President Allot Smart Business Unit
|
|
|
236,151
|
|
|
|
29,701
|
|
|
|
215,410
|
|
|
|
69,348
|
|
|
|
550,610
|
|
|
(1)
|
Unless otherwise indicated herein, all Covered Executives are
full-time employees of Allot.
|
|
(2)
|
Amounts reported in this column represent annual incentive bonuses
and commissions granted to the Covered Executives based on
performance-metric based formulas set forth in their respective
employment agreements.
|
|
(3)
|
Amounts reported in this column represent the grant date fair value
computed in accordance with accounting guidance for share-based
compensation. For a discussion of the assumptions used in reaching
this valuation, see Note 12 to our consolidated financial
statements for the year ended December 31, 2022, included
herein.
|
|
(4)
|
Amounts reported in this column include personal benefits and
perquisites, including those mandated by applicable law. Such
benefits and perquisites may include, to the extent applicable to
the respective Covered Executive, payments, contributions and/or
allocations for savings funds (e.g., Managers Life Insurance
Policy), education funds (referred to in Hebrew as “keren
hishtalmut”), pension, severance, vacation, car or car allowance,
medical insurances and benefits, risk insurance (e.g., life
insurance or work disability insurance), telephone expense
reimbursement, convalescence or recreation pay, relocation
reimbursement, payments for social security, and other personal
benefits and perquisites consistent with the Company’s guidelines.
All amounts reported in the table represent incremental cost to the
Company.
|
Compensation Policy
Under the Companies Law, we are required to adopt a compensation
policy, recommended by the compensation and nominating committee
and approved by our board of directors and the shareholders, in
that order. The shareholder approval requires a majority of the
votes cast by shareholders, excluding any controlling shareholder
and those who have a personal interest in the matter. In general,
all directors and executive officers’ terms of compensation,
including fixed remuneration, bonuses, equity compensation,
retirement or termination payments, indemnification, liability
insurance and the grant of an exemption from liability, must comply
with the compensation policy.
In addition, the compensation terms of directors, the chief
executive officer, and any employee or service provider who is
considered a controlling shareholder must be approved separately by
the compensation and nominating committee, the Board of Directors
and the shareholders of the Company (by the same majority noted
above), in that order. The compensation terms of other executive
officers require the approval of the compensation and nominating
committee and the Board of Directors.
We strive to provide a mix of compensation that supports a
pay-for-performance culture and emphasizes long-term incentives.
Our executive compensation packages have historically included
equity grants, which we believe to be effective tools in aligning
performance with compensation.
The compensation and nominating committee and the Board are
committed to responsible management of earnings-per-share dilution,
as the Company must balance the requirements associated with its
equity compensation program during its growth stage with the effect
on dilution. Therefore, the compensation and nominating committee
and the Board continue to review the Company’s equity compensation
practices to ensure that they remain in line with evolving
regulatory conditions and changes in best practices. The Company
remains focused on open and ongoing dialogue with its shareholders
and welcomes regular feedback regarding its compensation
policies.
Our compensation policy was approved by our compensation and
nominating committee and by our Board of Directors, and
subsequently approved by our shareholders in December 2022, and
will be in effect for a period of three years following approval.
Our compensation policy provides:
| • |
Objectives:
To attract,
motivate and retain highly experienced personnel who will provide
leadership for Allot’s success and enhance shareholder value, and
to promote for each executive officer an opportunity to advance in
a growing organization.
|
| • |
Compensation
instruments: Includes base salary;
benefits and perquisites; cash bonuses; equity-based awards; and
retirement and termination arrangements.
|
| • |
Ratio
between fixed and variable compensation: Allot aims to balance
the mix of fixed compensation (base salary, benefits and
perquisites) and variable compensation (cash bonuses and
equity-based awards) pursuant to the ranges set forth in the
compensation policy in order, among other things, to tie the
compensation of each executive officer to Allot’s financial and
strategic achievements and enhance the alignment between the
executive officer’s interests and the long-term interests of Allot
and its shareholders.
|
| • |
Internal
compensation ratio: Allot will target a
ratio between overall compensation of the executive officers and
the average and median salary of the other employees of Allot, as
set forth in the compensation policy, to ensure that levels of
executive compensation will not have a negative impact on work
relations in Allot.
|
| • |
Base
salary, benefits and perquisites: The compensation policy
provides guidelines and criteria for determining base salary,
benefits and perquisites for executive officers.
|
| • |
Cash
bonuses: Allot’s policy is to
allow annual cash bonuses, which may be awarded to executive
officers pursuant to the guidelines and criteria, including maximum
bonus opportunities, set forth in the compensation
policy.
|
| • |
“Clawback”:
In the event
of an accounting restatement, Allot shall be entitled to recover
from current executive officers bonus compensation in the amount of
the excess over what would have been paid under the accounting
restatement, with a three-year look-back.
|
| • |
Equity-based
awards: Allot’s policy is to
provide equity-based awards in the form of share options,
restricted share units and other forms of equity, which may be
awarded to executive officers pursuant to the guidelines and
criteria, including minimum vesting period, set forth in the
compensation policy.
|
| • |
Retirement
and termination: The compensation policy
provides guidelines and criteria for determining retirement and
termination arrangements of executive officers, including
limitations thereon.
|
| • |
Exculpation,
indemnification and insurance: The compensation policy
provides guidelines and criteria for providing directors and
executive officers with exculpation, indemnification and
insurance.
|
| • |
Directors:
The
compensation policy provides guidelines for the compensation of our
directors in accordance with applicable regulations promulgated
under the Companies Law, and for equity-based awards that may be
granted to directors pursuant to the guidelines and criteria,
including minimum vesting period, set forth in the compensation
policy.
|
| • |
Applicability:
The
compensation policy applies to all compensation agreements and
arrangements approved after the date on which the compensation
policy is approved by the shareholders.
|
| • |
Review:
The
compensation and nominating committee and the Board of Directors of
Allot shall review and reassess the adequacy of the Compensation
Policy from time to time, as required by the Companies
Law.
|
C. Board Practices
Corporate Governance Practices
As a foreign private issuer, we are permitted under Nasdaq Rule
5615(a)(3) to follow Israeli corporate governance practices instead
of Nasdaq requirements applicable to the U.S. issuers, provided we
disclose which requirements we are not following and describe the
equivalent Israeli requirement. See “ITEM 16G: Corporate Governance
Requirements” for a discussion of those ways in which our corporate
governance practices differ from those required by Nasdaq for
domestic companies.
Board of Directors
Terms of Directors
Our articles of association provide that we may have not less than
five directors and have up to nine directors.
Under our articles of association, our directors (other than our
outside directors) are divided into three classes. Each class of
directors consists, as nearly as possible, of one-third of the
total number of directors constituting the entire board of
directors (other than our outside directors). At each annual
meeting of our shareholders, the election or reelection of
directors following the expiration of the term of office of the
directors of that class of directors is for a term of office that
expires on the third annual meeting following such election or
reelection, such that each year the term of office of one class of
directors expires.
Our Class II directors, Itzhak Danziger and Raffi Kesten, will hold
office until our annual meeting of shareholders to be held in 2023.
Our Class III directors, Yigal Jacoby (who also serves as our
Chairman of the board of directors) and Manuel Echanove, will hold
office until our annual meeting of shareholders to be held in 2024.
Our Class I directors, Nadav Zohar and Cynthia Paul, will hold
office until the 2025 Annual General Meeting of Shareholders. The
directors (other than the outside directors) are elected by a vote
of the holders of a majority of the voting power present and voting
at the meeting. Each director will hold office until the annual
general meeting of our shareholders for the year in which his or
her term expires and until his or her successor is duly elected and
qualified, unless the tenure of such director expires earlier
pursuant to the Companies Law or unless he or she resigns or is
removed from office.
Under the Companies Law, a director (including an outside director)
must declare in writing that he or she has the required skills and
the ability to dedicate the time required to serve as a director in
addition to other statutory requirements. A director who ceases to
meet the statutory requirements for his or her appointment must
immediately notify us of the same and his or her office will become
vacated upon such notice.
Under our articles of association, the approval of a special
majority of the holders of at least 75% of the voting rights
present and voting at a general meeting is generally required to
remove any of our directors (other than the outside directors) from
office. The holders of a majority of the voting power present and
voting at a meeting may elect directors in their stead or fill any
vacancy, however created, in our board of directors. In addition,
vacancies on our board of directors, other than a vacancy in the
office of an outside director, may be filled by a vote of a simple
majority of the directors then in office. A director so chosen or
appointed will hold office until the next annual general meeting of
our shareholders, unless earlier removed by the vote of a majority
of the directors then in office prior to such annual meeting. See
“—Outside Directors” for a description of the procedure for
election of outside directors.
Outside Directors
Qualifications of Outside Directors
The Companies Law requires companies incorporated under the laws of
the State of Israel with shares listed on a stock exchange,
including Nasdaq, to appoint at least two outside directors. Our
outside directors are Ms. Makov and Mr. Levy. Ms. Makov also serves
as the lead independent director.
Outside directors are required to meet standards of independence
requirements set forth in the Companies Law and of the listing
standards of Nasdaq. Among other independence qualifications, a
person may not serve as an outside director if he is a relative of
a controlling shareholder of a company, or if he or his affiliate
(as defined in the Companies Law) has an employment, business or
professional relationship or other affiliation (as defined in the
Companies Law) with us.
In addition, the Companies Law requires every outside director
appointed to the board of directors of an Israeli company to
qualify as a “financial and accounting expert” or as
“professionally competent,” as such terms are defined in the
applicable regulations under the Companies Law, and at least one
outside director must qualify as a “financial and accounting
expert.” If at least one of our directors meets the independence
requirements of the Exchange Act and the standards of Nasdaq rules
for membership on the audit committee and also has financial and
accounting expertise as defined in the Companies Law, then the
other outside directors are only required to meet the professional
qualifications requirement. Under applicable regulations, a
director with financial and accounting expertise is a director who,
through his or her education, professional experience and skill,
has a high level of proficiency in and understanding of business
accounting matters and financial statements. He or she must be able
to thoroughly comprehend the financial statements of the company
and initiate debate regarding the manner in which financial
information is presented.
Election of Outside Directors
Outside directors are elected by a majority vote at a shareholders’
meeting, provided that either:
| • |
the majority of shares voted at the meeting, including at
least a majority of the shares of non-controlling shareholder(s)
and shareholders who do not have a personal interest in the
election of the outside director (other than a personal interest
that does not result from the shareholder’s relationship with a
controlling shareholder), voted at the meeting, excluding
abstentions, vote in favor of the election of the outside director;
or
|
| • |
the total number of shares of non-controlling shareholders and
shareholders who do not have a personal interest in the election of
the outside director (excluding a personal interest that does not
result from the shareholder’s relationship with a controlling
shareholder) voted against the election of the outside director
does not exceed two percent of the aggregate voting rights in the
company.
|
The initial term of an outside director is three years, and he or
she may be reelected to up to two additional terms of three years
each at a shareholders’ meeting, subject to the voting threshold
set forth above. Thereafter, an outside director may be reelected
for additional periods of up to three years each, only if the
company’s audit committee and board of directors confirm that, in
light of the outside director’s expertise and special contribution
to the work of the board of directors and its committees, the
reelection for such additional period is beneficial to the company.
The terms of our outside directors, Efrat Makov and Steven Levy,
will continue until November 30, 2024 and August 14, 2025,
respectively, unless such office is vacated in accordance with our
Articles of Association or the Israel Companies Law. Outside
directors may be removed by the same voting threshold as is
required for their election, or by a court, and only if the outside
directors cease to meet the statutory qualifications for their
appointment or if they violate their duty of loyalty to the
company. The tenure of outside directors, like all directors, may
also be terminated by a court under limited circumstances. If the
vacancy of an outside director position causes the company to have
fewer than two outside directors, a company’s board of directors is
required under the Companies Law to call a special general meeting
of the company’s shareholders as soon as possible to appoint a new
outside director. Each committee of a company’s board of directors
which is authorized to exercise the board of directors’ authorities
is required to include at least one outside director, except for
the audit committee and the compensation committee, which are
required to include all outside directors.
An outside director is entitled to compensation and reimbursement
of expenses as provided in regulations promulgated under the
Companies Law, and is otherwise prohibited from receiving any other
compensation, directly or indirectly, in connection with services
provided as an outside director, other than indemnification,
exculpation and insurance as permitted pursuant to the Companies
Law.
Nasdaq Requirements
Under Nasdaq rules, a majority of directors must meet the
independence requirements specified in those rules. Our board of
directors consists of eight members, all of whom are independent
under the listing standards of Nasdaq, as determined by the board
of directors. Specifically, our board has determined that Ms. Efrat
Makov, Mr. Itzhak Danziger, Mr. Yigal Jacoby, Mr. Steven Levy, Mr.
Raffi Kesten, Ms. Cynthia Paul, Mr. Nadav Zohar and Mr. Manuel
Echanove meet the independence standards of Nasdaq rules. In
reaching this conclusion, the board determined that none of these
directors has a relationship that would interfere with the exercise
of independent judgment in carrying out the responsibilities of a
director. None of our directors is a member of our executive team.
See “ITEM 16G. Corporate Governance” for additional
information.
Audit Committee
Companies Law Requirements
Under the Companies Law, the board of directors of any public
company must appoint an audit committee comprised of at least three
directors, including all of the outside directors. The following
persons may not be appointed as members of the audit
committee:
| • |
the chairperson of the board of directors;
|
| • |
a controlling shareholder or a relative of a controlling
shareholder (as defined in the Companies Law); or
|
| • |
any director who is engaged by, or provides services on a
regular basis to the company, the company’s controlling shareholder
or an entity controlled by a controlling shareholder or any
director who generally relies on a controlling shareholder for his
or her livelihood.
|
The Companies Law requires the majority of the audit committee
members to be independent directors (as defined in the Companies
Law), and the chairman of the audit committee is required to be an
outside director. Any person disqualified from serving as a member
of the audit committee may not be present at the audit committee
meetings, unless the chairperson of the audit committee has
determined that this person is required to be present for a
particular matter. The Companies Law provides for certain other
exclusions to this provision.
Nasdaq Requirements
Under Nasdaq rules, companies are required to maintain an audit
committee consisting of at least three independent directors, all
of whom are financially literate and one of whom has accounting or
related financial management expertise. Our audit committee members
are required to meet additional independence standards, including
minimum standards set forth in rules of the SEC and adopted by
Nasdaq.
Each of the members of our audit committee is “independent” under
the relevant Nasdaq rules and as defined in Rule 10A-3(b)(1) under
the Exchange Act, which is different from the general test for
independence of board and committee members.
Approval of Transactions with Related Parties
The approval of the audit committee is required to effect specified
actions and transactions with office holders and controlling
shareholders. The term “office holder” means a general manager,
chief business manager, deputy general manager, vice general
manager, or any other person assuming the responsibilities of any
of the foregoing positions, without regard to such person’s title,
as well as any director or manager directly subordinate to the
general manager. The term “controlling shareholder” means a
shareholder with the ability to direct the activities of the
company, other than by virtue of being an office holder. A
shareholder is presumed to be a controlling shareholder if the
shareholder holds 50% or more of the voting rights in a company or
has the right to appoint the majority of the directors of the
company or its general manager. For the purpose of approving
transactions with controlling shareholders, the term also includes
any shareholder that holds 25% or more of the voting rights of the
company, if the company has no shareholder that owns more than 50%
of its voting rights. For purposes of determining the holding
percentage stated above, two or more shareholders who have a
personal interest in a transaction that is brought for the
company’s approval are deemed as joint holders. The audit committee
may not approve an action or a transaction with a controlling
shareholder or with an office holder unless all the requirements of
the Companies Law regarding the structure of the committee and the
persons entitled to be present at meetings are met at the time of
approval.
Audit Committee Role
Our board of directors has adopted an audit committee charter
setting forth the responsibilities of the audit committee
consistent with the rules of the SEC and Nasdaq, which
include:
| • |
retaining and terminating the company’s independent auditors,
subject to shareholder ratification;
|
| • |
pre-approval of audit and non-audit services provided by the
independent auditors; and
|
| • |
approval of transactions with office holders and controlling
shareholders, as described above, and other related-party
transactions.
|
Additionally, under the Companies Law, the audit committee is
responsible for: (a) identifying deficiencies in the management of
a company’s business and making recommendations to the board of
directors as to how to correct them; (b) reviewing and deciding
whether to approve certain related party transactions and certain
transactions involving conflicts of interest; (c) deciding whether
certain actions involving conflicts of interest are material
actions and whether certain related party transactions are
extraordinary transactions; (d) reviewing the internal auditor’s
work program; (e) examining the company’s internal control
structure and processes, the performance of the internal auditor
and whether the internal auditor has the tools and resources
required to perform his or her duties; and (f) examining the
independent auditor’s scope of work as well as the independent
auditor’s fees, and providing the corporate body responsible for
determining the independent auditor’s fees with its
recommendations. In addition, the audit committee is also
responsible for implementing procedures concerning employee
complaints on improprieties in the administration of the company’s
business and the protection to be provided to such employees.
Furthermore, in accordance with regulations promulgated under the
Companies Law, the audit committee discusses the draft financial
statements and presents to the board its recommendations with
respect to the draft financial statements. The audit committee
charter states that in fulfilling this role the committee is
entitled to rely on interviews and consultations with our
management, our internal auditor and our independent auditor, and
is not obligated to conduct any independent investigation or
verification.
Our audit committee consists of Ms. Efrat Makov, Mr. Steven Levy
and Mr. Nadav Zohar. The chairperson is Ms. Makov. The financial
experts on the audit committee pursuant to the definition under the
relevant SEC rules and are all members of the audit
committee.
Compensation and Nominating Committee
Under the Companies Law, the compensation committee of a public
company must consist of at least three directors who satisfy
certain independence qualifications, including the additional
independence requirements of Nasdaq rules applicable to the members
of compensation committees, and the chairman of the compensation
committee is required to be an outside director. We have
established a compensation and nominating committee which currently
consists of Ms. Efrat Makov, Mr. Steven Levy, and Mr. Raffi Kesten.
The chairperson is Mr. Levy. This committee oversees matters
related to our compensation policy and practices. Our board of
directors has adopted a compensation and nominating committee
charter setting forth the responsibilities of the committee
consistent with the Companies Law and Nasdaq rules, which
include:
| • |
approving, and recommending to the board of directors and the
shareholders for their approval, the compensation of our Chief
Executive Officer and other executive officers;
|
| • |
granting options and RSUs to our employees and the employees
of our subsidiaries;
|
| • |
recommending candidates for nomination as members of our board
of directors; and
|
| • |
developing and recommending to the board corporate governance
guidelines and a code of business ethics and conduct in accordance
with applicable laws.
|
The compensation committee is also authorized to retain and
terminate compensation consultants, legal counsel or other advisors
to the committee and to approve the engagement of any such
consultant, counsel or advisor, to the extent it deems necessary or
appropriate after specifically analyzing the independence of any
such consultant retained by the committee.
On specified criteria, to review modifications to the compensation
policy from time to time, to review its implementation and to
approve the actual compensation terms of office holders prior to
approval by the board of directors.
Internal Auditor
Under the Companies Law, the board of directors of a public company
must appoint an internal auditor nominated by the audit committee.
The role of the internal auditor is, among other things, to examine
whether a company’s actions comply with applicable law and orderly
business procedure. The internal auditor may be an employee of the
company but not an interested party (as defined in the Companies
Law), an office holder of the company, or a relative of an
interested party or an office holder, among other restrictions. The
audit committee has appointed the firm of Deloitte Brightman
Almagor Zohar as the internal auditor of the Company.
Exculpation, Insurance and Indemnification of Office Holders
Under the Companies Law, a company may not exculpate an office
holder from liability for a breach of the duty of loyalty. However,
a company may provide certain indemnification rights as detailed
below and obtain insurance for an act performed in breach of the
duty of loyalty of an office holder provided that the office holder
acted in good faith, the act or its approval does not harm the
company, and the office holder discloses the nature of his or her
personal interest in the act and all material facts and documents a
reasonable time before discussion of the approval. Our articles of
association, in accordance with Israeli law, allow us to exculpate
an office holder, in advance, from liability to us, in whole or in
part, for damages caused to us as a result of a breach of duty of
care. We may not exculpate a director for liability arising out of
a prohibited dividend or distribution to shareholders or prohibited
purchase of its securities.
In accordance with Israeli law, our articles of association allow
us to indemnify an office holder in respect of certain liabilities
either in advance of an event or following an event. Under Israeli
law, an undertaking provided in advance by an Israeli company to
indemnify an office holder with respect to a financial liability
imposed on him or her in favor of another person pursuant to a
judgment, settlement or arbitrator’s award approved by a court must
be limited to events which in the opinion of the board of directors
can be foreseen based on the company’s activities when the
undertaking to indemnify is given, and to an amount or according to
criteria determined by the board of directors as reasonable under
the circumstances, and such undertaking must detail the above
mentioned events and amount or criteria. Our articles of
association allow us to undertake in advance to indemnify an office
holder for, among other costs, reasonable litigation expenses,
including attorneys’ fees, and certain financial liabilities and
obligations, subject to certain restrictions pursuant to the
Companies Law.
In accordance with Israeli law, our articles of association allow
us to insure an office holder against certain liabilities incurred
for acts performed as an office holder, including certain breaches
of duty of loyalty to the company, a breach of duty of care to the
company or to another person and certain financial liabilities and
obligations imposed on the office holder.
We may not indemnify or insure an office holder against any of the
following:
| • |
a breach of duty of loyalty, except to the extent that the
office holder acted in good faith and had a reasonable basis to
believe that the act would not prejudice the company;
|
| • |
a breach of duty of care committed intentionally or
recklessly, excluding a breach arising out of the negligent conduct
of the office holder;
|
| • |
an act or omission committed with intent to derive illegal
personal benefit; or
|
| • |
a fine, civil fine, monetary sanction or forfeit levied
against the office holder.
|
Under the Companies Law, exculpation, indemnification and insurance
of office holders must be approved by our compensation committee
and our board of directors and, in respect of our directors, the
chief executive officer, and any employee or service provider who
is considered a controlling shareholder, by our shareholders,
provided that changes to existing arrangements may be approved by
the audit committee if it approves that such changes are
immaterial.
As of the date of this annual report, there are no claims for
directors’ and officers’ liability insurance which have been filed
in 2022 under our policies and we are not aware of any pending or
threatened litigation or proceeding involving any of our directors
or officers in which indemnification is sought.
We have entered into agreements with each of our directors and with
certain of our office holders exculpating them, to the fullest
extent permitted by law, from liability to us for damages caused to
us as a result of a breach of duty of care, and undertaking to
indemnify them to the fullest extent permitted by law. This
indemnification is limited to events determined as foreseeable by
the board of directors based on our activities, and to an amount or
according to criteria determined by the board of directors as
reasonable under the circumstances, and the insurance is subject to
our discretion depending on its availability, effectiveness and
cost. The current maximum amount set forth in such agreements is
the greater of (1) with respect to indemnification in connection
with a public offering of our securities, the gross proceeds raised
by us and/or any selling shareholder in such public offering, and
(2) with respect to all permitted indemnification, including a
public offering of our securities, an amount equal to 50% of the
our shareholders’ equity on a consolidated basis, based on our most
recent financial statements made publicly available before the date
on which the indemnity payment is made.
In the opinion of the SEC, indemnification of directors and office
holders for liabilities arising under the Securities Act is against
public policy and therefore unenforceable.
D.
Employees*
As of December 31, 2022, we had 749 Personnel Employed of whom 314
were based in Israel, 257 in Europe, 31 in North America, 29 in
Latin America and 118 in Asia, Africa and Oceania. We have never
experienced a work stoppage or a strike. The breakdown of our
employees by department is as follows:
|
|
|
December 31,
|
|
|
Department
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Manufacturing and operations
|
|
|
15
|
|
|
|
13
|
|
|
|
15
|
|
|
Research and development
|
|
|
281
|
|
|
|
331
|
|
|
|
328
|
|
|
Sales, marketing, service and support
|
|
|
314
|
|
|
|
324
|
|
|
|
328
|
|
|
Management and administration
|
|
|
66
|
|
|
|
73
|
|
|
|
78
|
|
|
Total
|
|
|
676
|
|
|
|
741
|
|
|
|
749
|
|
The table below provides a breakdown of employees, permanent
contractors and subcontractors employed or engaged by the Company
(herein: “Personnel Employed”):
|
|
|
December 31,
|
|
|
Department
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Full
time Employee
|
|
|
504
|
|
|
|
508
|
|
|
|
523
|
|
|
Part
time Employee
|
|
|
30
|
|
|
|
38
|
|
|
|
38
|
|
|
Permanent Contractor
|
|
|
32
|
|
|
|
33
|
|
|
|
37
|
|
|
Subcontractor
|
|
|
110
|
|
|
|
162
|
|
|
|
151
|
|
|
Total
|
|
|
676
|
|
|
|
741
|
|
|
|
749
|
|
* Based on the number of full time equivalent Personnel Employed,
which is the product of all full time Personnel Employed, plus the
ratio of the average monthly hours of part time Personnel Employed
to average monthly hours of full time Personnel Employed. In the
foregoing table and in each instance herein where number of
employees is provided, employees include full time and part time
employees, as well as subcontractors and consultants. Typically,
our employees, as well as our subcontractors and consultants, are
employed or engaged for indefinite periods of time and may be
dismissed or terminated with or without notice, depending on the
jurisdiction and contracts under which they are employed or
engaged. Under applicable Israeli law, we and our employees are
subject to protective labor provisions such as restrictions on
working hours, minimum wages, minimum vacation, sick pay, severance
pay and advance notice of termination of employment as well as
equal opportunity and anti-discrimination laws. Orders issued by
the Israeli Ministry of Economy make certain industry-wide
collective bargaining agreements applicable to us. These agreements
affect matters such as cost of living adjustments to salaries,
length of working hours and week, recuperation, travel expenses,
and pension rights. Except as otherwise stated hereunder, our
employees are not represented by a labor union. Under Spanish Labor
law, we and our employees are subject to protective labor
provisions and collective bargaining agreements, governing, among
others, restrictions on working hours, minimum wages, minimum
vacation, sick pay, severance pay and advance notice of termination
of employment as well as equal opportunity and anti-discrimination
laws. Our workers in our San Sebastian office in Spain are
represented by a worker’s representative, who was recently elected
for a term of four years. In addition, our employees in our Madrid
office in Spain are represented by five worker representatives, who
were recently elected for a term of four years. Such
representatives represent the employees with respect to labor
health and prevention, training and equality. We provide our
employees with benefits and working conditions which we believe are
competitive with benefits and working conditions provided by
similar companies. We have never experienced labor-related work
stoppages and believe that our relations with our employees are
good.
E. Share Ownership
Beneficial Ownership of Executive Officers and Directors
The following table sets forth certain information regarding the
beneficial ownership of our ordinary shares as of February 20, 2023
by (i) each of our directors, (ii) each of our executive officers
and (iii) all of our executive officers and directors serving as of
February 20, 2023, as a group. Unless otherwise stated, the address
of each named executive officer and director is c/o Allot Ltd, 22
Hanagar Street, Neve Ne’eman Industrial Zone B, Hod-Hasharon
4501317, Israel.
|
Name of Beneficial Owner
|
|
Number of Shares Beneficially
Held(1)
|
|
|
Percent of Class
|
|
|
Directors
|
|
|
|
|
|
|
|
Efrat
Makov
|
|
|
*
|
|
|
|
*
|
|
|
Itzhak Danziger
|
|
|
*
|
|
|
|
*
|
|
|
Manuel Echanove
|
|
|
*
|
|
|
|
*
|
|
|
Nadav
Zohar
|
|
|
*
|
|
|
|
*
|
|
|
Steven D. Levy
|
|
|
*
|
|
|
|
*
|
|
|
Yigal
Jacoby
|
|
|
414,014
|
|
|
|
1.1
|
%
|
|
Raffi
Kesten
|
|
|
*
|
|
|
|
*
|
|
|
Cynthia Paul
|
|
|
8,770,332
|
|
|
|
23.4
|
%
|
|
Miron
Kenneth (2)
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Officers
|
|
|
*
|
|
|
|
*
|
|
|
Erez
Antebi
|
|
|
413,333
|
|
|
|
1.1
|
%
|
|
Ziv
Leitman
|
|
|
*
|
|
|
|
*
|
|
|
Rael
Kolevsohn
|
|
|
*
|
|
|
|
*
|
|
|
Keren
Rubanenko
|
|
|
*
|
|
|
|
*
|
|
|
Vered
Zur
|
|
|
*
|
|
|
|
*
|
|
|
Mark
Shteiman
|
|
|
*
|
|
|
|
*
|
|
|
Aharon Mullokandov
|
|
|
*
|
|
|
|
*
|
|
|
Noam
Lila
|
|
|
*
|
|
|
|
*
|
|
|
Assaf
Eyal
|
|
|
*
|
|
|
|
*
|
|
|
Sarah
Warshavsky Oberman
|
|
|
|
|
|
|
*
|
|
|
Ronit
Weinstein(2)
|
|
|
*
|
|
|
|
*
|
|
|
Yael
Villa(2)
|
|
|
*
|
|
|
|
*
|
|
|
All
directors and executive officers as a group
|
|
|
10,097,007
|
|
|
|
27.0
|
%
|
|
____________
|
|
* Less than one percent of the
outstanding ordinary shares.
|
|
(1)
|
As
used in this table, “beneficial ownership” is determined in
accordance with the rules of the SEC and consists of either or both
voting or investment power with respect to securities. For purposes
of this table, a person is deemed to be the beneficial owner of
securities that can be acquired within 60 days from February 20,
2023 through the exercise of any option or pursuant to vesting of
RSU. Ordinary shares subject to options that are currently
exercisable or exercisable within 60 days of February 20, 2023 and
outstanding RSUs vesting within 60 days of February 20, 2023, are
deemed outstanding for computing the ownership percentage of the
person holding such options or RSUs, but are not deemed outstanding
for the purpose of computing the ownership percentage of any other
person. Except as otherwise indicated, the persons named in the
table have reported that they have sole voting and sole investment
power with respect to all ordinary shares shown as beneficially
owned by them. The amounts and percentages are based upon
37,425,405 ordinary shares outstanding as of February 20, 2023
pursuant to Rule 13d-3(d)(1)(i) under the Exchange Act.
|
|
|
|
|
(2)
|
Former Director or Executive Officer, stepped down during the 2022
Fiscal Year.
|
Our directors and executive officers hold, in the aggregate,
905,672 outstanding options and RSUs. The said amount includes
options currently exercisable for 402,000 ordinary shares, as of
February 20, 2023. The
options (excluding RSUs) have a weighted average exercise price of
$5.67 per share and have expiration dates until 2025.
Share Option Plans
The following table summarizes our equity incentive plans, which
have outstanding awards as of February 20, 2023:
|
Plan
|
|
Shares
reserved
|
|
|
Option and
RSU grants,
net (*)
|
|
|
Outstanding
options and
RSUs
|
|
|
Options
outstanding
exercise
price
|
|
Date of expiration
|
|
Options
exercisable
|
|
2016 Incentive
Compensation Plan
|
|
|
1,239,744
|
|
|
|
9,528,172
|
|
|
|
2,633,616
|
|
|
|
0.028-27.58
|
|
5/5/2023-9/6/2025
|
|
|
461,328
|
|
|
____________
|
|
(*)
|
“Option and RSU grants, net” is calculated by subtracting options
and RSUs expired or forfeited.
|
As of February 20, 2023,
we had 37,425,405 ordinary shares outstanding. We have adopted four
share option plans. Under our share option plans, as of
February 20, 2023, there
were 2,633,616 outstanding options and RSUs, including options
currently exercisable for 461,328 ordinary shares. As of
February 20, 2023,
1,239,744 shares remained available for future grants under the
2016 Plan (as described below). Upon issuance, such ordinary shares
may be freely sold in the public market, except for shares held by
affiliates who have certain restrictions on their ability to sell.
The options (excluding RSUs) have a weighted average exercise price
of $5.92 per share.
We will only grant options, RSUs or other equity incentive awards
under the 2016 Incentive Compensation Plan, although
previously-granted options will continue to be governed by our
other plans.
2016 Incentive Compensation Plan, as amended (formerly, 2006
Incentive Compensation Plan)
The Allot Ltd. 2006 Incentive Compensation Plan (the “2006 Plan”)
was adopted by the Company’s board of directors on October 29, 2006
and became effective immediately prior to the effective date of the
Company’s initial public offering. Effective October 28, 2016, the
Board of Directors of the Company amended and restated the 2006
Plan to extend the term of the 2006 Plan by ten years and to rename
the 2006 Plan as the Allot Ltd. 2016 Incentive Compensation Plan
(the “2016 Plan”). The 2016 Plan will remain in effect, subject to
the right of the Board of Directors to amend or terminate the 2016
Plan at any time pursuant to the terms of the 2016 Plan, until all
shares reserved for issuance under the 2016 Plan shall have been
delivered, and any restrictions on such shares shall have lapsed,
provided that in no event may an award under the 2016 Plan be
granted on or after October 27, 2026.
The 2016 Plan is intended to further our success by increasing the
ownership interest of certain of our and our subsidiaries’
employees, directors and consultants and to enhance our and our
subsidiaries’ ability to attract and retain employees, directors
and consultants.
The number of ordinary shares that we may issue under the 2016 Plan
will increase on the first day of each fiscal year during the term
of the 2016 Plan, in each case in an amount equal to the lesser of
(i) 1,000,000 shares, (ii) 3.5% of our outstanding ordinary shares
on the last day of the immediately preceding year, or (iii) an
amount determined by our board of directors. The number of shares
subject to the 2016 Plan is also subject to adjustment if
particular capital changes affect our share capital. Ordinary
shares subject to outstanding awards under the 2006 Plan or our
2003 plan or 1997 plans that are subsequently forfeited or
terminated for any other reason before being exercised will again
be available for grant under the 2016 Plan. As of February 20, 2023, there were
2,633,616 outstanding options and RSUs under the 2016 Plan and
1,239,744 ordinary shares remained reserved for future grants under
the 2016 Plan. Israeli participants in the 2016 Plan may be granted
options and/or restricted share units subject to Section 102 of the
Ordinance. Section 102 of the Ordinance, allows employees,
directors and officers, who are not controlling shareholders and
are considered Israeli residents to receive favorable tax treatment
for compensation in the form of shares or options. Our
non-employees service providers and controlling shareholders may
only be granted options under another section of the Ordinance,
which does not provide for similar tax benefits. Section 102
includes two alternatives for tax treatment involving the issuance
of options or shares to a trustee for the benefit of the grantees
and also includes an additional alternative for the issuance of
options or shares directly to the grantee. The most favorable tax
treatment for the grantees is under Section 102(b)(2) of the
Ordinance, the issuance to a trustee under the “capital gain
track.” However, under this track we are not allowed to deduct an
expense with respect to the issuance of the options or shares. Any
share options granted under the 2016 Plan to participants in the
United States will be either “incentive share options,” which may
be eligible for special tax treatment under the U.S. Internal
Revenue Code of 1986, or options other than incentive share options
(referred to as “nonqualified share options”), as determined by our
compensation and nominating committee and stated in the option
agreement.
Our compensation and nominating committee administers the 2016 Plan
and it selects which of our and our subsidiaries’ and affiliates’
eligible employees, directors and/or consultants receive options,
RSUs or other awards under the 2016 Plan and will determine the
terms of the grant, including, exercise prices, method of payment,
vesting schedules, acceleration of vesting and the other matters
necessary in the administration of the plan.
If we undergo a change of control, as defined in the 2016 Plan,
subject to any contrary law or rule, or the terms of any award
agreement in effect before the change of control, (a) the
compensation and nominating committee may, in its discretion,
accelerate the vesting, exercisability and payment, as applicable,
of outstanding options, RSUs and other awards; and (b) the
compensation and nominating committee, in its discretion, may
adjust outstanding awards by substituting ordinary shares or other
securities of any successor or another party to the change of
control transaction, or cash out outstanding options, RSUs and
other awards, in any such case, generally based on the
consideration received by our shareholders in the
transaction.
ITEM 7: Major
Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth certain information regarding the
beneficial ownership of our outstanding ordinary shares as of
February 20, 2023, by each
person who we know beneficially owns 5.0% or more of the
outstanding ordinary shares. Each of our shareholders has identical
voting rights with respect to its shares. All of the information
with respect to beneficial ownership of the ordinary shares is
given to the best of our knowledge.
|
|
|
Ordinary Shares Beneficially Owned(1)
|
|
|
Percentage of Ordinary Shares Beneficially Owned
|
|
|
Lynrock Lake LP
(2)
|
|
|
8,768,666
|
|
|
|
23.4
|
%
|
|
Clal Insurance
Enterprises Holdings Ltd. (3)
|
|
|
2,749,041
|
|
|
|
7.4
|
%
|
|
Outerbridge Capital Management, LLC
(4)
|
|
|
2,735,112
|
|
|
|
7.3
|
%
|
|
(1)
|
As used in this table, “beneficial
ownership” means the sole or shared power to vote or direct the
voting or to dispose or direct the disposition of any security. For
purposes of this table, a person is deemed to be the beneficial
owner of securities that can be acquired within 60 days from
February 20, 2023 through
the exercise of any option or warrant. Ordinary shares subject to
options or warrants that are currently exercisable or exercisable
within 60 days are deemed outstanding for computing the ownership
percentage of the person holding such options or warrants, but are
not deemed outstanding for computing the ownership percentage of
any other person. The amounts and percentages are based upon
37,425,405 ordinary shares outstanding as of February 20, 2023.
|
|
|
|
|
(2)
|
Based on a Schedule 13D/A filed on
November 15, 2022, Lynrock Lake LP (“Lynrock Lake”) directly holds
8,768,666 of our ordinary shares. Cynthia Paul, the Chief
Investment Officer of Lynrock Lake and Sole Member of Lynrock Lake
Partners LLC, the general partner of Lynrock Lake, may be deemed to
exercise voting and investment power over securities of the Issuer
held by Lynrock Lake.
|
|
|
|
|
(3)
|
Based on a
Schedule 13G/A filed on February 10, 2022, Clal Insurance
Enterprises Holdings Ltd. (“Clal”) had shared voting and
dispositive power over 2,749,041 of our shares.
|
|
|
|
|
|
All
of the 2,749,041 ordinary shares reported in this statement as
beneficially owned by Clal are held for members of the public
through, among others, provident funds and/or pension funds and/or
insurance policies, which are managed by subsidiaries of
Clal.
|
|
|
|
|
(4)
|
Based on a
Schedule 13D/A filed on May 12, 2022, Outerbridge Capital
Management, LLC (“Outerbridge”) had shared voting and dispositive
power over 2,735,112
ordinary shares. The address of Outerbridge is 767 Third Avenue, 11th Floor, New York, New
York 10017.
|
Significant Changes in the Ownership of Major Shareholders
Based on a Schedule 13D/A filed on February 11, 2022 by
Outerbridge, Outerbridge became the beneficial owner of 5% or more
of our ordinary shares, and is now the beneficial owner of
2,735,112, or 7.3% of our
ordinary shares.
Record Holders
As of March 13, 2023, there were 15 record holders of ordinary
shares, of which six consisted of United States record holders
holding approximately 99.5% of our outstanding ordinary shares. The
actual number of shareholders is greater than this number of record
holders, and includes shareholders who are beneficial owners, but
whose shares are held in street name by brokers and other nominees.
The United States record holders included Cede & Co., the
nominee of the Depositary Trust Company.
B. Related Party Transactions
Our policy is to enter into transactions with related parties on
terms that, on the whole, are no less favorable, than those
available from unaffiliated third parties. Based on our experience
in the business sectors in which we operate and the terms of our
transactions with unaffiliated third parties, we believe that all
of the transactions described below met this policy standard at the
time they occurred.
Agreements with Directors and Officers
Engagement
of Officers. We have entered into
employment agreements with each of our officers, who work for us as
employees or as consultants. These agreements all contain
provisions standard for a company in our industry regarding
noncompetition, confidentiality of information and assignment of
inventions. The enforceability of covenants not to compete in
Israel may be limited. In connection with the engagement of our
officers, we have granted them options pursuant to our 2016
Plan.
Exculpation,
Indemnification and Insurance. Our articles of
association permit us to exculpate, indemnify and insure our office
holders, in accordance with the provisions of the Companies Law. We
have entered into agreements with each of our directors and certain
office holders, exculpating them from a breach of their duty of
care to us to the fullest extent permitted by law and undertaking
to indemnify them to the fullest extent permitted by law, to the
extent that these liabilities are not covered by insurance. See
“ITEM 6: Directors, Senior Management and Employees—Board
Practices—Exculpation, Insurance and Indemnification of Office
Holders.”
C. Interests of Experts and Counsel
Not applicable.
ITEM 8:
Financial Information
A. Consolidated Financial Statements and Other Financial
Information.
Consolidated Financial Statements
For our audited consolidated balance sheets as of December 31, 2022
and 2021, and the related consolidated statements of comprehensive
loss, changes in shareholders’ equity and cash flows for each of
the three years in the period ended December 31, 2022, please see
pages F-5 to F-49 of this report.
Export Sales
See “ITEM 4: Operating and Financial Review and Prospects” under
the caption “Customers” for certain details of export sales for the
last three fiscal years.
Legal Proceedings
We may, from time to time in the future be involved in legal
proceedings in the ordinary course of business. Such matters are
generally subject to many uncertainties and outcomes are not
predictable with assurance. We accrue for contingencies when the
loss is probable and it can reasonably estimate the amount of any
such loss. Except as set forth in Note 11 to our consolidated
financial statements for the fiscal year ended December 31, 2022
included elsewhere in this report, we are currently not a party to
any material legal or administrative proceedings for which an
appropriate accrual has not been made, and is not aware of any
pending or threatened material legal or administrative proceedings
against us.
Dividends
We have never declared or paid any cash dividends on our ordinary
shares and we do not anticipate paying any cash dividends on our
ordinary shares in the future. We currently intend to retain all
future earnings to finance our operations and to expand our
business. Any future determination relating to our dividend policy
will be made at the discretion of our board of directors and will
depend on a number of factors, including future earnings, capital
requirements, financial condition and future prospects and other
factors our board of directors may deem relevant.
B. Significant Changes
Since the date of our audited financial statements included
elsewhere in this annual report, there have not been any
significant changes in our financial position.
ITEM 9: The
Offer and Listing
Our ordinary shares have been quoted under the symbol “ALLT” on
Nasdaq since November 16, 2006 and on the TASE since December 21,
2010.
As of March 1, 2023 the last reported sale price of our ordinary
shares on Nasdaq was $2.90 per share and on the TASE was 10.54 ILS
per share.
ITEM 10:
Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Registration Number and Objectives
We are registered as a public company with the Israeli Registrar of
Companies. Our registration number is 51-239477-6.
Our objectives under our memorandum of association are to engage in
the business of computers, hardware and software, including without
limitation research and development, marketing, consulting and the
selling of knowledge, and any other activity which our board of
directors shall determine.
Ordinary Shares
Our authorized share capital consists of 200,000,000 ordinary
shares, par value ILS 0.10 per share. As of February 20, 2023, we
had 37,425,405 ordinary shares outstanding. All outstanding
ordinary shares are validly issued, fully paid and non-assessable.
The rights attached to the ordinary shares are as follows:
Voting.Holders
of our ordinary shares have one vote for each ordinary share held
on all matters submitted to a vote of shareholders at a shareholder
meeting. Shareholders may vote at shareholder meeting either in
person, by proxy or by written ballot. Shareholder voting rights
may be affected by the grant of any special voting rights to the
holders of a class of shares with preferential rights that may be
authorized in the future.
Transfer
of Shares. Fully paid ordinary
shares are issued in registered form and may be freely transferred
under our articles of association unless the transfer is restricted
or prohibited by another instrument, Israeli law or the rules of a
stock exchange on which the shares are traded.
Election
of Directors. Our ordinary shares do
not have cumulative voting rights for the election of directors.
Rather, under our articles of association our directors are elected
by the holders of a simple majority of our ordinary shares at a
general shareholder meeting. As a result, the holders of our
ordinary shares that represent more than 50% of the voting power
represented at a shareholder meeting have the power to elect any or
all of our directors whose positions are being filled at that
meeting, subject to the special approval requirements for outside
directors. See “ITEM 6: Directors, Senior Management and
Employees—Board Practices—Outside Directors.”
Dividend
and Liquidation Rights. Under the Companies Law,
shareholder approval is not required for the declaration of a
dividend, unless the company’s articles of association provide
otherwise. Our articles of association provide that our board of
directors may declare and distribute a dividend to be paid to the
holders of ordinary shares without shareholder approval in
proportion to the paid up capital attributable to the shares that
they hold. Dividends may be paid only out of profits legally
available for distribution, as defined in the Companies Law,
provided1 that there is no reasonable concern that the payment of a
dividend will prevent us from satisfying our existing and
foreseeable obligations as they become due. If we do not have
profits legally available for distribution, we may seek the
approval of the court to distribute a dividend. The court may
approve our request if it is convinced that there is no reasonable
concern that a payment of a dividend will prevent us from
satisfying our existing and foreseeable obligations as they become
due.
In the event of our liquidation, after satisfaction of liabilities
to creditors, our assets will be distributed to the holders of
ordinary shares in proportion to the paid up capital attributable
to the shares that they hold. Dividend and liquidation rights may
be affected by the grant of preferential dividend or distribution
rights to the holders of a class of shares with preferential rights
that may be authorized in the future.
Shareholder Meetings
We are required to convene an annual general meeting of our
shareholders once every calendar year within a period of not more
than 15 months following the preceding annual general meeting. Our
board of directors may convene a special general meeting of our
shareholders and is required to do so at the request of two
directors or one quarter of the members of our board of directors
or at the request of one or more holders of 5% or more of our share
capital and 1% of our voting power or the holder or holders of 5%
or more of our voting power. All shareholder meetings require prior
notice of at least 21 days. The chairperson of our board of
directors, or any other person appointed by the board of directors,
presides over our general meetings. In the absence of the
chairperson of the board of directors or such other person, one of
the members of the board designated by a majority of the directors
presides over the meeting. If no director is designated to preside
as chairperson, then the shareholders present will choose one of
the shareholders present to be chairperson. Subject to the
provisions of the Companies Law and the regulations promulgated
thereunder, shareholders entitled to participate and vote at
general meetings are the shareholders of record on a date to be
decided by the board of directors, which may be between four and 40
days prior to the date of the meeting.
Quorum
The quorum required for a meeting of shareholders consists of at
least two shareholders present in person, by proxy or by written
ballot, who hold or represent between them at least 25% of our
voting power. A meeting adjourned for lack of a quorum generally is
adjourned to the same day in the following week at the same time
and place or any time and place as the directors designate in a
notice to the shareholders. At the reconvened meeting, the required
quorum consists of at least two shareholders present, in person, by
proxy or by written ballot, who hold or represent between them at
least 10% of our voting power, provided that if the meeting was
initially called pursuant to a request by our shareholders, then
the quorum required must include at least the number of
shareholders entitled to call the meeting. See “—Shareholder
Meetings.”
Resolutions
An ordinary resolution requires approval by the holders of a simple
majority of the voting rights represented at the meeting, in
person, by proxy or by written ballot, and voting on the
resolution.
Under the Companies Law, unless otherwise provided in the articles
of association or applicable law, all resolutions of the
shareholders require a simple majority. A resolution for the
voluntary winding up of the company requires the approval by
holders of at least 75% of the voting rights represented at the
meeting, in person, by proxy or by written ballot, and voting on
the resolution. Under our articles of association (1) certain
shareholders’ resolutions require the approval of a special
majority of the holders of at least 75% of the voting rights
represented at the meeting, in person, by proxy or by written
ballot, and voting on the resolution, and (2) certain shareholders’
resolutions require the approval of a special majority of the
holders of at least two-thirds of the voting securities of the
company then outstanding.
Access to Corporate Records
Under the Companies Law, all shareholders generally have the right
to review minutes of our general meetings, our shareholder
register, including with respect to material shareholders, our
articles of association, our financial statements and any document
we are required by law to file publicly with the Israeli Companies
Registrar. Any shareholder who specifies the purpose of its request
may request to review any document in our possession that relates
to any action or transaction with a related party which requires
shareholder approval under the Companies Law. We may deny a request
to review a document if we determine that the request was not made
in good faith, that the document contains a commercial secret or a
patent or that the document’s disclosure may otherwise impair our
interests.
Fiduciary Duties and Approval of Specified Related Party
Transactions Under Israeli Law
Fiduciary duties of office holders
The Companies Law imposes a duty of care and a duty of loyalty on
all office holders of a company.
The duty of care of an office holder requires an office holder to
act with the degree of proficiency with which a reasonable office
holder in the same position would have acted under the same
circumstances. The duty of care includes, among other things, a
duty to use reasonable means, in light of the circumstances, to
obtain certain information pertaining to the proposed action before
the board of directors.
The duty of loyalty incumbent on an office holder requires him or
her to act in good faith and for the benefit of the company, and
includes, among other things, the duty to avoid conflicts of
interest with the company, to refrain from competing with the
company, and to disclose to the company information disclosed to
him or her as a result of being an office holder.
We may approve an act specified above which would otherwise
constitute a breach of the office holder’s duty of loyalty,
provided that the office holder acted in good faith, the act or its
approval does not harm the company, and the office holder discloses
his or her personal interest a sufficient time before the approval
of such act. Any such approval is subject to the terms of the
Companies Law, setting forth, among other things, the organs of the
company entitled to provide such approval, and the methods of
obtaining such approval.
Disclosure of personal interests of an office holder and approval
of acts and transactions
The Companies Law requires that an office holder promptly disclose
to the company any personal interest that he or she may have
relating to any existing or proposed transaction by the company (as
well as certain information or documents). Once an office holder
has disclosed his or her personal interest in a transaction, the
approval of the appropriate organ(s) in the company is required in
order to effect the transaction. However, a company may approve
such a transaction or action only if it is in the best interests of
the Company.
Disclosure of personal interests of a controlling shareholder and
approval of transactions
Under the Companies Law, a controlling shareholder must also
disclose any personal interest it may have in an existing or
proposed transaction by the company. Transactions with controlling
shareholders that are material, that are not in the ordinary course
of business or that are not on market terms require approval by the
audit committee, the board of directors and the shareholders of the
company, and the Companies Law provides for certain quantitative
requirements in respect of the voting of shareholders not having a
personal interest in the applicable transaction.
Duties of shareholders
Under the Companies Law, a shareholder has a duty to refrain from
abusing its power, to act in good faith and to act in an acceptable
manner in exercising its rights and performing its obligations to
the company and other shareholders. A shareholder also has a
general duty to refrain from acting to the detriment of other
shareholders.
In addition, any controlling shareholder or any shareholder having
specific power with respect to a company (the power to appoint an
office holder, or specific influence over a certain vote) is under
a duty to act with fairness towards the company. The Companies Law
does not describe the substance of this duty except to state that
the remedies generally available upon a breach of contract will
also apply in the event of a breach of the duty to act with
fairness, taking the shareholder’s position in the company into
account.
Approval of private placements
Under the Companies Law and the regulations promulgated thereunder,
certain private placements of securities may require approval at a
general meeting of the shareholders of a company. These include,
for example, certain private placements completed in lieu of a
special tender offer (See “Memorandum and Articles of
Association—Acquisition under Israeli law”) or a private placement
which qualifies as a related party transaction (See “Corporate
governance practices—Fiduciary duties and approval of specified
related party transactions under Israeli law”).
Acquisitions under Israeli Law
Full
Tender Offer. A person wishing to
acquire shares of a public Israeli company and who would as a
result hold over 90% of the target company’s issued and outstanding
share capital is required by the Companies Law to make a tender
offer for the purchase of all of the issued and outstanding shares
of the company. If the shareholders who do not accept the offer
hold less than 5% of the issued and outstanding share capital of
the company, and more than half of the offerees who do not have a
personal interest in the tender offer accept the tender offer, all
of the shares that the acquirer offered to purchase will be
transferred to the acquirer by operation of law. Notwithstanding
the above, if the shareholders who do not accept the offer hold
less than 2% of the issued and outstanding share capital of the
company or of the applicable class, the offer will nonetheless be
accepted. However, a shareholder that had its shares so transferred
may, within six months from the date of acceptance of the tender
offer, petition the court to determine that the tender offer was
for less than fair value and that the fair value should be paid as
determined by the court. The bidder may provide in its tender offer
that any accepting shareholder may not petition the court for fair
value, but such condition will not be valid unless all of the
information required under the Companies Law was provided prior to
the acceptance date. The description above regarding a full tender
offer also applies, with certain limitations, when a full tender
offer for the purchase of all of the company’s securities is
accepted.
Special
Tender Offer. The Companies Law
provides, subject to certain exceptions, that an acquisition of
shares of a public Israeli company must be made by means of a
“special tender offer” if, as a result of the acquisition, the
purchaser would become a holder of at least 25% of the voting
rights in the company. This rule does not apply if there is already
another holder of at least 25% of the voting rights in the company.
Similarly, the Companies Law provides that an acquisition of shares
in a public company must be made by means of a tender offer if, as
a result of the acquisition, the purchaser would become a holder of
more than 45% of the voting rights in the company, and there is no
other shareholder of the company who holds more than 45% of the
voting rights in the company. The special tender offer may be
consummated subject to certain majority requirements set forth in
the Companies Law, and provided further that at least 5% of the
voting rights attached to the company’s outstanding shares will be
acquired by the party making the offer.
Merger.The
Companies Law permits merger transactions between two Israeli
companies if approved by each party’s board of directors and a
certain percentage of each party’s shareholders. Following the
approval of the board of directors of each of the merging
companies, the boards must jointly prepare a merger proposal for
submission to the Israeli Registrar of Companies.
Under the Companies Law, if the approval of a general meeting of
the shareholders is required, merger transactions may be approved
by the holders of a simple majority of our shares present, in
person, by proxy or by written ballot, at a general meeting of the
shareholders and voting on the transaction. In determining whether
the required majority has approved the merger, if shares of the
company are held by the other party to the merger, by any person
holding at least 25% of the voting rights, or 25% of the means of
appointing directors or the general manager of the other party to
the merger, then a vote against the merger by holders of the
majority of the shares present and voting, excluding shares held by
the other party or by such person, or any person or entity acting
on behalf of, related to or controlled by either of them, is
sufficient to reject the merger transaction. In certain
circumstances, a court may still approve the merger upon the
request of holders of at least 25% of the voting rights of a
company, if the court holds that the merger is fair and reasonable,
taking into account the value of the parties to the merger and the
consideration offered to the shareholders.
The Companies Law provides for certain requirements and procedures
that each of the merging companies is to fulfill. In addition, a
merger may not be completed unless at least fifty days have passed
from the date that a proposal for approval of the merger was filed
with the Israeli Registrar of Companies and thirty days from the
date that shareholder approval of both merging companies was
obtained.
Anti-Takeover Measures
Undesignated
preferred shares. The Companies Law allows
us to create and issue shares having rights different from those
attached to our ordinary shares, including shares providing certain
preferred or additional rights with respect to voting,
distributions or other matters and shares having preemptive rights.
We do not have any authorized or issued shares other than ordinary
shares. In the future, if we do create and issue a class of shares
other than ordinary shares, such class of shares, depending on the
specific rights that may be attached to them, may delay or prevent
a takeover or otherwise prevent our shareholders from realizing a
potential premium over the market value of their ordinary shares.
The authorization of a new class of shares will require an
amendment to our articles of association which requires the prior
approval of a simple majority of our shares represented and voted
at a general meeting. In addition, we undertook towards the TASE
that, as long as our shares are registered for trading with the
TASE we will not issue or authorize shares of any class other than
the class currently registered with the TASE, unless such issuance
is in accordance with certain provisions of the Israeli Securities
Law determining that a company registering its shares for trade on
the TASE may not have more than one class of shares for a period of
one year following registration with the TASE, and following such
period the company is permitted to issue preferred shares if the
preference of those shares is limited to a preference in the
distribution of dividends and the preferred shares have no voting
rights.
Supermajority
voting. Our articles of
association require the approval of the holders of at least
two-thirds of our combined voting power to effect certain
amendments to our articles of association.
Classified
board of directors. Our articles of
association provide for a classified board of directors. See “ITEM
6: Directors, Senior Management and Employees—Board Practices—Term
of Directors.”
Transfer Agent and Registrar
The transfer agent and registrar for our ordinary shares is
American Stock Transfer & Trust Company. Its address is 6201
15th Avenue, Brooklyn, New York 11219, and its telephone number is
(800) 937-5449.
C. Material Contracts
We have not been party to any material contracts within the two
years prior to the date of this annual report, other than contracts
entered into in the ordinary course of business, or as otherwise
described below in this ITEM 10.C.
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Material Contract
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Location
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Non-Stabilized Lease Agreement
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“ITEM
4: Information on Allot – D. Property, Plant and Equipment”
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D. Exchange Controls
In 1998, Israeli currency control regulations were liberalized
significantly, so that Israeli residents generally may freely deal
in foreign currency and foreign assets, and non-residents may
freely deal in Israeli currency and Israeli assets. There are
currently no Israeli currency control restrictions on remittances
of dividends on the ordinary shares or the proceeds from the sale
of the shares provided that all taxes were paid or withheld;
however, legislation remains in effect pursuant to which currency
controls can be imposed by administrative action at any time.
Non-residents of Israel may freely hold and trade our securities.
Neither our memorandum of association nor our articles of
association nor the laws of the State of Israel restrict in any way
the ownership or voting of ordinary shares by non-residents, except
that such restrictions may exist with respect to citizens of
countries which are in a state of war with Israel. Israeli
residents are allowed to purchase our ordinary shares.
E. Taxation
Israeli Tax Considerations and Government Programs
The following is a general discussion only and is not exhaustive of
all possible tax considerations. It is not intended, and should not
be construed, as legal or professional tax advice and should not be
relied upon for tax planning purposes. In addition, this discussion
does not address all of the tax consequences that may be relevant
to purchasers of our ordinary shares in light of their particular
circumstances, or certain types of purchasers of our ordinary
shares subject to special tax treatment. Examples of this kind of
investor include residents of Israel and traders in securities who
are subject to special tax regimes not covered in this discussion.
Each individual/entity should consult its own tax or legal advisor
as to the Israeli tax consequences of the purchase, ownership and
disposition of our ordinary shares.
To the extent that part of the discussion is based on new tax
legislation, which has not been subject to judicial or
administrative interpretation, we cannot assure that the tax
authorities or the courts will accept the views expressed in this
section.
The following summary describes the current tax structure
applicable to companies in Israel, with special reference to its
effect on us. The following also contains a discussion of the
material Israeli tax consequences to holders of our ordinary
shares.
General Corporate Tax Structure in Israel
Israeli companies are generally subject to corporate tax rate of
23%. However, the effective tax rate payable by a company that
derives income from an Approved Enterprise, a Benefited Enterprise,
a Preferred Enterprise or a Technological Preferred Enterprise (as
discussed below) may be considerably lower. Capital gains derived
by an Israeli company are generally subject to the prevailing
corporate tax rate.
Tax Benefits and Grants for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction
for expenditures, including capital expenditures, for the year in
which they are incurred. Expenditures are deemed related to
scientific research and development projects, if:
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The expenditures are approved by the relevant Israeli
government ministry, determined by the field of research;
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The research and development must be for the promotion of the
company; and
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The research and development is carried out by or on behalf of
the company seeking such tax deduction.
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The amount of such deductible expenses is reduced by the sum of any
funds received through government grants for the finance of such
scientific research and development projects. No deduction under
these research and development deduction rules is allowed if such
deduction is related to an expense invested in an asset depreciable
under the general depreciation rules of the Ordinance. Expenditures
for research and development not approved are deductible in equal
amounts over three years, according to the Ordinance.
From time to time, we may apply the Israel Innovation Authority for
approval to allow a tax deduction for all research and development
expenses during the year incurred. There can be no assurance that
such application will be accepted.
Law for the Encouragement of Industry (Taxes), 1969
The Law for the Encouragement of Industry (Taxes), 1969, generally
referred to as the Industry Encouragement Law, provides several tax
benefits for industrial companies. We believe that we currently
qualify as an “Industrial Company” within the meaning of the
Industry Encouragement Law. The Industry Encouragement Law defines
“Industrial Company” as a company resident in Israel, of which 90%
or more of its income in any tax year, other than of income from
certain government loans, from an “Industrial Enterprise which is
located in Israel” owned by it. An “Industrial Enterprise” is
defined as an enterprise whose major activity in a given tax year
is industrial production activity.
The following corporate tax benefits, among others, are available
to Industrial Companies:
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Amortization of the cost of purchased know-how and patents and
of rights to use a patent and know-how which are used for the
development or advancement of the company, over an eight-year
period;
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Under specified conditions, an election to file consolidated
tax returns with additional related Israeli Industrial Companies;
and
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Expenses related to a public offering in Israel and in
recognized stock markets, are deductible in equal amounts over
three years.
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Under certain tax laws and regulations, an “Industrial Enterprise”
may be eligible for special depreciation rates for machinery,
equipment and buildings. These rates differ based on various
factors, including the date the operations begin and the number of
work shifts. An “Industrial Company” owning an approved enterprise
may choose between these special depreciation rates and the
depreciation rates available to the approved enterprise.
Eligibility for the benefits under the Industry Encouragement Law
is not subject to receipt of prior approval from any governmental
authority. We can give no assurance that we qualify or will
continue to qualify as an “Industrial Company” or that the benefits
described above will be available in the future.
Tax Benefits under the Law for Encouragement of Capital
Investments, 1959
Tax Benefits Prior to the 2005 Amendment
The Law for the Encouragement of Capital Investments, 1959, as
amended, generally referred to as the Investments Law, provides
that a proposed capital investment in eligible facilities may, upon
application to the Investment Center of the Ministry of Industry
and Commerce of the State of Israel, be designated as an “Approved
Enterprise.”
The Investments Law provides that an approved enterprise is
eligible for tax benefits on taxable income derived from its
approved enterprise programs. The tax benefits under the
Investments Law also apply to income generated by a company from
the grant of a usage right with respect to know-how developed by
the Approved Enterprise, income generated from royalties, and
income derived from a service which is auxiliary to such usage
right or royalties, provided that such income is generated within
the Approved Enterprise’s ordinary course of business. The tax
benefits under the Investments Law are not, generally, available
with respect to income derived from products manufactured outside
of Israel. In addition, the tax benefits available to an Approved
Enterprise are contingent upon the fulfillment of conditions
stipulated in the Investments Law and regulations and the criteria
set forth in the specific certificate of approval, as described
above. In the event that a company does not meet these conditions,
it would be required to refund the amount of tax benefits, plus a
consumer price index linkage adjustment and interest.
Should a company derive income from sources other than the Approved
Enterprise during the relevant period of benefits, such income is
taxable at the regular corporate tax rates.
A company may elect to receive an alternative package of benefits.
Under the alternative package of benefits, a company’s
undistributed income derived from the Approved Enterprise will be
exempt from corporate tax for a period of between two and ten years
from the first year the company derives taxable income under the
program, after the commencement of production, depending on the
geographic location of the Approved Enterprise within Israel, and
such company will be eligible for a reduced tax rate for the
remainder of the benefits period. Under certain circumstances (as
detailed below regarding Foreign Investment Companies), the benefit
period may extend to a maximum of ten years from the commencement
of the benefit period.
A company that has elected the alternative track of benefits, such
as us, that subsequently pays a dividend out of income derived from
the approved enterprise(s) during the tax exemption period will be
subject to corporate tax in the year the dividend is distributed in
respect of the gross amount distributed, at the rate which would
have been applicable had the company not elected the alternative
track of benefits, (generally 10%-25%, depending on the percentage
of the company’s ordinary shares held by foreign shareholders). The
dividend recipient is subject to withholding tax at the reduced
rate of 15% applicable to dividends from approved enterprises if
the dividend is distributed during the tax exemption period or
within twelve years thereafter. In the event, however, that the
company qualifies as a foreign investors’ company, there is no such
time limitation.
Foreign Investors’ Company (“FIC”)
A company that has an Approved Enterprise program is eligible for
further tax benefits if it qualifies as a foreign investors’
company. A foreign investors’ company is a company of which, among
other criteria, more than 25% of its share capital and combined
share and loan capital is owned by non-Israeli residents. A company
that qualifies as a foreign investors’ company and has an approved
enterprise program is eligible for tax benefits for a ten-year
benefit period.
Subject to applicable provisions concerning income under the
alternative package of benefits, dividends paid by a company are
considered to be attributable to income received from the entire
company and the company’s effective tax rate is the result of a
weighted average of the various applicable tax rates, excluding any
tax-exempt income. Under the Investments Law, with the exception of
amendment 74, a company that has elected the alternative track of
benefits is not obliged to distribute retained profits, and may
generally decide from which year’s profits to declare
dividends.
In 1998, the production facilities of the Company related to its
computational technologies were granted the status of an “Approved
Enterprise” under the Law. In 2004, an expansion program was
granted the status of “Approved Enterprise.” According to the
provisions of the Law, the Company has elected the alternative
track of benefits and has waived Government grants in return for
tax benefits.
As of December 31, 2022, the Company has not yet realized the
benefits under the “Approved Enterprise” program. We believe that
we met the aforementioned conditions.
Tax Benefits under the 2005 Amendment
An amendment to the Investments Law, generally referred as the 2005
Amendment, effective as of April 1, 2005 has significantly changed
the provisions of the Investments Law. The amendment includes
revisions to the criteria for investments qualified to receive tax
benefits as an Approved Enterprise.
The 2005 Amendment simplifies the approval process for the approved
enterprise. According to the 2005 Amendment, only approved
enterprises receiving cash grants require the approval of the
Investment Center.
A program receiving benefits under the 2005 Amendment is referred
to as the Benefited Enterprise.
The duration of tax benefits is subject to a limitation of the
earlier of seven to ten years from the Commencement Year, or twelve
years from the first day of the Year of Election. We elected the
year of 2009 as “year of election” under the Investments Law after
the 2005 Amendment. The benefit period under this year of election
has ended on December 31, 2020.
We believe that a portion of taxable operating income that we may
realize in the future will be eligible to benefits under the
Investments Law.
As of December 31, 2022, we did not generate exempt income under
the provisions of the Investments Law.
Trapped Earning
Following amendment 74 to the Investment Law as part of the Law for
Economic Efficiency (Legislative Amendments for Attaining the
Budget Goals for Fiscal Years 2021 and 2022), which was enacted in
November, 2021, any dividends distributed, or deemed as distributed
under the Investment Law after August 15, 2021 by a company which
earned exempt income under the Approved or Benefited Enterprise
regimes (Trapped Earnings) which it did not elect to release under
the terms of amendment 74, will be allocated pro-rata between
exempt income and other sources and taxed accordingly. In addition,
the corporate income tax claw-back will apply upon any dividend
distribution, as long as the company has Trapped Earnings.
Tax Benefits under the 2011 Amendment
As of January 1, 2011, new legislation amending the Investments Law
came into effect (the “2011 Amendment”). The 2011 Amendment
introduced a new status of “Preferred Company” and “Preferred
Enterprise.” replacing the then existing status of “Benefited
Company” and “Benefited Enterprise.” Similar to a “Benefited
Company,” a Preferred Company is an industrial company owning a
Preferred Enterprise which meets certain conditions (including a
minimum threshold of 25% export). However, under this legislation
the requirement for a minimum investment in productive assets was
cancelled.
Under the 2011 Amendment, a uniform corporate tax rate applies to
all qualifying income of the Preferred Company, as opposed to the
former law, which was limited to income from the Approved
Enterprises and Benefited Enterprise during the benefits period. As
of the 2017 tax year the corporate tax rate for preferred taxable
income is 7.5% in areas in Israel designated as Development Zone A
and 16% elsewhere in Israel.
A dividend distributed from income which is attributed to a
Preferred Enterprise will be subject to withholding tax at source
at the following rates: (i) Israeli resident corporation –0%, (ii)
Israeli resident individual – 20% in 2014 and onwards (iii)
non-Israeli resident - 20% in 2014 and onwards, subject to a
reduced tax rate under the provisions of an applicable double tax
treaty.
The provisions of the 2011 Amendment also provided transitional
provisions to address companies already enjoying current benefits.
Under the transition provisions of the new legislation, a company
may decide to irrevocably implement the 2011 Amendment while
waiving benefits provided under the Investments Law prior to the
2011 Amendment; or to remain subject to the Investments Law prior
to the 2011 Amendment. We have examined the possible effect, if
any, of these provisions of the 2011 Amendment on our financial
statements and have decided, at this time, not to opt to apply the
new benefits under the 2011 Amendment.
Tax Benefits under the 2016 Amendment
In December 2016, new legislation amended the Investments Law,
effective as of the 2017 tax year (the “2016 Amendment”). Under the
2016 Amendment a new status of “Technological Preferred Enterprise”
was introduced to the Investments Law.
Under the 2016 Amendment, two new tracks are available:
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Technological Preferred Enterprise – an enterprise which is
part of a consolidated group with consolidated annual revenues of
less than ILS 10 billion. A Technological Preferred Enterprise
which is located in areas other than Development Zone A will be
subject to tax at a rate of 12% on profits derived from
intellectual property, and a Technological Preferred Enterprise in
Development Zone A will be subject to tax at a rate of 7.5%;
and
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Special Technological Preferred Enterprise – an enterprise
which is part of a consolidated group with consolidated annual
revenues exceeding ILS 10 billion. Such an enterprise will be
subject to tax at a rate of 6% on profits derived from intellectual
property regardless of the enterprise’s geographical
location.
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Any dividends distributed to foreign companies, as defined in the
Investments Law, derived from income from the Technological
Preferred Enterprise will be subject to tax at a rate of 20% (with
an exemption from such withholding tax applying to dividends paid
to an Israeli company), or a lower rate of 4% in case 90% or more
of the Preferred Technological Enterprise’s shares are held by
foreign corporations. The above rates may be reduced by an
applicable double tax treaty, subject to the receipt in advance of
a valid certificate from the Israel Tax Authority allowing for a
reduced tax rate.
We have examined the possible effect, if any, of these provisions
of the 2016 Amendment on our financial statements and have decided,
at this time, not to opt to apply the new benefits under the 2016
Amendment.
Special Provisions Relating to Israeli Tax Reporting in United
States Dollars
Under the Income Tax (Inflationary Adjustments) Law, 1985, results
for tax purposes are measured in real terms, in accordance with the
changes in the Israeli Consumer Price Index (“Israeli CPI”).
Accordingly, until 2011, results for tax purposes were measured in
terms of earnings in ILS after certain adjustments for increases in
the Israeli CPI. Commencing in the taxable year 2012, we have
elected to measure our taxable income and file our tax return in
United States Dollars, under the Israeli Income Tax Regulations
(Principles Regarding the Management of Books of Account of Foreign
Invested Companies and Certain Partnerships and the Determination
of Their Taxable Income), 1986.
Capital Gains Tax on Sales of Our Ordinary Shares
Israeli law generally imposes a capital gains tax on the sale of
any capital assets by residents of Israel, as defined for Israeli
tax purposes, and on the sale of assets located in Israel,
including shares in Israeli companies, by both residents and
non-residents of Israel, unless a specific exemption is available
or a tax treaty between Israel and the shareholder’s country of
residence provides otherwise. The law distinguishes between real
gain and inflationary surplus. The inflationary surplus is a
portion of the total capital gain which is equivalent to the
increase of the relevant asset’s purchase price which is
attributable to the increase in the Israeli consumer price index
or, in certain circumstances, a foreign currency exchange rate,
between the date of purchase and the date of sale. The real gain is
the excess of the total capital gain over the inflationary
surplus.
The tax rate applicable to capital gains derived from the sale of
shares, whether listed on a stock market or not, is 25% for Israeli
individuals, unless such shareholder claims a deduction for
financing expenses in connection with such shares, in which case
the gain is generally taxed at a rate of 30%. Additionally, if such
shareholder is considered a “material shareholder” at any time
during the 12-month period preceding such sale, i.e., such
shareholder holds directly or indirectly, including with others, at
least 10% of any means of control in a company, the tax rate is
30%. Israeli companies are subject to the Corporate Tax rate on
capital gains derived from the sale of shares. However, the
foregoing tax rates do not apply to: (i) dealers in securities; and
(ii) shareholders who acquired their shares prior to an initial
public offering (that may be subject to a different tax
arrangement).
Individuals who are subject to tax in Israel are also subject to an
additional tax at a rate of 3% on annual income exceeding a certain
threshold (NIS 647,640 and NIS 663,240 for 2021 and 2022
respectively linked to the annual change in the Israeli Consumer
Price Index), including, but not limited to income derived from,
dividends, interest and capital gains.
Non-Israeli residents are exempt from Israeli capital gains tax on
any gains derived from the sale of shares of Israeli companies
publicly traded on a recognized stock exchange or regulated market
outside of Israel, provided that such capital gains are not derived
from a permanent establishment in Israel, and the shareholders did
not acquire their shares prior to an initial public offering.
However, non-Israeli corporations will not be entitled to such
exemption if Israeli residents (i) have a controlling interest of
more than 25% in such non-Israeli corporation, or (ii) are the
beneficiaries or are entitled to 25% or more of the revenues or
profits of such non-Israeli corporation, whether directly or
indirectly.
In some instances where our shareholders may be liable to Israeli
tax on the sale of their ordinary shares, the payment of the
consideration may be subject to the withholding of Israeli tax at
the source.
Pursuant to the Convention between the government of the United
States and the government of Israel with respect to taxes on
income, as amended (the “U.S.-Israel Tax Treaty”), the sale,
exchange or disposition of ordinary shares by a person who (i)
holds the ordinary shares as a capital asset, (ii) qualifies as a
resident of the United States within the meaning of the U.S.-Israel
Tax Treaty and (iii) is entitled to claim the benefits afforded to
such person by the U.S.-Israel Tax Treaty, generally, will not be
subject to the Israeli capital gains tax. Such exemption will not
apply if (i) the capital gain arising from such sale, exchange or
disposition is attributed to real estate located in Israel, (ii)
the capital gain arising from such sale, exchange or disposition is
attributed to royalties, (iii) such U.S. resident holds, directly
or indirectly, shares representing 10% or more of our voting power
during any part of the 12-month period preceding such sale,
exchange or disposition, subject to certain conditions, (iv) the
capital gains from such sale, exchange or disposition can be
allocated to a permanent establishment in Israel, or (v) such U.S.
resident is an individual and was present in Israel for 183 days or
more during the relevant taxable year. In such case, the sale,
exchange or disposition of ordinary shares would be subject to
Israeli tax, to the extent applicable; however, under the
U.S.-Israel Tax Treaty, such U.S. resident would be permitted to
claim a credit for such taxes against the U.S. federal income tax
imposed with respect to such sale, exchange or disposition, subject
to the limitations in U.S. laws applicable to foreign tax credits.
The U.S.-Israel Tax Treaty does not relate to U.S. state or local
taxes.
Taxation of Dividends paid to Non-Resident Holders of Shares
Non-residents of Israel are subject to income tax on income accrued
or derived from sources in Israel. Such sources of income include
passive income such as dividends. On distributions of dividends
other than bonus shares, or stock dividends, income tax is
applicable at the rate of 25%, or 30% for a shareholder that is
considered a “material shareholder” at any time during the 12-month
period preceding such distribution, unless a different rate is
provided in a treaty between Israel and the shareholder’s country
of residence. However, under the Investments Law, dividends
generated by an Approved Enterprise, Benefited Enterprise,
Preferred Enterprise or Technological Preferred Enterprise may be
are taxed at a different rate as discussed above.
Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid
to a holder of ordinary shares that is a Treaty U.S. Resident is
25%. However, if the income out of which the dividend is paid is
not generated by an Approved Enterprise, Benefited Enterprise,
Preferred Enterprise or Technological Preferred Enterprise, and not
more than 25% of our gross income consists of interest or dividends
(and certain other conditions are met), dividends paid to a U.S.
corporation holding at least 10% of our issued voting power during
the part of the tax year which precedes the date of payment of the
dividend and during the whole of its prior tax year are generally
taxed at a rate of 12.5%. If the aforementioned conditions are met
and the income out of which the dividend is paid is generated by an
Approved Enterprise, Benefited Enterprise, Preferred Enterprise or
Technological Preferred Enterprise, then the tax rate will be
15%.
United States Federal Income Taxation
The following is a description of the material United States
federal income tax consequences to U.S. Holders (defined below) of
the ownership and disposition of our ordinary shares, but does not
purport to be a comprehensive discussion of all tax considerations
that may be relevant to a particular person’s decision to acquire
our ordinary shares. This description addresses only the United
States federal income tax considerations of holders that hold such
ordinary shares as capital assets for U.S. federal income tax
purposes. This description does not address tax considerations
applicable to holders that may be subject to special tax rules,
including:
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financial institutions or insurance companies;
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real estate investment trusts, regulated investment companies
or grantor trusts;
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dealers or traders in securities or currencies;
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certain former citizens or long-term residents of the United
States;
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persons that will hold our shares through a partnership or
other pass-through entity or arrangement;
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| • |
persons that received our shares as compensation for the
performance of services;
|
| • |
persons that will hold our shares as part of a “hedging,”
“conversion,” “wash sale,” or other integrated transaction or as a
position in a “straddle” for United States federal income tax
purposes;
|
| • |
persons whose “functional currency” for U.S. federal income
tax purposes is not the United States dollar;
|
| • |
persons owning ordinary shares in connection with a trade or
business conducted outside the United States;
|
| • |
certain U.S. expatriates;
|
| • |
persons subject to special tax accounting rules as a result of
any item of gross income with respect to our ordinary shares being
taken into account in an applicable financial statement; or
|
| • |
holders that own directly, indirectly or through attribution
10.0% or more of the voting power or value of our shares.
|
Moreover, this description does not address any U.S. state, local
or non-U.S. tax law, the Medicare tax on net investment income, the
United States federal estate and gift or alternative minimum tax
consequences of the ownership and disposition of our ordinary
shares, and, except as expressly described herein, this description
does not address the U.S. federal income tax consequences that may
apply to U.S. Holders under the U.S.-Israel Tax Treaty.
This description is based on the Code, existing, proposed and
temporary United States Treasury Regulations and judicial and
administrative interpretations thereof, in each case as in effect
and available on the date hereof. All of the foregoing are subject
to change, which change could apply retroactively and could affect
the tax consequences described below.
For purposes of this description, a “U.S. Holder” is a beneficial
owner of our ordinary shares that, for United States federal income
tax purposes, is:
| • |
a citizen or individual resident of the United States;
|
| • |
corporation, or other entity treated as a corporation for U.S.
federal income tax purposes, created or organized in or under the
laws of the United States, any state thereof, or the District of
Columbia;
|
| • |
an estate the income of which is subject to United States
federal income taxation regardless of its source; or
|
| • |
a trust if such trust has validly elected to be treated as a
United States person for United States federal income tax purposes
or if (1) a court within the United States is able to exercise
primary supervision over its administration and (2) one or more
United States persons have the authority to control all of the
substantial decisions of such trust.
|
If a partnership (or any other entity or arrangement treated as a
partnership for United States federal income tax purposes) holds
our ordinary shares, the tax treatment of a partner in such
partnership will generally depend on the status of the partner and
the activities of the partnership. Such a partner or partnership
should consult its tax advisor as to its tax consequences.
You should consult your tax advisor with respect to the United
States federal, state, local and foreign tax consequences of owning
and disposing of our ordinary shares.
Distributions
Subject to the discussion below under “Passive Foreign Investment
Company Considerations,” for United States federal income tax
purposes, the gross amount of any distribution made to you, with
respect to our ordinary shares before reduction of any Israeli
taxes withheld therefrom, other than certain distributions, if any,
of our ordinary shares distributed pro rata to all our
shareholders, will be includible in your income as dividend income
to the extent such distribution is paid out of our current or
accumulated earnings and profits as determined under United States
federal income tax principles. Subject to the discussion below
under “Passive Foreign Investment Company Considerations,” to the
extent, if any, that the amount of any distribution by us exceeds
our current and accumulated earnings and profits as determined
under United States federal income tax principles, it will be
treated first as a tax-free return of your adjusted tax basis in
our ordinary shares and thereafter as capital gain. We do not
expect to maintain calculations of our earnings and profits under
United States federal income tax principles and, therefore, if you
are a U.S. Holder you should expect that the entire amount of any
distribution generally will be reported as dividend income to
you.
Subject to the discussion below under “Passive Foreign Investment
Company Considerations,” dividends paid to non-corporate U.S.
Holders will be taxed at the lower capital gains rate applicable to
“qualified dividend income,” provided that (i) we are eligible
for the benefits of the U.S.-Israel Tax Treaty, (ii) we are
not a PFIC (as discussed below under “Passive Foreign Investment
Company Considerations”) for the taxable year in which the dividend
is paid and the preceding taxable year, and (iii) certain
holding period and other requirements are met. However, such
dividends will not be eligible for the dividends received deduction
generally allowed to corporate U.S. Holders.
If you are a U.S. Holder, dividends paid to you with respect to
your ordinary shares will be treated as foreign source income,
which may be relevant in calculating your foreign tax credit
limitation. Subject to certain conditions and limitations, Israeli
tax withheld on dividends at a rate not exceeding the rate provided
in the U.S.-Israel Tax Treaty (if applicable) may be deducted from
your taxable income or credited against your United States federal
income tax liability. The limitation on foreign taxes eligible for
credit is calculated separately with respect to specific classes of
income. For this purpose, dividends that we distribute generally
should constitute “passive category income,” or, in the case of
certain U.S. Holders, “general category income.” A foreign tax
credit for foreign taxes imposed on distributions may be denied
when you do not satisfy certain minimum holding period
requirements. In addition, for periods in which we are a “United
Stated-owned foreign corporation,” a portion of dividends paid by
us may be treated as U.S. source solely for purposes of the foreign
tax credit. We would be treated as a United States-owned foreign
corporation if 50% or more of the total value or total voting power
of our shares is owned, directly, indirectly or by attribution, by
United States persons. Furthermore, Treasury Regulations that apply
to taxable years beginning on or after December 28, 2021 may in
some circumstances prohibit a U.S. Holder from claiming a foreign
tax credit unless the taxes are creditable under the U.S.-Israel
Tax Treaty and the holder is eligible for benefits under the
U.S.-Israel Tax Treaty and elects its application. The rules
relating to the determination of the foreign tax credit are
complex, and you should consult your personal tax advisors to
determine whether and to what extent you would be entitled to this
credit.
Sales Exchange or other Disposition of Ordinary Shares
Subject to the discussion below under “Passive Foreign Investment
Company Considerations,” if you are a U.S. Holder, you generally
will recognize gain or loss on the sale, exchange or other
disposition of our ordinary shares equal to the difference between
the amount realized on such sale, exchange or other disposition and
your adjusted tax basis in our ordinary shares. Such gain or loss
will be capital gain or loss. If you are a non-corporate U.S.
Holder, capital gain from the sale, exchange or other disposition
of ordinary shares is eligible for the preferential rate of
taxation applicable to long-term capital gains if your holding
period for such ordinary shares exceeds one year (that is, such
gain is long-term capital gain). Gain or loss, if any, recognized
by you generally will be treated as United States source income or
loss for United States foreign tax credit purposes. The
deductibility of capital losses for U.S. federal income tax
purposes is subject to limitations.
Passive Foreign Investment Company Considerations
A non-U.S. corporation will be classified as a “passive foreign
investment company,” or a PFIC, for United States federal income
tax purposes in any taxable year in which, after applying certain
look-through rules, either:
| • |
at least 75 percent of its gross income is “passive income;”
or
|
| • |
at least 50 percent of the average value of its gross assets
(generally based on the quarterly value of such gross assets, or in
certain cases, adjusted basis) is attributable to assets that
produce “passive income” or are held for the production of passive
income.
|
Passive income for this purpose generally includes dividends,
interest, royalties, rents, gains from commodities and securities
transactions and the excess of gains over losses from the
disposition of assets which produce passive income.
PFIC status is an annual determination that is based on tests which
are factual in nature and our status in future years will depend on
our income, assets and activities in each of those years.
Therefore, there can be no assurance that we will not be considered
a PFIC for any taxable year. As a public company, the market
capitalization method was employed to value our assets for PFIC
purposes. In previous years, we obtained an independent valuation
of our company which employed an approach other than the market
capitalization approach. For the 2022 tax year, based on the
analysis of our U.S. tax advisor, the market capitalization method
was determined to be appropriate for determining our PFIC status.
On that basis, we believe that we were not a PFIC for the 2022 tax
year. However, there can be no certainty that the IRS will not
challenge such a position and determine that based on the IRS’s
interpretation of the asset test, we were a PFIC for the 2022 tax
year. However, because PFIC status is based on our income, assets
and activities for the entire taxable year, it is not possible to
determine whether we will be characterized as a PFIC for the 2023
taxable year until after the close of the year. Moreover, we must
determine our PFIC status annually based on tests which are factual
in nature, and our status in future years will depend on our
income, assets, market capitalization and activities in each of
those years. Because the market price of our ordinary shares is
likely to fluctuate and the market price of the shares of
technology companies has been especially volatile, and because that
market price may affect the determination of whether we will be
considered a PFIC, we cannot assure you that we will not be
considered a PFIC for any taxable year. If we were a PFIC, and you
are a U.S. Holder, you generally would be subject to ordinary
income tax rates, imputed interest charges and other
disadvantageous tax treatment (including the denial of the taxation
of such dividends at the lower rates applicable to long-term
capital gains, as discussed above under “—Distributions”) with
respect to any gain from the sale, exchange or other disposition
of, and certain distributions with respect to, your ordinary
shares. A U.S. Holder should consult his, her or its own tax
advisor with respect to the potential application of the PFIC rules
in his, her or its particular circumstances.
Under the PFIC rules, unless a U.S. Holder makes one of the
elections described in the next paragraphs, a special tax regime
will apply to both (a) any “excess distribution” by us (generally,
the U.S. Holder’s ratable portion of distributions in any year
which are greater than 125% of the average annual distribution
received by such U.S. Holder in the shorter of the three preceding
years or the U.S. Holder’s holding period) and (b) any gain
realized on the sale or other disposition of the ordinary shares.
Under this regime, any excess distribution and realized gain will
be treated as ordinary income and will be subject to tax as if (a)
the excess distribution or gain had been realized ratably over the
U.S. Holder’s holding period, (b) the amount deemed realized had
been subject to tax in each year of that holding period, and (c)
the interest charge generally applicable to underpayments of tax
had been imposed on the taxes deemed to have been payable in those
years. In addition, dividend distributions made to you will not
qualify for the lower rates of taxation applicable to long term
capital gains discussed above under “Distributions.”
Certain elections are available to U.S. Holders of shares that may
serve to alleviate some of the adverse tax consequences of PFIC
status. If we agreed to provide the necessary information, you
could avoid the interest charge imposed by the PFIC rules by making
a qualified electing fund, or a QEF election, which election may be
made retroactively under certain circumstances, in which case you
generally would be required to include in income on a current basis
your pro rata share of our ordinary earnings as ordinary income and
your pro rata share of our net capital gains as long-term capital
gain. We do not expect to provide to U.S. Holders the information
needed to report income and gain pursuant to a QEF election, and we
make no undertaking to provide such information in the event that
we are a PFIC.
Under an alternative tax regime, you may also avoid certain adverse
tax consequences relating to PFIC status discussed above by making
a mark-to-market election with respect to our ordinary shares
annually, provided that the shares are “marketable.” Shares will be
marketable if they are regularly traded on certain U.S. stock
exchanges (including Nasdaq) or on certain non-U.S. stock
exchanges. For these purposes, the shares will generally be
considered regularly traded during any calendar year during which
they are traded, other than in negligible quantities, on at least
fifteen days during each calendar quarter.
If you choose to make a mark-to-market election, you would
recognize as ordinary income or loss each year an amount equal to
the difference as of the close of the taxable year between the fair
market value of the PFIC shares and your adjusted tax basis in the
PFIC shares. Losses would be allowed only to the extent of net
mark-to-market gain previously included by you under the election
for prior taxable years. If the mark-to-market election were made,
then the PFIC rules set forth above relating to excess
distributions and realized gains would not apply for periods
covered by the election. If you make a mark-to-market election
after the beginning of your holding period of our ordinary shares,
you would be subject to interest charges with respect to the
inclusion of ordinary income attributable to the period before the
effective date of such election.
We may invest in stock of non-U.S. corporations that are PFICs, or
if we are a PFIC, U.S. Holders will be deemed to own their
proportionate share of our PFIC subsidiaries. In such a case,
provided that we are classified as a PFIC, a U.S. Holder would be
treated as owning its pro rata share of the stock of the PFIC owned
by us. Such a U.S. Holder would be subject to the rules generally
applicable to shareholders of PFICs discussed above with respect to
distributions received by us from such a PFIC and dispositions by
us of the stock of such a PFIC (even though the U.S. Holder may not
have received the proceeds of such distribution or disposition).
Assuming we receive the necessary information from the PFIC in
which we own stock, certain U.S. Holders may make the QEF election
discussed above with respect to the stock of the PFIC owned by us,
with the consequences discussed above. However, no assurance can be
given that we will be able to provide U.S. Holders with such
information. A. U.S. Holder generally would not be able to make the
mark-to-market election described above with respect to the stock
of any PFIC owned by us.
If we were a PFIC, a holder of ordinary shares that is a U.S.
Holder must file United States Internal Revenue Service Form 8621
for each tax year in which the U.S. Holder owns the ordinary
shares.
You should consult your own tax advisor regarding our potential
status as a PFIC and the tax consequences and filing requirements
that would arise if we were treated as a PFIC.
Foreign Asset Reporting
Certain U.S. Holders who are individuals (and certain specified
entities) are required to report information relating to an
interest in ordinary shares, subject to certain exceptions
(including an exception for securities held in certain accounts
maintained by financial institutions). U.S. Holders are encouraged
to consult their own tax advisers regarding the effect of this
reporting requirement on their ownership and disposition of
ordinary shares.
Backup Withholding Tax and Information Reporting Requirements
United States backup withholding tax and information reporting
requirements generally apply to certain payments to certain
non-corporate U.S. Holders of shares. Information reporting
generally will apply to payments of dividends on, and to proceeds
from the sale or redemption of, ordinary shares made within the
United States, or by a United States payor or United States
middleman, to a U.S. Holder of ordinary shares, other than an
exempt recipient (including a corporation, a payee that is not a
United States person that provides an appropriate certification and
certain other persons). A payor will be required to withhold backup
withholding tax from any payments of dividends on, or the proceeds
from the sale or redemption of, ordinary shares within the United
States, or by a United States payor or United States middleman, to
a U.S. Holder, other than an exempt recipient, if such holder fails
to furnish its correct taxpayer identification number or otherwise
fails to comply with, or establish an exemption from, such backup
withholding tax requirements.
Any amounts withheld under the backup withholding rules will be
allowed as a refund or credit against the beneficial owner’s United
States federal income tax liability, if any, provided that the
required information is furnished to the IRS.
The above description is not intended to constitute a complete
analysis of all tax consequences relating to ownership and
disposition of our ordinary shares. You should consult your tax
advisor concerning the tax consequences of your particular
situation.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are currently subject to the information and periodic reporting
requirements of the Exchange Act, and file periodic reports and
other information with the SEC through its electronic data
gathering, analysis and retrieval (EDGAR) system. The SEC maintains
a website at http:/www.sec.gov containing reports, proxy and
information statements and other information regarding issuers that
file electronically with the SEC. Our securities filings, including
this annual report and the exhibits thereto, are available on the
SEC’s website, the TASE’s website at http://maya.tase.co.il and the
Israeli Securities Authority’s website at
http://www.magna.isa.gov.il. As permitted under Nasdaq Rule
5250(d)(1)(C), we will also post our annual reports filed with the
SEC on our website at http://www.allot.com. The information
contained on our website is not part of this or any other report
filed with or furnished to the SEC. We will furnish hard copies of
such reports to our shareholders upon written request free of
charge. The information contained on our website is not part of
this or any other report filed with or furnished to the SEC.
As a foreign private issuer, we are exempt from the rules under the
Exchange Act relating to the furnishing and content of proxy
statements, and our officers, directors and principal shareholders
are exempt from the reporting and short-swing profit recovery
provisions contained in Section 16 of the Exchange Act. In
addition, we are not required under the Exchange Act to file
periodic reports and financial statements with the SEC as
frequently or as promptly as United States companies whose
securities are registered under the Exchange Act. However, we are
required to file with the SEC, within 120 days after the end of
each subsequent fiscal year, an annual report on Form 20-F
containing financial statements which will be examined and reported
on, with an opinion expressed, by an independent public accounting
firm. We also furnish to the SEC reports on Form 6-K containing
quarterly unaudited financial information.
I. Subsidiary
Information
Not applicable.
ITEM 11:
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of market risks, including foreign
currency exchange fluctuations, changes in interest rates and
inflation. We regularly assess currency, interest rate and
inflation risks to minimize any adverse effects on our business as
a result of those factors.
Risk of Interest Rate Fluctuation
The primary objectives of our investment activities are to preserve
principal, support liquidity requirements, and maximize income
without significantly increasing risk. Our investments are subject
to market risk due to changes in interest rates, which may affect
our interest income and fair market value of our investments.
To minimize this risk, we maintain our portfolio of cash, cash
equivalents and short and long-term investments in a variety of
securities, including U.S. government and agency securities, and
corporate debt securities. We do not have any long-term borrowings.
We have a significant amount of cash that is currently invested
primarily in interest bearing investment such as bank time
deposits, money market funds and available for sale marketable
securities. These investments expose us to risks related to changes
in interest rates. If interest rates decline, our results of
operations may be adversely affected due to lower interest income
from these investments. We do not believe that a 10% increase or
decrease in interest rates would have a material impact on our
operating results, cash flows or the fair value of our portfolio.
The primary objective of our investment activities is to preserve
principal while maximizing the income that we receive from our
investments without significantly increasing risk and loss. Our
investments are exposed to market risk due to fluctuation in
interest rates, which may affect our interest income and the fair
market value of our investments. We manage this exposure by
performing ongoing evaluations of our investments. Due to the
short- and medium-term maturities nature of our investments to
date, their carrying value approximates the fair value. We
generally hold investments to maturity in order to limit our
exposure to interest rate fluctuations.
Foreign Currency Exchange Risk
Our foreign currency exposures give rise to market risk associated
with exchange rate movements of the U.S. dollar, our functional and
reporting currency, mainly against the ILS. In 2022, we derived
substantial part of our revenues in U.S. dollars and also a
substantial portion in Euros and other currencies. Although a
substantial part of our expenses were denominated in U.S. dollars,
a significant portion of our expenses were denominated in ILS and
to a lesser extent in Euros and other currencies. Our
ILS-denominated expenses consist principally of salaries and
related personnel expenses. We monitor foreign currency exposure
and, from time to time, may use various instruments to preserve the
value of sales transactions and commitments; however, this cannot
assure our protection against risks of currency fluctuations. Any
strengthening or weakening in the value of the ILS against the U.S.
dollar is being partially mitigated using hedging transactions and
therefore, though we cannot provide any assurance that such
transaction will fully mitigate the effect on our net income, it is
not likely that such effect will be material in the upcoming
year.
In the event of a 10% hypothetical strengthening or weakening in
the value of the Euro against the U.S. dollar, we may be able to
mitigate the effect of such currency exchange fluctuation by
adapting our pricing. However, in the event that market conditions
will limit our ability to adjust our pricing, we might not be able
to fully mitigate the adverse effect of such currency fluctuation.
We estimate that in such event, the impact on our net income in
2022 did not exceed $2 million. For more information regarding
foreign currency related risks, see “ITEM 3: Key Information—Risk
Factors—Our international operations expose us to the risk of
fluctuations in currency exchange rates.”
We use currency derivatives contracts primarily to hedge payments
in ILS, EUR CNY, JPY and CAD against USD. These transactions
constitute a future cash flow hedge. As of December 31, 2022, we
had outstanding derivatives contracts in the amount of $37 million,
net. These transactions were for a period of up to twelve months.
As of December 31, 2022, the fair value of the above-mentioned
foreign currency derivative contracts was $0.9 million.
ITEM 12:
Description of Securities Other Than Equity Securities
Not applicable.
PART II
ITEM 13:
Defaults, Dividend Arrearages and Delinquencies
None.
ITEM 14:
Material Modifications to the Rights of Security Holders and Use of
Proceeds
A. Material Modifications to the Rights of Security Holders
None.
B. Use of Proceeds
Not applicable.
ITEM 15:
Controls and Procedures
(a) Disclosure Controls and Procedures. As of the end of the period
covered by this report, our management, including our Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of December 31, 2022. Based upon, and as of the date of,
such evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of December 31, 2022, our
disclosures controls and procedures were effective such that the
information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in SEC rules and
forms, and is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required
disclosure.
(b) Management’s Annual Report on Internal Control over Financial
Reporting. Our management is responsible for establishing and
maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Our internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements in
accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those policies
and procedures that:
| • |
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of our assets;
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provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that
our receipts and expenditures are being made only in accordance
with authorizations of our management and directors; and
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provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
|
Our management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2022.
In making this assessment, our management used the criteria
established in Internal Control—Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Our management has concluded, based on its
assessment, that our internal control over financial reporting was
effective as of December 31, 2022 to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of consolidated financial statements for external
reporting purposes in accordance with generally accepted accounting
principles.
(c) Attestation Report of the Registered Independent Public
Accounting Firm. Our independent auditors, Kost Forer Gabbay &
Kasierer, a member of Ernst & Young Global, have audited the
consolidated financial statements included in this annual report on
Form 20-F, and as part of its audit, have issued an unqualified
audit report on the effectiveness of our internal control over
financial reporting as of December 31, 2022. The report is included
in pages F-2 and F-3 of this annual report on Form 20-F and is
incorporated herein by reference.
(d) Changes in Internal Control over Financial Reporting. During
the period covered by this report, no changes in our internal
control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) have occurred that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 16:
Reserved
ITEM 16A:
Audit Committee Financial Expert
The board of directors has determined that Ms. Efrat Makov is an
“audit committee financial expert” as defined under the U.S.
federal securities laws and is independent under the rules of
Nasdaq. The board of directors has also determined that Ms. Makov
is independent, as such term is defined by Nasdaq Rule 5605(a)(2)
and Rule 10A-3 under the Exchange Act.
ITEM 16B: Code
of Ethics
We have adopted a code of ethics applicable to our Chief Executive
Officer, Chief Financial Officer, principal accounting officer or
controller and persons performing similar functions. This code has
been posted on our website, www.allot.com. Information contained
on, or that can be accessed through, our website does not
constitute a part of this annual report and is not incorporated by
reference herein. Waivers of our code of ethics may only be granted
by the board of directors. Under Item 16B of Form 20-F, if a waiver
or amendment of the code of ethics applies to the persons specified
in Item 16B(a) of the Form 20-F and relates to standards promoting
any of the values described in Item 16B(b) of Form 20-F, we will
disclose such waiver or amendment (i) on our website within five
business days following the date of amendment or waiver in
accordance with the requirements of Instruction 4 to such Item 16B
or (ii) through the filing of a Form 6-K. We granted no waivers
under our code of ethics in 2022.
ITEM 16C:
Principal Accountant Fees and Services
Fees paid to the Auditors
The following table sets forth, for each of the years indicated,
the fees expensed by our independent registered public accounting
firm.
|
|
|
Year ended December, 31,
|
|
|
|
|
2021
|
|
|
2022
|
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Audit
Fees(1)
|
|
$
|
416
|
|
|
$
|
445
|
|
|
Audit-Related Fees(2)
|
|
|
-
|
|
|
|
10
|
|
|
Tax
Fees(3)
|
|
|
39
|
|
|
|
60
|
|
|
Other
|
|
|
50
|
|
|
|
30
|
|
|
Total
|
|
$
|
505
|
|
|
$
|
545
|
|
|
__________________
|
|
|
|
|
|
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(1)
|
“Audit fees” include fees for services performed by our independent
public accounting firm in connection with our annual audit for 2021
and 2022, certain procedures regarding our quarterly financial
results submitted on Form 6-K and consultation concerning financial
accounting and reporting standards.
|
|
(2)
|
“Audit-Related fees” relate to assurance and associated services
that are traditionally performed by the independent auditor,
including: accounting consultation and consultation concerning
financial accounting, reporting standards and due diligence
investigations.
|
|
(3)
|
“Tax
fees” include fees for professional services rendered by our
independent registered public accounting firm for tax compliance,
transfer pricing and tax advice on actual or contemplated
transactions.
|
Audit Committee’s Pre-Approval Policies and Procedures
Our audit committee has adopted a pre-approval policy for the
engagement of our independent accountant to perform certain audit
and non-audit services. Pursuant to this policy, which is designed
to assure that such engagements do not impair the independence of
our auditors, the audit committee pre-approves annually a catalog
of specific audit and non-audit services in the categories of audit
service, audit-related service and tax services that may be
performed by our independent accountants.
Our audit committee pre-approved all audit and non-audit services
provided to us and to our subsidiaries during the periods listed
above.
ITEM 16D:
Exemptions from the Listing Standards for Audit Committees
Not applicable.
ITEM 16E:
Purchase of Equity Securities by the Company and Affiliated
Purchasers
On August 2015, the Board of Directors approved a program for the
Company to repurchase up to $15 million of its outstanding ordinary
shares, which program was thereafter approved by the Israeli court,
pursuant to Israeli law on November 26, 2015. Share purchases will
take place in open market transactions or in privately negotiated
transactions and may be made from time to time depending on market
conditions, share price, trading volume and other factors. Such
purchases will be made in accordance with all applicable securities
laws and regulations. The repurchase program does not require Allot
to acquire a specific number of shares, and may be suspended from
time to time or discontinued. The court approvals previously
granted were each valid for a period of six months. During 2020,
2021 and 2022 we did not repurchase any outstanding ordinary shares
under this program.
ITEM 16F:
Change in Registrant’s Certifying Accountant
None.
ITEM 16G:
Corporate Governance
As a foreign private issuer, we are permitted under Nasdaq Rule
5615(a)(3) to follow Israeli corporate governance practices instead
of Nasdaq requirements, provided we disclose which requirements we
are not following and describe the equivalent Israeli requirement.
We must also provide Nasdaq with a letter from outside counsel in
our home country, Israel, certifying that our corporate governance
practices are not prohibited by Israeli law.
We rely on this “foreign private issuer exemption” with respect to
the following items:
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We follow the requirements of Israeli law with respect to the
quorum requirement for meetings of our shareholders, which are
different from the requirements of Rule 5620(c). Under our articles
of association, the quorum required for an ordinary meeting of
shareholders consists of at least two shareholders present in
person, by proxy or by written ballot, who hold or represent
between them at least 25% of the voting power of our shares,
instead of the issued share capital provided by under Nasdaq
requirements. This quorum requirement is based on the default
requirement set forth in the Companies Law.
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We do not seek shareholder approval for equity compensation
plans a practice which complies with the requirements of the
Companies Law, but does not reflect the requirements of Rule
5635(c). Under Israeli law, we may amend our 2016 Plan by the
approval of our board of directors, and without shareholder
approval as is generally required under Rule 5635(c). Under Israeli
law, the adoption and amendment of equity compensation plans,
including changes to the reserved shares, do not require
shareholder approval.
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We follow Section 274 of the Companies Law, which does not
require shareholder approval for (i) certain private issuance of
securities that may result in a change of control, which does not
reflect the requirements of Rule 5635(b), and (ii) certain private
issuances of securities representing more than 20% of our
outstanding shares or voting power at below market prices, which
does not reflect the requirements of Rule 5635(d).
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We are subject to additional Israeli corporate governance
requirements applicable to companies incorporated in Israel whose
securities are listed for trading on a stock exchange outside of
Israel.
We may in the future provide Nasdaq with an additional letter or
letters notifying Nasdaq that we are following our home country
practices, consistent with the Companies Law and practices, in lieu
of other requirements of Rule 5600.
ITEM 16H: Mine
Safety Disclosure
Not applicable.
ITEM 16I:
Disclosure Regarding Foreign Jurisdictions that Prevent
Inspections
Not applicable.
PART III
ITEM 17:
Financial Statements
Not applicable.
ITEM 18:
Financial Statements
See Financial Statements included at the end of this report.
ITEM 19:
Exhibits
See exhibit index incorporated herein by reference.
SIGNATURES
The registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
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Allot
Ltd
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By:
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/s/
Erez Antebi
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Erez Antebi
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Chief Executive Officer and President
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Dated: March 28, 2023
ANNUAL REPORT ON FORM 20-F
INDEX OF EXHIBITS
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Number
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Description
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Non-Stabilized Lease Agreement, dated February 13, 2006 (as amended
from time to time), by and among, Aderet Hod Hasharon Ltd., Miritz,
Inc., Leah
and Israel Ruben Assets Ltd., Tamar and Moshe Cohen Assets Ltd.,
Drish Assets Ltd., S. L. A. A. Assets and Consulting
Ltd., Iris Katz Ltd., Y. A. Groder Investments Ltd., Ginotel Hod
Hasharon 2000 Ltd. and Allot Ltd (1)
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