Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: As of December 31, 2017, the registrant had outstanding 22,122,935 ordinary shares, par value 0.645 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, a non-accelerated filer or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐ Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis for accounting the registrant has used to prepare the financing statements included in this filing:
U.S. GAAP ☐
International Financial Reporting Standards as issued by the International Accounting Standards Board ☒
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No ☒
In this annual report, the terms “SodaStream,” “we,” “us,” “our,” “our company” and “the company” refer to SodaStream International Ltd. and its consolidated subsidiaries. References to “Euros” or “€” are to the Euro, the official currency of the Eurozone; references to “U.S. Dollars,” “$” or “dollars” are to U.S. dollars, the official currency of the United States; and references to “NIS,” “shekel” or “Israeli shekel” are to New Israeli Shekels, the official currency of the State of Israel.
Throughout this annual report, we refer to various trademarks, service marks and trade names that we use in our business. SodaStream® and Soda-Club® are some of our registered trademarks. We also have a number of other registered trademarks, service marks and pending applications relating to our products. Other trademarks and service marks appearing in this annual report are the property of their respective holders.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, that are based on our management’s beliefs and assumptions and on information currently available to our management. 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, in some cases, can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions that convey uncertainty of future events or outcomes and the negatives of those terms. These statements include, but are not limited to, statements regarding:
growing our business by continuing to position our brand around health and wellness;
our plans to develop and introduce new products;
our plans to increase our installed base in our markets and generate ongoing demand for our consumables;
our intention to use certain marketing techniques for expansion into select new markets and broaden our penetration in existing markets;
increasing the number of stores in markets where we sell our products;
our belief that the sale of sparkling water makers will increase the sale of consumables;
our belief regarding our ability to meet demand for our products;
our belief that we have sufficient inventory to continue manufacturing during the time it would take us to locate and qualify an alternative source of supply for our raw materials; and
entering selected new markets, including in collaboration with distributors.
The forward-looking statements contained in this annual report reflect our views as of the date of this annual report about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described in “Item 3.D. — Risk Factors,” “Item 4 — Information on the Company” and “Item 5 — Operating and Financial Review and Prospects.”
All of the forward-looking statements included in this annual report are based on information available to us as of the date of this annual report. Unless we are required to do so under U.S. federal securities laws or other applicable laws, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Item 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Item 2.OFFER STATISTICS AND EXPECTED TIMETABLE
Item 3.KEY INFORMATION
A. Selected Financial Data
You should read the following selected consolidated financial data in conjunction with “Item 5 — Operating and Financial Review and Prospects” and our consolidated financial statements and the related notes appearing elsewhere in this annual report. The following table sets forth our selected consolidated financial and other financial and operating data. Historical results are not indicative of the results to be expected in the future. Our financial statements have been prepared in accordance with International Financial Reporting Standards or the IFRS, as issued by the International Accounting Standards Board. The consolidated statements of operations data for each of the years in the three-year period ended December 31, 2017, and the consolidated balance sheet data as of December 31, 2016 and December 31, 2017 are derived from our audited consolidated financial statements appearing elsewhere in this annual report. The consolidated statements of operations data for the year ended December 31, 2013 and 2014 and the consolidated balance sheet data as of December 31, 2013, 2014 and 2015 are derived from our audited consolidated financial statements that are not included in this annual report. The information presented below under the caption “Other financial and operating data” contains unaudited information that is not derived from our financial statements.
(in thousands, except share and per share amounts)
Consolidated statements of operations data:
Cost of revenues
Sales and marketing
General and administrative
Other expenses, net
Total operating expenses
Interest expense (income), net
Other financial expenses (income), net
Total financial expenses (income), net
Income before income tax
Income tax expense
Net income per ordinary share:
Shares used in computing net income per ordinary share:
Year Ended December 31,
Other financial and operating data (unaudited):
Total number of sparkling water makers sold
Total number of CO2 refills sold (1)
Adjusted net income (3)
*Reclassified (See the table “Reconciliation of net income to EBITDA” below)
As of December 31,
Consolidated balance sheet data:
Cash and cash equivalents
Working capital (4)
Loans and borrowings
Total shareholders’ equity
The CO2 refills are sold in exchangeable CO2 cylinders of different sizes. For the purpose of comparison, we have adjusted the number of CO2 refills to be equivalent to one “standard” 60‑liter cylinder size.
EBITDA is a non-IFRS measure and is defined as earnings before total financial expense (income), net, taxes, depreciation and amortization. We present EBITDA as a supplemental performance measure because we believe that it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structures (affecting financial expenses (income), net), tax positions (such as the impact on periods or companies of changes in effective tax rates) and the age and depreciation and amortization of fixed and intangible assets, respectively (affecting relative depreciation and amortization expense).
EBITDA should be considered in addition to results prepared in accordance with IFRS, but should not be considered in isolation or as a substitute for operating income or other statement of operations items prepared in accordance with IFRS as a measure of our performance. EBITDA does not take into account our debt service requirements and other commitments, including capital expenditures, and, accordingly, is not necessarily indicative of amounts that may be available for discretionary uses. In addition, EBITDA, as presented in this annual report, may not be comparable to similarly titled measures reported by other companies due to differences in the way that these measures are calculated.
Adjusted EBITDA is a non-IFRS measure and is defined as earnings before financial expense (income), income tax, depreciation and amortization, and further eliminates the effect of restructuring costs and impairment of goodwill and other intangible assets. For 2015, Adjusted EBITDA eliminates the effect of impairment of other intangible assets and restructuring costs. For 2016, Adjusted EBITDA eliminates impairment of other intangible assets. For 2015, Adjusted net income is a non-IFRS measure, which eliminates the effect of restructuring costs. We believe that Adjusted net income and Adjusted EBITDA, as described above, should be considered in evaluating our operations. Adjusted net income excludes restructuring costs because it is mostly a non-cash expense that does not reflect the performance of the company’s underlying business and operations. Adjusted EBITDA facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structures (affecting financial expenses (income), net), tax positions (such as the impact on periods or companies of changes in effective tax rates) and the age and depreciation charges and amortization of fixed and intangible assets, respectively (affecting relative depreciation and amortization expense) and Adjusted net income and Adjusted EBITDA are useful to an investor in evaluating our operating performance because they are widely used by investors, securities analysts and other interested parties to measure a company’s operating performance without regard to one-time costs associated with non-recurring events and without regard to non-cash items.
Working capital is defined as (i) total current assets, excluding cash and cash equivalents, bank deposits and financial investments, minus (ii) total current liabilities, excluding loans and borrowings.
Reconciliation of net income to adjusted net income:
Adjusted net income
B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
D. Risk Factors
Our business faces significant risks. You should carefully consider all of the information set forth in this annual report and in our other filings with the United States Securities and Exchange Commission, or the SEC, including the following risk factors. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. This report also contains forward-looking statements that involve risks and uncertainties. Our results 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 SEC filings. See also “Special Note Regarding Forward-Looking Statements.”
Risks Related to our Business and Industry
A key element of our strategy is to expand in target markets, including the United States and Germany, and our failure to do so would have a material adverse effect on our business, financial condition, results of operations and prospects.
A key element of our strategy is to grow our business by expanding sales of our sparkling water makers, CO2 refills and other consumables in certain existing markets that we believe have high growth potential and in select new markets. In particular, a significant portion of our growth efforts are focused on the United States, the world’s largest market for carbonated beverages and an important potential growth market and on Germany, a key market in terms of revenue and profit. Our success depends, in large part, upon long-term consumer acceptance and adoption of our products. We face several challenges in achieving consumer acceptance and adoption of our home beverage carbonation systems, including, among other things, identifying and addressing market trends and consumers’ tastes and preferences, which often differ between markets, adapting to changes in market trends and consumers’ tastes and preferences in our existing markets, encouraging consumers to make sparkling water beverages at home rather than purchasing sparkling water beverages and consumers’ willingness to exchange empty CO2 cylinders for filled CO2 cylinders. In recent years, we have invested, and we expect to continue to invest, amounts in positioning our brand around health and wellness. We may not be successful in establishing such positioning and such positioning might not appeal to consumers. We may not achieve the anticipated positive results or growth from positioning our brand around health and wellness, even if we succeed in establishing and maintaining such positioning. There can be no assurance that we will meet any of the challenges we face or that we will succeed in achieving our growth strategy in our existing markets, including in the United States and in Germany, or in new markets that we are targeting, and the failure to do so would materially adversely affect our growth in a particular market or markets and may materially adversely affect our business, financial condition, results of operations and prospects.
Our marketing campaigns and media spending might not result in increased sales or generate the levels of product and brand awareness we desire, which may adversely affect our business and prospects.
Our products are ultimately sold to consumers and, therefore, our future growth depends in large part on our ability to create and maintain awareness of our products and our brand in a manner that appeals to consumers. In recent years, we have invested, and we expect to continue to invest, amounts to establish our positioning around health and wellness and environmental friendliness and our future growth depends in part on our successfully positioning our brand and products in a manner that appeals to consumers. To create and maintain product and brand awareness, we engage in extensive advertising and promotional campaigns in certain key markets that we believe have significant growth potential, such as the United States as well as in digital and social media campaigns. Our future growth and results of operations depend in part on the effectiveness and efficiency of these campaigns and our media spending, including our ability to:
raise awareness of our home beverage carbonation systems and brand;
determine the appropriate creative message and media mix to raise awareness of our products and our brand in a manner that appeals to consumers;
create and tailor specific advertisements and promotion campaigns for the consumers we target in the markets in which we sell our products; and
effectively manage advertising costs, including creative and media costs.
We believe that our ability to drive sales of our products depends on raising awareness of our brand in a manner that appeals to consumers. Our advertising and marketing campaigns require significant financial resources and may require additional funds depending on the results they generate.
Our marketing campaigns and messages may not result in increased revenues or increased product or brand awareness in a manner that appeals to consumers, and we may not be able to increase our sales at the same rate as we increase our advertising expenditures, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our digital and social media campaigns are global and may be subject to various regulations in different jurisdictions relating to fair competition, comparative advertising, copyrights and consumer protection.
Our digital and social media marketing efforts are global, which subject them to various regulations in the markets in which we operate and in which they are released. These laws include unfair competition, comparative advertising, copyrights and consumer protection laws and they vary by jurisdiction and country. Once a digital campaign is launched, we cannot control or limit it to a certain jurisdiction, media or channel, which could lead to third party claims or regulatory actions in certain jurisdictions. Defending such claims or regulatory actions in various jurisdictions may divert the attention of our management from running the day-to-day operations of our business. Further, a negative ruling by a court may require us to withdraw a campaign, subject us to liabilities, including payment of damages, impair our marketing efforts or limit our ability to increase our sales, each of which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our ability to grow our business successfully depends, among other things, on our ability to develop and implement our production and operating infrastructure in a way that would effectively support our growth in our target markets.
We are targeting certain markets for growth, including the United States. Achieving and successfully managing growth in our target markets will require us to continue developing and implementing our production and operating infrastructure, including, among other things, infrastructure and logistics for our products’ distribution and supply chain, quality assurance controls, product development, manufacturing of our products, information technology and financial control systems. In addition, we will need to continue to develop the infrastructure for consumers to conveniently exchange empty CO2 cylinders for filled ones, whether through retailers, direct channels or otherwise. The development
and implementation of our infrastructure requires significant investment and can be complex in the markets in which we operate and seek to operate. We expect that these investments will increase and become increasingly complex as our business grows. Our future results will depend on our ability to successfully develop and implement these initiatives, particularly in our larger markets. Failure to do so could negatively impact our efforts to increase our sales in the markets in which we operate and seek to operate and have a material adverse effect on our business, financial condition, results of operations and prospects.
Our future success also requires that we have adequate capacity in our manufacturing facilities to manufacture the quantities of products to support our current sales level and the anticipated increased levels that may result from our growth. There can be no assurance as to the timing or our ability to achieve planned, needed, or desired manufacturing capacity levels. We believe that the capacity of our current manufacturing facilities and subcontractors is sufficient to meet anticipated demand for our products through 2018.
In addition, we have experienced, and may in the future experience, difficulties that are common in the installation, functionality and operation of manufacturing equipment. Failures or delays in obtaining and installing the necessary equipment, technology and other resources or their malfunction could result in manufacturing delays, which could harm our business, financial condition and results of operations.
A single facility houses the majority of our production operations. Business interruptions at our Lehavim facility or at any of our other manufacturing facilities could adversely impact our production capabilities for extended periods of time, which would have a material adverse effect on our business, financial condition, results of operations and prospects.
We currently produce most of our products at a single facility, the Lehavim facility, located in the southern part of Israel, including metals (such as cylinder manufacturing and cylinder retesting), CO2 refills, plastic injection, bottle blowing and printing, machining and assembly. We continue to manufacture flavors in Ashkelon, located on the Mediterranean coast of Israel.
If operations at any of our manufacturing facilities, and at the Lehavim facility in particular, were to be disrupted as a result of equipment failures, earthquakes or other natural disasters, fires, accidents, work stoppages, power outages, water shortages, acts of terrorism or war, or other reasons, we may be unable to produce our products for extended periods of time. A facility and certain equipment located therein would be difficult to replace and could require substantial replacement lead-time. Catastrophic events could also destroy any inventory located at a facility. Lost sales or increased costs that we may experience due to the disruption of operations may not be recoverable under our insurance policies, and longer-term business disruptions could result in a loss of customers. The occurrence of any of such events could have a material adverse effect on our business, financial condition, results of operations and prospects.
We lease some of our facilities from third parties, including our manufacturing facility in Ashkelon where we manufacture our flavors. As such, there is a risk that we will not be able to renew the lease agreements, which could lead to a disruption of our operations, or that the terms of the leases under any such renewals will be on less favorable terms. If we are not successful in renewing the lease of our manufacturing facility in Ashkelon or in establishing an alternative manufacturing facility in a timely manner, the production of our flavors may be delayed, which could have a material adverse effect on our business, financial condition and results of operations.
We may not be successful in continuing to develop or in maintaining our presence in retail networks for the sale of our products and the exchange of our empty CO2 cylinders in the markets we are targeting for growth, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our growth in both existing and new markets depends significantly on our ability to develop and maintain our presence in retail networks, as retailers are the primary channel through which consumers initially purchase our home beverage carbonation systems and through which our consumables and other products are sold. Our ability to successfully expand in our target markets depends, among other things, on whether we are able to establish relationships with strong retailers in those markets for the sale of our home beverage carbonation systems, the exchange of our empty CO2 cylinders and the sale of our other consumables and products. There can be no assurance that we will be successful
in establishing or maintaining relationships with strong retailers in the markets we are targeting for growth, or if successful, that we will do so in a time frame consistent with our plans or in a way that will enable us to achieve significant sales. Our failure to establish and maintain such relationships will adversely affect our ability to grow in a particular market or markets and may adversely affect our business, financial condition, results of operations and prospects.
We may face competition from sales of consumables and, in particular, with respect to refilling our exchangeable CO2 cylinders, which could adversely affect our business, financial condition and results of operations.
Our business of refilling our exchangeable CO2 cylinders is important to the long-term success of our business and our future growth. For safety, public health and other reasons, we retain ownership of the exchangeable CO2 cylinders included in our home beverage carbonation systems and provide them under license, whether sold with our systems or as a separate component. Our agreements with retailers contain an acknowledgement that we retain title to the exchangeable CO2 cylinders. In addition, the packaging in which the cylinders are distributed, as well as the cylinders themselves, bear notices advising consumers that the cylinders are provided under license. Nevertheless, these contractual arrangements have not always been effective, and in a number of locations, suppliers of CO2, not authorized by us, have sought or may in the future seek, to refill our exchangeable CO2 cylinders or refill other exchangeable CO2 cylinders marketed as compatible with our systems. In addition to creating potential safety and public health risks, such sales of consumables by third parties, unauthorized by us, may result in lost sales opportunities for us, negatively impact customer retention and could harm our reputation if these products cause damage when used with our products.
In 2008, the German Federal Court of Justice, the highest German court, upheld a decision by the German Federal Cartel Office that preventing end consumers from having their CO2 cylinders refilled by third parties constituted an abuse of a dominant position in violation of EU and German competition law and requiring us to permit the end consumers to have their CO2 cylinders refilled by or exchanged with third parties. Although the decision of the German Federal Court of Justice is not binding on courts in other jurisdictions, it could be cited as a precedent in other antitrust or competition law proceedings. There can be no assurance that a court of law in any other jurisdiction will determine that we have not violated applicable competition or antitrust laws. Further, there can be no assurance that a court in any of the jurisdictions in which we operate will uphold our ownership rights over the exchangeable CO2 cylinders or find that the cylinder refilling restrictions we impose do not violate applicable competition or antitrust laws. Our failure to successfully enforce our ownership rights to our exchangeable CO2 cylinders could have a material adverse effect on our business, financial condition, results of operations and prospects.
Further, in our key markets, if we are unable to successfully compete with other suppliers of CO2 cylinders and CO2 refills, our business, financial condition, results of operations and prospects may be materially adversely affected.
We may be unable to compete effectively with other companies which offer, or may offer in the future, competing products.
We face competition in several of our markets from companies which offer products that compete with ours, including sparkling water makers, carbonation bottles, flavors, CO2 cylinders and CO2 refills. We anticipate that we will face additional competition from competitors that may enter the home carbonated beverage and sparkling water market, including from manufacturers of home beverage carbonation systems and consumables and manufacturers of carbonated beverages. Current or future competitors may, for example, introduce products with features which may cause consumers to stop using our systems or to use them less frequently, such as sparkling water makers that do not require the exchange of CO2 cylinders or that use other methods of carbonation. The entry of new competitors into our market or the acquisition of our existing competitors by companies with substantial resources could result in further increased competition and harm our business. Increased competition from existing or new competitors may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects. Additionally, our competitors’ arrangements with their collaborators may prevent us from entering into similar, or other, arrangements with such collaborators.
Furthermore, some competing products might not meet proper safety requirements and their failure may result in personal injury. Such safety failures may make the entire home beverage carbonation systems category perceived as
unsafe, negatively impact our sales and harm our reputation and brand, which could have a material adverse effect on our business, financial condition and results of operations.
We also face competition from companies that sell counterfeit reproductions of our sparkling water makers. Although we monitor and attempt to take action against such companies when we deem it appropriate, there can be no assurance that we will be successful in deterring competitors from manufacturing and selling counterfeit reproductions of our products. The sale of counterfeit reproductions of our products may result in lost sales opportunities and cause harm to our brand and reputation due to the lower quality of these counterfeit products compared to our products. The risk of counterfeiting may increase with the expansion of our business and increased recognition of our brand name. Finally, we face competition from beverage companies, including large global companies, for the dollars spent by consumers on non-alcoholic beverages. These include primarily manufacturers of carbonated soft drinks and sparkling water.
A number of our competitors are substantially larger than we are and have significantly greater financial, sales and marketing, manufacturing and other resources than are available to us, and have established brands and greater brand awareness. These competitors may use their resources and scale to respond more rapidly than we can to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities.
We may be unable to retain our customers in markets where we have an established presence due to changes in consumer preferences, spending habits and perceptions.
Our long-term revenue growth and profitability depend upon our ability to implement our business model of selling sparkling water makers to new consumers and our consumables to consumers who already own our sparkling water makers. Since we derive higher profit margins from our consumables, the continued use of our home beverage carbonation systems by, and the repeat sales of our consumables to, consumers who have already purchased our systems are important to our business. In markets where we have an established presence, we face the challenge of retaining customers due to changes in consumer preferences, spending habits and perceptions, including with respect to the exchange of the CO2 cylinders, as well as the introduction of competing products, any of which may cause our customers to stop using our systems or to use them less frequently. In order to maintain the use of our systems by our customers, we will need to identify and respond quickly to such changes, including through creative initiatives, such as new product offerings and special promotions. For example, in response to what we believe is a shift in consumer preferences towards health and wellness in the carbonated beverage industry, in recent years, we have made significant efforts to position our brand around health and wellness. However, we may not be successful in establishing and maintaining such positioning and such positioning might not appeal to consumers. Our failure to predict or respond effectively to changes in consumer behavior, which often differ between markets, including where they shop, could result in a reduction in the number of our customers, which could lead to lower revenues and increased inventories, and would have a material adverse effect on our business, financial condition, results of operations and prospects.
If we do not manage our inventory effectively, our business, financial condition and results of operations could be materially adversely affected.
If our forecasts of demand for our products exceed actual demand, we could experience excess inventory. As we innovate and introduce new sparkling water makers and other products to the marketplace, our existing sparkling water makers and other products are at an increased risk of inventory obsolescence. If we ultimately determine that we have excess inventory, we may have to reduce our prices and write-down inventory which could have an adverse effect on our business, financial condition and results of operations. In addition, we may determine that having both older and newer products for sale in the marketplace is confusing to consumers or interferes with promoting our new products and therefore decide to cease selling our older products, which would result in our not receiving any revenues for such products. Conversely, if the introduction of new products is delayed, we may have insufficient existing inventory to meet our customer demand, potentially resulting in lost revenue opportunities and adversely impacting our financial condition and results of operations. Risks of inventory obsolescence also exist with our products that are subject to expiration, such as our carbonation bottles and flavors. If we are unable to accurately forecast demand for our products and inventory
expires or becomes unusable, our business, financial condition and results of operations could be materially adversely affected.
Our home beverage carbonation systems and other products may fail, whether due to design faults, defects or misuse, and cause personal injury or property damage, which may subject us to product liability and other claims and harm our reputation.
Our home beverage carbonation systems and other products may fail and cause personal injury or property damage. Failures of our home carbonation beverage systems may be caused by, among other things, design defects, defects in workmanship or materials and misuse by consumers. Although we take quality assurance measures which are intended to ensure that our products are free from design faults and defects in workmanship and materials, there can be no assurance that our products will not fail. Additionally, although we include explicit instructions for the operation of our home beverage carbonation systems and place safety warnings on our products, consumers may misuse our products, including by:
washing our non-dishwasher safe carbonation bottles in the dishwasher or otherwise exposing them to severe heat, which could cause the bottles to burst during the carbonation process;
carbonating substances other than water with our sparkling water makers, which could cause the sparkling water makers to fail and possibly cause damage to the other components of our home beverage carbonation systems; and
subjecting our exchangeable CO2 cylinders to pressure beyond their measured stress resistance, which could cause the cylinder to burst.
The failure or misuse of any of the components of our home beverage carbonating systems may cause personal injury and damage to property. In addition, any unauthorized use of our home beverage carbonation systems, including by using third-party consumables with our systems, could lead to failure or malfunction of the systems which in turn could cause personal injury or property damage. Potential personal injury and property damage may also result from the deterioration of the quality or contamination of the materials used in our systems. Product safety or quality issues, actual or perceived, including allegations of product contamination or other issues, even when false or unfounded, could subject us to product liability and other claims, tarnish the image of the affected brands and may cause consumers to choose other products. Such issues or allegations may also require us to conduct product recalls and result in higher than anticipated rates of warranty returns and other returns of goods.
In addition, consumer protection agencies that have broad authority to order product modifications or recalls may take such actions with respect to our products, even if we include explicit instructions with our products regarding their use. Under these circumstances, we could be required to offer to exchange our existing products for new ones or to recall products entirely from the market, which would materially adversely affect our business, financial condition, results of operations, brand and reputation.
Our product liability insurance for personal injury and damage to property may not be sufficient or available to cover product liability claims, or similar claims, against us, which could materially adversely affect our financial condition and results of operations. Whether or not a claim against us would be successful, defense of a claim may be costly and the existence of any claim may materially adversely affect our business, financial condition, results of operations and reputation.
Our inability to protect our intellectual property rights could reduce the value of our products or permit competitors to more easily compete with us and have a material adverse effect on our business, brand, financial condition, results of operations and prospects.
The strength of our brand and product, and our ability to compete depend in part on the intellectual property we own. While we make efforts to develop and protect our intellectual property, the validity, enforceability and commercial value of our intellectual property rights may be reduced or eliminated by the discovery of prior inventions by third
parties, the discovery of similar marks previously used by third parties, non-use or non-enforcement by us of intellectual property rights or the successful independent development by third parties of the same or similar confidential or proprietary innovations. We have been in the past, and may in the future be, subject to opposition proceedings with respect to applications for registrations of our intellectual property, including, but not limited to, our marks. As we rely in part on brand names and trademark protection to enforce our intellectual property rights, barriers to the registration of our brand names and trademarks in various countries may restrict our ability to promote and maintain a cohesive brand throughout our key markets.
Our ability to compete effectively depends, in part, on our ability to maintain the proprietary nature of our technologies, which includes the ability to obtain, protect and enforce patents, trade secrets and other know-how relating to our technologies. Our current patent portfolio is limited and certain patents that cover aspects of our products have expired or are due to expire in the next few years. Although we hold additional utility patents and design registrations and patents, as well as have pending patent and registration applications that may protect certain aspects of our products for an extended period, there can be no assurance that pending U.S. applications or applications in other jurisdictions will be approved in a timely manner or at all, or that such registrations will effectively protect our intellectual property. There can be no assurance that we will develop patentable intellectual property in the future, and we may choose not to pursue patents or other protection for innovations that subsequently turn out to be important.
To protect our intellectual property, including our know-how and trade secrets, we have implemented a system in most jurisdictions by which we require our relevant employees to enter into employment contracts which include clauses requiring such employees to acknowledge our ownership of all inventions and intellectual property rights they develop in the course of their employment and to agree not to disclose confidential information. Agreements with certain of our employees also typically contain provisions restricting employment with our competitors for a certain period of time after they stop working for us. These restrictions may be of no or little enforceability under applicable law. We also typically include similar provisions in our distributor and supplier agreements. These provisions may not be adequate or enforceable, and despite our efforts, our know-how, confidential information and trade secrets could be disclosed to third parties, or third parties could independently develop the same or similar information or technologies, which could cause us to lose competitive advantages.
From time to time, we may discover that third parties are infringing or otherwise violating our intellectual property rights. For example, we are aware of unauthorized third-party uses of our trademarks and designs, and there may be other third parties using trademarks or names, or designs, similar to ours of which we are unaware. Monitoring unauthorized use of intellectual property is difficult and protecting our intellectual property rights could be costly and time consuming. The monitoring and protection of our intellectual property rights may become more difficult, costly and time consuming as we expand into new markets, particularly in those markets, such as China, Russia, Argentina and others, in which legal protection of intellectual property rights is less robust than in the United States and other developed markets in which we currently operate. We are prepared to protect our intellectual property rights vigorously; however, our patent portfolio is limited in certain markets and, as such, we may be unable to institute effective legal action against third parties engaged in copying our sparkling water makers and components.
There can also be no assurance that we will prevail in any intellectual property infringement litigation we institute to protect our intellectual property rights given the complex technical issues and inherent uncertainties in litigation. Such litigation may be time consuming, expensive, and may distract our management from running the day-to-day operations of our business. If we are unable to successfully defend our intellectual property rights, our business, brand, financial condition, results of operations and prospects could be materially adversely affected. There can be no assurance that our intellectual property rights can be successfully asserted or will not be invalidated, circumvented or challenged. In addition, there can be no assurance that these protections will be adequate to deter the unauthorized use of our intellectual property rights by third parties or to deter the development of products with features based upon, or otherwise similar to, our products.
We may be subject to claims by third parties asserting that our products and other intellectual property infringe, or may infringe, their proprietary rights, which, if successful, could materially adversely affect our business, financial condition and results of operations.
We have in the past been, and may in the future be, subject to claims by third parties asserting misappropriation, or that our products and other intellectual property infringe, or may infringe, or otherwise violate, their proprietary rights. Any such claims, regardless of merit, could result in litigation, which could result in expenses, divert the attention of our management from running the day-to-day operations of our business, cause significant delays in and materially disrupt the conduct of our business. As a consequence of such claims, we could lose our proprietary rights, become subject to liabilities, including payments of damages, be required to develop non-infringing products, seek licenses from others, which may not be available on reasonable terms, if at all, stop selling our products or re-brand our products and could suffer other negative effects to our business. In the event of a successful claim of infringement against us or our failure or inability to develop non-infringing technology or license the infringed or similar technology or other intellectual property, our business, financial condition, results of operations and prospects could be materially adversely affected.
If a large number of empty exchangeable CO2 cylinders are returned to us without having been exchanged for full ones, we would incur costs with no corresponding revenues.
We retain ownership of the exchangeable CO2 cylinders and provide them under license. In most cases, we collect a license fee for each exchangeable CO2 cylinder from the distributors and retailers who receive them. The amount of the license fee varies from country to country and also changes over time as market conditions change in a particular country. In addition, in some countries, including certain major markets in Northern and Western Europe, consumers have paid in the past an advance rental fee when they received their first exchangeable CO2 cylinder. A portion of these fees may be refundable when an empty exchangeable CO2 cylinder is returned and not exchanged for a full one. To date, returns of exchangeable CO2 cylinders from our distributors, retailers and consumers have been negligible. However, if distributors, retailers or consumers in any one or more of the markets in which we operate return a large number of cylinders without exchanging them for full ones, we may be required to pay a large amount of cash to refund a portion of the rental or license fees, which could have a material adverse effect on our financial condition and results of operations.
We are subject to currency exchange rate fluctuations and may not adequately hedge against them.
The dollar is our functional and reporting currency. However, a significant portion of our cost of revenues and operating expenses are incurred in NIS, and to a lesser extent, in other currencies, such as the Euro. As a result, we are exposed to the risks that the Israeli shekel or these other currencies may appreciate relative to the dollar. In any such event, the dollar cost of our non-dollar denominated operations would increase and our dollar-denominated results of operations would be adversely affected. Furthermore, because a material portion of our revenues is denominated in currencies other than the dollar, the strengthening of the dollar in relation to other currencies, in particular the Euro, will negatively affect our results of operations. For example, in 2017, our operating income was negatively impacted from changes in foreign currency exchange rates by approximately $4.0 million. We cannot predict any future trends and rates of devaluation (if any) of the Israeli shekel or any of these other currencies against the dollar. Although we currently engage in hedging transactions to minimize our currency exchange rate risk, future currency exchange rate fluctuations that we have not adequately hedged could adversely affect our profitability and may vary from quarter to quarter. We are also exposed to credit risk if counterparties to our derivative instruments are unable to meet their obligations.
Fluctuations in our business caused by seasonality or unusual weather conditions could cause fluctuations in our quarterly results of operations and volatility in the market price of our ordinary shares.
Historically, our revenues have generally been strongest in the third and fourth quarters and weakest in the first quarter. We generally attribute this historical seasonality to increased demand for our products during the warmer summer months and increased sales associated with holiday shopping. As such, our revenues may also be impacted by the effects of the weather as our revenues would likely decrease if periods when the weather is colder are longer than usual. Our operating expenses and, therefore, our overall margins are also seasonally impacted. For example, we typically increase our advertising and promotional expenditures in the second and fourth quarters. Consequently, our overall operating income may be lower in these quarters. The impact on sales volume and operating results due to these
and other factors can significantly impact our business. Accordingly, our results for any quarter are not necessarily indicative of the results that may be achieved in subsequent quarters or for the full fiscal year. Our quarterly operating results should not be relied on as indications of our future performance. These fluctuations may also cause volatility in the market price of our ordinary shares.
We may have exposure to greater tax liabilities than anticipated.
We have endeavored to structure our activities in a manner so as to minimize our and our subsidiaries’ aggregate tax liabilities. However, we have operations in various taxing jurisdictions, and our tax liabilities in one or more jurisdictions could be more than reported in respect of prior taxable periods and more than anticipated in respect of future taxable periods. In this regard, the amount of income taxes that we pay in future taxable periods could be higher if earnings are lower than anticipated in jurisdictions where lower statutory tax rates apply and higher than anticipated in jurisdictions where higher statutory tax rates apply.
In addition, we have entered into transfer pricing arrangements that establish transfer prices for our inter-company operations. However, our transfer pricing procedures are not binding on the applicable taxing authorities. No official authority in any country has made a binding determination as to whether or not we are operating in compliance with its transfer pricing laws. Accordingly, taxing authorities in any of the countries in which we operate could challenge our transfer prices and require us to adjust them to reallocate our income and potentially to pay additional taxes for prior tax periods. For example, the tax authorities in the United States have increased their focus on transfer pricing procedures, which could result in a greater likelihood of a challenge to our transfer pricing arrangements and the risk that we will be required to adjust them and reallocate our income. Such an adjustment could result in a higher effective tax rate than that to which we are currently subject. We expect that the issue of the validity of our transfer pricing procedures will become of greater importance as we continue our expansion in markets in which we currently have a limited presence and attempt to penetrate new markets. Any change to the allocation of our income as a result of reviews by taxing authorities could have a negative effect on our financial condition and results of operations.
In addition, the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment and the ultimate tax determination is uncertain for many transactions and calculations. Although we believe our estimates are reasonable, our ultimate tax liability may differ from the amounts recorded in our financial statements and may materially adversely affect our financial condition and results of operations in the period or periods for which such determination is made. We have created reserves with respect to tax liabilities where we believe it to be appropriate. However, there can be no assurance that our ultimate tax liability will not exceed the reserves we have created.
The base erosion and profit shifting, or the BEPS, project undertaken by the Organization for Economic Cooperation and Development, or the OECD, may have adverse consequences to our tax liabilities. The BEPS project contemplates changes to numerous international tax principles, as well as national tax incentives, and these changes, which are being adopted in different manners by individual countries, could adversely affect our provision for income taxes. Countries have only recently begun to translate the BEPS recommendations into specific national tax laws, and it remains difficult to predict with accuracy the magnitude of any impact that such new rules may have on our financial results
In the United States, H.R. 1, originally known as the 2017 Tax Cuts and Jobs Act, or the TCJA, made significant changes to the U.S. Internal Revenue Code, including a reduction in the federal income corporate tax rate from 35% to 21% and limitations on certain corporate deductions and credits. In addition, the TCJA requires complex computations to be performed that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the TCJA and significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the TCJA will be applied or otherwise administered that is different from our interpretation. Finally, foreign governments may enact tax laws in response to the TCJA that could result in further changes to global taxation and materially adversely affect our financial position and results of operations. The application of accounting guidance for various items and the ultimate impact of the TCJA on our business are currently uncertain.
Our products are subject to extensive governmental regulation in the markets in which we operate.
Our products are subject to extensive governmental regulation in the markets in which we operate. Among the regulations with which we must comply are those governing the manufacturing and transportation of our exchangeable CO2 cylinders. In the United States, and in certain other markets in which we currently operate or may in the future operate, our exchangeable CO2 cylinders are considered hazardous materials due to the highly pressurized CO2 inside, and the applicable regulations consequently restrict our ability to ship our exchangeable CO2 cylinders by air and also place significant restrictions on their land transportation, which results in additional costs. There can be no assurance that we will be in compliance with all applicable laws and regulations to which we and our products are subject. If we fail to comply, we may be subject to civil remedies, including fines, injunctions, recalls or seizures, as well as criminal sanctions, which could have a material adverse effect on our business, financial condition, results of operations and reputation.
The flavors we manufacture and distribute are also subject to numerous health and safety laws regulating the manufacturing and distribution of food products. A failure to plan and develop effective procedures to address these laws and regulations, new or revised laws or regulations, or new interpretations or enforcement of existing laws and regulations, may affect our ability to manufacture, distribute and sell our products, which could have a material adverse effect on our business, financial condition and results of operations.
Furthermore, new government laws and regulations may be introduced in the future that could result in additional compliance costs, seizures, confiscations, recalls or monetary fines, any of which could prevent or inhibit the development, distribution and sale of our products. For example, governmental authorities in certain of our markets, such as Finland, France, United Kingdom and certain states in the United States, have imposed taxes on sugar-sweetened beverages which apply to our flavors. Other governmental authorities, such as certain states in the United States, have introduced, or considered levying, similar taxes. If such taxes are introduced and were to apply to our flavors, the sales and consumption of such flavors might decrease and thereby have a material adverse effect on our financial condition and results of operations.
An increase in the cost or a shortage of supply of the raw materials, some of which are commodities, for our products could have a material adverse effect on our business, financial condition and results of operations.
We use certain raw materials to produce our sparkling water makers, exchangeable CO2 cylinders and consumables. The most important of these materials are aluminum, brass, certain plastics, flavoring essences, sugar, CO2, sweeteners and fruit concentrate. These materials represent a significant portion of our cost of goods sold. The availability and cost of such raw materials have fluctuated in the past and may fluctuate in the future due to movements in currency exchange rates, government policies and regulations, increased demand for, or decreased supply of, such materials, crop failures, fluctuations in commodity markets, weather conditions, shortages or other reasons or unforeseen circumstances. To the extent that any of the foregoing or other factors increase the prices or limit the supply of such materials, and we are unable to increase our prices or adequately hedge against such changes in a manner that offsets such changes, our business, financial condition and results of operations could be materially adversely affected.
Disruption of our supply chain could adversely affect our business.
Damage or disruption to our manufacturing or distribution capabilities due to the financial and/or operational instability of key suppliers, distributors, warehousing and transportation providers, or brokers, or other reasons, could impair our ability to manufacture or sell our products. To the extent that we are unable to retain alternative sources of supply, to financially mitigate the impact of such events, such as by identifying an alternative supplier in a timely and cost-effective manner, or to effectively manage such events if they occur, there could be a material adverse effect on our sales and profitability, and additional resources could be required to restore our supply chain.
We are subject to certain safety risks in our manufacturing facilities.
Our business involves complex manufacturing processes and hazardous materials that can be dangerous to our employees. Although we employ safety procedures in the design and operation of our facilities, there have been two
deaths at our facilities in the past, and there is a risk that an accident or death could occur in one of our facilities in the future. Any accident could result in manufacturing or other delays, which could harm our business and our results of operations. The potential liability resulting from any such accident or death, to the extent not covered by insurance, and any negative publicity associated therewith could harm our business, reputation, financial condition or results of operations. Whether or not a claim against us succeeds, its defense may be costly and the existence of any claim may adversely impact our business, reputation, financial condition and results of operations.
Higher energy costs and other factors affecting the cost of producing, transporting and distributing our products could materially adversely affect our results of operations.
Rising fuel, freight and energy costs have in the past, and may in the future, have an adverse impact on the cost of our operations, including the manufacture, transportation and distribution of our products. All of these costs may fluctuate due to a number of factors outside of our control, including governmental policies and regulations and weather conditions. Additionally, we may be unable to maintain favorable arrangements with respect to the costs of transporting products, which could result in increased expenses and negatively affect our operations. If we are unable to hedge against such increases or raise the prices of our products to offset the changes, our results of operations could be materially adversely affected.
Adverse or uncertain conditions in the global economy could materially adversely affect customer demand for our products.
A number of economic factors, including gross domestic product, availability of consumer credit, consumer sentiment, retail trends, fiscal and credit market uncertainty, and foreign currency exchange rates, generally affect demand for our products. Consumer purchases of discretionary items tend to decline during recessionary periods, when disposable income is lower, which may impact sales of our products. If a global recession occurs, consumers may have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies and other events. A prolonged economic downturn or recession in, or the imposition of trade restrictions by, any of the countries in which we conduct significant business or in any of the markets we are targeting for expansion, may cause significant changes in both the volume and mix of our product sales, which could materially adversely affect our business, financial condition and results of operations. We may be required to implement cost reduction efforts, including restructuring activities, which may adversely affect our ability to capitalize on opportunities in a market recovery. Regional, political and economic instability in countries in which we do business may adversely affect business conditions, disrupt our operations, and have an adverse effect on our financial condition and results of operations. Uncertainty about future economic and industry conditions also makes it more challenging for us to forecast demand for our products, make business decisions, and identify and prioritize the risks that may affect our business, sources and uses of cash, financial condition and results of operations. In addition, our operations are subject to general credit, liquidity, foreign exchange, market and interest rate risks.
These conditions may similarly affect key suppliers, which could impair their ability to deliver parts and result in delays for our products or added costs.
If we do not adapt to changes resulting from the uncertain macroeconomic environment and industry conditions, or to difficulties in the financial markets appropriately and in a timely fashion, our business, financial condition and results of operations may be materially and adversely affected.
We depend on the expertise of key personnel. If these individuals leave without replacements, our operations could suffer.
Our success depends on the continued service of our senior management. The loss of the services of certain of these individuals could delay or prevent the successful implementation of our business plans, or could otherwise affect our ability to manage our company effectively. Given their extensive knowledge of the home beverage carbonation industry, we believe that it would be difficult to find replacements should any of them leave. Our inability to find suitable replacements for members of our senior management team, particularly our Chief Executive Officer, Daniel Birnbaum,
would impair our ability to implement our business strategies and plans and could have a material adverse effect on our business and results of operations.
Disruptions to our information technology, or IT, systems due to system failures or cybersecurity attacks may impact our operations, result in sensitive customer information being compromised, which would negatively materially adversely affect our reputation business.
We believe that an appropriate IT infrastructure is important in order to support our daily operations and the growth of our business. If we experience difficulties in implementing new or upgraded information systems or experience significant system failures, or if we are unable to successfully modify our management information systems or respond to changes in our business needs, we may not be able to effectively manage our business, and we may fail to meet our reporting obligations.
Additionally, if our current back-up storage arrangements and our disaster recovery plan are not operated as planned, we may not be able to effectively recover our information system in the event of a crisis, which may materially adversely affect our business and results of operations.
In the current environment, there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error. High-profile security breaches at other companies and in government agencies have increased in recent years, and security industry experts and government officials have warned about the risks of hackers and cyberattacks targeting businesses such as ours. Computer hackers and others routinely attempt to breach the security of technology products, services and systems, and to fraudulently induce employees, customers, or others to disclose information or unwittingly provide access to systems or data. Although we have invested in measures to reduce these risks, 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. Legislative or regulatory action in these areas is also evolving, and we may be unable to adapt our IT system to accommodate these changes. We have experienced and expect to continue to experience actual or attempted cyberattacks of our IT networks. Although none of these actual or attempted cyberattacks has had a material adverse effect on our operations or financial condition thus far, we cannot guarantee that any such incidents will not have a material adverse effect on our operations or financial condition in the future. Furthermore, a cyberattack that bypasses our IT security systems, causing an IT security breach, could lead to a material disruption of our information systems, the loss of business information and loss of service to our customers. Additionally, we have access to sensitive customer information in the ordinary course of business. If a significant data breach occurs and we lose customer information, our reputation may be materially and adversely affected, our customers’ confidence in us may be diminished, or we may be subject to legal claims, any of which may contribute to the loss of customers and have a material adverse effect on our business and result of operations. In addition, the continued worldwide threat of terrorism and heightened security in response to such threat may cause further disruptions and create further uncertainties or may otherwise materially adversely affect our business. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders or the manufacture or shipment of our products, or in theft, destruction, loss, misappropriation or release of our confidential data or our intellectual property, our business and results of operations could be materially and adversely affected.
Non-compliance with new regulatory data privacy concerns, including regulations of cross-border data transfer restrictions and other domestic or foreign regulations may lead to penalties and loss of reputation, which could materially adversely affect our business.
Our company is global and privacy and data protection regulations vary greatly around the world. The increasingly-burdensome regulatory environment surrounding privacy and data protection issues may adversely affect our business, including through increased risk, costs and expanded compliance obligations. Many U.S. states have enacted laws requiring companies to notify individuals of data security breaches involving their personal data. In the United Kingdom, or the U.K., businesses are currently subject to the Data Protection Act 1998, which requires that appropriate technical and organizational measures be taken against unauthorized or unlawful processing of personal data and against accidental loss or destruction of, or damage to, personal data. Additionally, the General Data Protection Regulation, or the GDPR, of the European Union, or the E.U., will enter into force in May 2018. Among other areas, this law will
regulate the protection of personal information of citizens of E.U. countries. The GDPR will supersede current E.U. data protection legislation, impose more stringent E.U. data protection requirements, provide for greater penalties for noncompliance and may cause us to incur additional compliance costs. The U.K. government is also expected to enact U.K. laws similar to the E.U. GDPR after the U.K. completes its exit from the E.U. as part of “Brexit.” Such laws and regulations are also subject to new and differing interpretations and may be inconsistent among jurisdictions. In addition, in many cases these privacy laws apply not only to transfers of information to third parties, but also transfers within an enterprise. Noncompliance with, and other burdens imposed by, such laws, regulations and standards may subject us to significant fines, penalties or liabilities, any of which could harm our business.
We may need to raise additional capital in the future and may be unable to do so on acceptable terms, if at all.
Based on current expectations, we believe that our cash on hand, financial investments, cash flows from operations and borrowings available under our short-term credit facilities from financial institutions will be sufficient to meet our currently anticipated cash requirements for the next 12 months. However, in the future, we may require additional capital in order to finance our activities. We may be unable to obtain requisite financing or such financing may not be available on terms that are acceptable to us. The incurrence of debt would result in debt service obligations and the terms of which may include operating or other covenants that might, among other things, restrict our ability to pay dividends to our shareholders. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects. If we were to issue equity to raise capital, it would dilute the holdings of our existing shareholders.
We rely on third-party distributors of our home beverage carbonation systems and consumables in a number of our markets.
In some less significant markets we rely on relationships with third-party distributors for the distribution of our home beverage carbonation systems and consumables. Where we rely on third-party distributors, we have less control than when we distribute directly and can be adversely affected by the actions of our distributors. Furthermore, our distributors also manage the reverse logistics needed for customers to return empty CO2 cylinders and exchange them for filled CO2 cylinders. If our distributors fail to manage the reverse logistics successfully, our customers may have difficulty in exchanging the CO2 cylinders, which could negatively affect our brand and our revenues in that market. Any disruption in our distribution network could have a negative effect on our ability to sell our products and maintain our customers in that market, which may, in turn, materially adversely affect our business, financial condition, results of operations and prospects.
Our business could be negatively affected as a result of actions of activist shareholders, and such activism could impact the trading value of our securities.
In recent years, certain Israeli issuers listed on the securities exchanges in the United States have been faced with governance-related demands from activist shareholders, as well as unsolicited tender offers and proxy contests. Responding to these types of actions by activist shareholders could be costly and time consuming, disrupting our operations and diverting the attention of our management from running the day-to-day operation of our business. Such activities could interfere with our ability to execute our strategic plan. 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 these potential actions of activist shareholders also could affect the market price and volatility of our securities.
Risks Related to our Operations in Israel
We conduct operations in Israel and therefore, political, economic and military instability in Israel and its region may adversely affect our business.
We are incorporated under the laws of the State of Israel, and our principal offices and our manufacturing facilities are located in Israel. Accordingly, political, economic and military conditions in Israel and the surrounding region directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have
occurred between Israel and its Arab neighbors, the Hamas (an Islamist militia and political group that controls the Gaza Strip) and Hezbollah (an Islamist militia and political group based in Lebanon). Although Israel has entered into peace treaties with Egypt and Jordan, and various agreements with the Palestinian National Authority, it is unclear whether any negotiations that may occur between Israel and the Palestinian Authority will result in any additional agreements. In recent years, including in 2014, Israel engaged in an armed conflict with Hamas, which involved missile strikes against civilian targets in various parts of Israel and negatively affected business conditions in Israel. In addition, Israel faces threats from more distant neighbors, in particular, Iran, which has a strong influence among extremist groups in the region, such as Hamas in the Gaza Strip and Hezbollah in Lebanon.
Recent political uprisings and social unrest in various countries in the Middle East and North Africa are affecting the political stability of those countries. This instability may lead to deterioration of the political relationships that exist between Israel and these countries, and have raised concerns regarding security in the region and the potential for armed conflict. Among other things, this instability may affect the global economy and marketplace through changes in oil and gas prices.
Any hostilities between Israel and its neighbors and any future armed conflict, terrorist activity, political instability or violence in the region could adversely affect our operations in Israel and adversely affect the market price of our ordinary shares. Further escalation of tensions or violence might result in a significant downturn in the economic or financial condition of Israel, which could have a material adverse effect on our operations in Israel and our business.
Our commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East. Although the Israeli government is currently committed to covering the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, there can be no assurance that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by us could have a material adverse effect on our business, financial condition and results of operations.
In addition, several countries, principally in the Middle East, restrict doing business with Israel, and additional countries may impose restrictions on doing business with Israel and Israeli companies whether as a result of hostilities in the region or otherwise. These restrictions may limit our ability to distribute our products in these countries or establish distributor relationships with companies operating in these regions. The State of Israel and Israeli companies have been and are today subjected to threats of economic boycotts. In recent years, there have been increased efforts by activists to cause companies and consumers to boycott Israeli goods based on Israeli government policies. Such actions, particularly if they become more widespread, may adversely impact our ability to sell our products. Any hostilities involving Israel or any interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel, could adversely affect our business, financial condition and results of operations. Organizations are facing increasingly sophisticated, continuously changing, and targeted cyber threats, including the growing threat of cyber terrorism throughout the world, and we may be targeted by cyber terrorists because we are an Israeli company.
Our employees at our Lehavim facility in Israel have joined the Histadrut (General Federation of Labor in Israel) and established an employees’ committee, which has resulted and may further result in, among other things, our incurring additional labor costs and experiencing work stoppages and/or reduced operational flexibility.
In the fourth quarter of 2016, we were notified by the Histadrut (General Federation of Labor in Israel) that our Israeli subsidiary’s employees at our Lehavim facility have decided to join the Histadrut and that they have established an employees’ committee. In March 2017 a limited number of our Israeli subsidiary’s employees commenced a work stoppage. Such work stoppage has not adversely impacted our business operations. In May 2017, we notified the Histadrut of our decision to unilaterally withdraw from the negotiations of a collective bargaining agreement in light of the violent behavior towards our company and employees, which was encouraged by the Histadrut. In 2017, the Histadrut filed a collective bargaining dispute motion against us, claiming that we allegedly interfered with the unionization of our Israeli subsidiary’s employees at our Lehavim facility. For additional information regarding the legal dispute, see “Item 8 A. — Consolidated Statements and Other Financial Information — Legal proceedings.”
We have incurred and could further incur in the future increased operational costs and/or experience work stoppages. If we enter into a collective bargaining agreement, such agreement may result in increased labor costs and limit our operational flexibility and we may also experience work stoppages or disruptions to our operations. Any of the foregoing could adversely affect our business, financial condition and results of operations.
Our operations could be disrupted as a result of the obligation of certain of our personnel in Israel to perform military service.
Our operations could be disrupted by the obligations of our employees to perform military service. Generally, adult citizens and permanent residents of Israel until the age of 40 (or older, for individuals who hold certain positions in the Israeli armed forces reserves) are, unless exempt, obligated to perform up to 36 days (and in some cases more) of military reserve duty annually. Additionally, all Israeli residents of this age may be called to active duty at any time under emergency circumstances. Many of our employees are currently obligated to perform annual reserve duty. In response to increased tension and hostilities in the region, there have been, at times, call-ups of military reservists, and it is possible that there will be additional call-ups in the future. Our operations could be disrupted by the absence of one or more of our key employees for a significant period due to military service. Such disruption could have a material adverse effect on our business and results of operations.
The tax benefits and grants that may be available to us may be terminated or reduced in the future, which could increase our costs and taxes. If we fail to satisfy various conditions, we may be required to refund the tax benefits and government grants we received.
One of our Israeli subsidiaries is eligible for tax benefits under the Israeli Law for the Encouragement of Capital Investments, 5719‑1959, or the Investment Law, and the Israeli Law for the Encouragement of Industry (Taxes), 5729‑1969. To remain eligible for these tax benefits, this subsidiary must continue to meet certain conditions stipulated in the Investment Law and the regulations promulgated thereunder, as amended. If this subsidiary does not meet these requirements, the tax benefits could be canceled and it could be required to refund any tax benefits and investment grants that it received in the past. Furthermore, these tax benefits may be reduced or discontinued in the future. The termination or reduction of these tax benefits would increase our tax liability, which would harm our financial condition and results of operations. See “Item 10.E. — Taxation - Israeli tax considerations and government programs — Law for the encouragement of capital investments, 5719‑1959.”
We have received and have been approved to receive grants under certain Israeli Government programs and may apply from time to time in the future, to receive additional grants, including under the Investment Law. The receipt of approved grants and future grants, if approved, is subject to our satisfying certain conditions stipulated in applicable Israeli legislation and letters of approval. If we fail to meet these conditions, the grants could be canceled and we may be required to refund the amounts received, as adjusted by the Israeli consumer price index, and interest, and may become subject to other monetary penalties, which would harm our financial condition and results of operations. In addition, in order to secure fulfillment of the conditions related to the receipt of the grants, a floating lien was registered in favor of the State of Israel on substantially all of the assets of our Israeli subsidiary. The exercise of such lien could have a material adverse effect on our business.
It may be difficult to enforce the judgment of a U.S. court against us, our officers and directors in Israel or the United States, or to assert U.S. securities laws claims in Israel or serve process on our officers and directors.
We are incorporated in Israel. All of our executive officers and most of our directors are not residents of the United States, and the majority of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a judgment of a U.S. court 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 initiate an action with respect to U.S. securities laws in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must
be proven as a fact by expert witnesses, 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 that addresses the matters described above. As a result of the difficulty associated with enforcing a judgment against us in Israel, you may not be able to collect any damages awarded by either a U.S. or foreign court.
Rights and responsibilities of our shareholder are governed by Israeli law, which differs in some respects from the rights and responsibilities of shareholders of U.S. corporations.
Because we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by our articles of association and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith towards the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters, such as an amendment to the company’s articles of association, an increase in the company’s authorized share capital, a merger and approval of related party transactions that require shareholder approval. In addition, shareholders have a general duty to refrain from discriminating against other shareholders and a shareholder who knows that it possesses the power to determine the outcome of a shareholders’ vote or to appoint or prevent the appointment of a director or executive officer in a company has a duty of fairness towards the company with regard to such vote or appointment. There is limited case law available to assist us in understanding the nature of these duties or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations. See “Item 6.C. — Board Practices — Fiduciary duties and approval of specified related party transactions under Israeli law - Duties of shareholders.”
As a foreign private issuer whose shares are listed on the Nasdaq Global Select Market, we follow and we may in the future elect to follow additional home country corporate governance practices instead of certain Nasdaq requirements.
As a foreign private issuer whose shares are listed on the Nasdaq Global Select Market, we have elected to follow certain home country corporate governance practices instead of certain requirements of the Nasdaq Stock Market Rules, or the Nasdaq Rules. We may in the future elect to follow Israeli corporate governance practices with regard to, among other things, the composition of our board of directors, compensation of officers and director nomination procedures. In addition, we may elect to follow Israeli corporate governance practices instead of the requirements under the Nasdaq Rules to obtain shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity-based compensation plans, issuances that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company). Accordingly, our shareholders may not be afforded the same protection as provided under Nasdaq’s corporate governance rules. Following our home country governance practices as opposed to the requirements that would otherwise apply to a U.S. company listed on the Nasdaq Global Select Market may provide less protection than is accorded to investors of U.S. domestic issuers. We currently rely on this “foreign private issuer exemption” with respect to the quorum requirement for meetings of our shareholders. See “Item 16G. — Corporate Governance.”
In addition, 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 we are not required under the Exchange Act to file annual, quarterly 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. In addition, we are not required to comply with Regulation FD, which restricts the selective disclosure of material information. Moreover, as a foreign private issuer, our officers, directors and 10% shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. We may from time to time disclose certain purchases or sales of our shares by our Chief Executive Officer and Chief Financial Officer, but may not do so consistently and may not disclose sales of shares which we reported were purchased. Investors should therefore assume that there may be additional purchase and sale information that we may not have disclosed.
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 to disclose the compensation of our Chief Executive Officer, Chief Financial Officer and other three most highly compensated executive officers on an individual basis. Nevertheless, pursuant to regulations promulgated under the Israeli Companies Law, 5759‑1999, or the Companies Law, we are required to disclose the annual compensation of SodaStream International Ltd.’s five most highly compensated office holders on an individual basis. Under the Companies Law regulations, this disclosure is required to be included, or referenced, in the proxy statement for our annual meeting of shareholders each year, which we furnish to the SEC under cover of a Report of Foreign Private Issuer on Form 6‑K. Because of that disclosure requirement under Israeli law, we are also including such information in this annual report. See — “Item 6.B. Directors, Senior Management and Employees — Compensation.”
We would lose our foreign private issuer status if, as of the determination date under rules promulgated under the Exchange Act, a majority of our directors or executive officers are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such 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 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 may lose our ability to rely upon exemptions from certain Nasdaq corporate governance requirements that are available to foreign private issuers.
Provisions of our articles of association, Israeli law and certain of our agreements 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. These provisions include that our directors (other than external directors, if applicable) are elected on a staggered basis, and therefore a potential acquirer cannot readily replace our entire board of directors at a single annual general shareholder meeting. Our articles of association also include the requirement of a supermajority vote of our shareholders to amend certain provisions of our articles of association. 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. See “Item 10.B. — Memorandum and Articles of Association — Acquisitions under Israeli law.” Further, Israeli tax considerations may make potential transactions undesirable to us or to some of our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including, in some cases, a holding period of two years from the date of the transaction during which certain sales and dispositions of shares of the participating companies are restricted. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no actual disposition of the shares has occurred. Certain of our agreements require the receipt of consents, including from governmental authorities, for change of control transactions. These provisions of Israeli law, our agreements and our articles of association could have the effect of delaying or preventing a change in control in us and may make it more difficult for a third-party 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 in the future for our ordinary shares.
Risks Related to our Ordinary Shares and the Trading of our Ordinary Shares
The price of our ordinary shares may fluctuate significantly.
In the past, our stock price has experienced high levels of volatility. The trading price of our ordinary shares may fluctuate significantly. Fluctuations in the market price of our ordinary shares 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 any one or more of the securities analysts that may cover our company in the future. The market price for our ordinary shares is affected by a number of factors, some of which are beyond our control, including, without limitation:
an increase or decrease in our revenues;
quarterly variations in our results of operations or in our competitors’ results of operations;
announcements or introductions of new products by us or competitors;
rumors about material events involving third parties;
the recruitment or departure of key personnel;
recalls and/or adverse events associated with our products;
announcements concerning our products by us or regulatory authorities;
changes in earnings estimates, if provided, investors’ perceptions or recommendations by securities analysts or our failure to achieve analysts’ earnings estimates;
developments in our industry;
price and volume fluctuations on other exchanges on which our ordinary shares are listed for trading;
sales or proposed sales of our ordinary shares by us or our shareholders; and
general market conditions and political and other factors unrelated to our operating performance or the operating performance of our competitors.
These factors may materially adversely affect the market price of our ordinary shares and result in significant price fluctuations.
In the past, many companies that have experienced volatility in the market price of their securities have become subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.
If securities or industry analysts cease to publish research or publish inaccurate or unfavorable research about our business, the price of our ordinary shares could decline.
The trading price for our ordinary shares may be affected by any research or reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us or our business publish inaccurate or unfavorable research about us or our business, and in particular, if they downgrade their evaluations of our ordinary shares, the price of our ordinary shares would likely decline. If one or more of these analysts ceases coverage of our
company, we could lose visibility in the market for our ordinary shares, which in turn could cause the price of our ordinary shares to decline.
We do not expect to pay any dividends for the foreseeable future.
We do not anticipate that we will pay any dividends to holders of our ordinary shares in the foreseeable future. In addition, our ability to pay dividends might be limited by the terms of any future credit facility we may take containing terms prohibiting or limiting the amount of dividends that may be declared or paid on our ordinary shares. Accordingly, investors must rely on sales of their ordinary shares after price appreciation, which may never occur, as the only way to realize any return on their investment. As a result, investors seeking cash dividends should not purchase our ordinary shares. In addition, Israeli law limits our ability to declare and pay dividends, and may subject our dividends to Israeli withholding taxes.
Our ordinary shares are traded on more than one market and this may result in price variations.
In addition to being listed on the Nasdaq Global Select Market, our ordinary shares are also listed for trade on the Tel Aviv Stock Exchange Ltd., or the TASE. Trading in our ordinary shares on these markets takes place in different currencies (U.S. Dollars on the Nasdaq Global Select Market and NIS on the TASE), and at different times (resulting from different time zones, trading days and public holidays in the United States and Israel). The trading prices of our ordinary shares on these two markets may differ due to these and other factors. Any decrease in the price of our ordinary shares on one market could cause a decrease in the trading price of our ordinary shares on the other market.
Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a Passive Foreign Investment Company.
Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of our assets are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company for U.S. federal income tax purposes. To determine if at least 50% of our assets are held for the production of, or produce, passive income, we are required to use the market capitalization method. Under the market capitalization method, the total asset value of a company would be considered to equal the fair market value of its outstanding shares plus outstanding indebtedness on a relevant testing date. Because the market price of our ordinary shares is likely to fluctuate and may be volatile, the market price may affect the determination of whether we will be considered a passive foreign investment company. Accordingly, there can be no assurance that we will not be considered a passive foreign investment company for any taxable year. If we are characterized as a passive foreign investment company, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather than capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals who are United States holders, and having interest charges apply to distributions by us and the proceeds of share sales. See “Item 10.E. — Taxation — United States federal income taxation.”
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 Internal Revenue Code of 1986, as amended (the “Code”).
A non-U.S. corporation is considered a CFC if more than fifty percent of the voting power or the total value of the shares is owned, or is considered to be owned, by U.S. shareholders who each own shares representing ten percent or more of the voting or total value of the shares of such non-U.S. corporation (“10% U.S. Shareholder”).
Generally, 10% U.S. Shareholders of a CFC are currently required to include in their gross income their pro-rata share of the CFC’s “Subpart F income”, a portion of the CFC’s earnings, to the extent the CFC holds certain U.S. property, and certain other new items under the TCJA. Such 10% U.S. Shareholders are subject to current U.S. federal income tax with respect to such items, even if the CFC has not made 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.
Certain changes to the CFC constructive ownership rules introduced by the TCJA may cause one or more of our non-U.S. subsidiaries to be treated as CFCs and may also impact our CFC status. This may result in negative U.S. federal income tax consequences for 10% U.S. Shareholders of our ordinary shares.
The CFC rules are complex and therefore no assurances can be given that we are not or will not become a CFC. Certain changes to the CFC constructive ownership rules introduced by recent U.S. tax legislation could, under certain circumstances, cause us to be classified as a CFC. Current or prospective 10% U.S. Shareholders should consult their tax advisors regarding the U.S. tax consequences of acquiring, owning, or disposing our ordinary shares and the impact of the TCJA, especially the changes to the rules relating to CFCs.
Item 4.INFORMATION ON THE COMPANY
A. History and Development of the Company
The SodaStream brand has a history that dates back to the beginning of the 20th century with the forerunner of our sparkling water makers being invented in London in 1903. During the 1970s and 1980s, the SodaStream home beverage carbonation system gained substantial popularity in certain markets. In 1998, Soda Stream Ltd. was acquired by Soda Club Enterprises N.V., which, at the time, was its Israeli distributor.
In March 2007, Fortissimo Capital Fund GP, L.P., or Fortissimo Capital, invested in us, and in connection with that investment, SodaStream International Ltd. was incorporated under the laws of the State of Israel on March 8, 2007, and all of the shares of Soda Club Enterprises N.V. were exchanged for our ordinary shares. Following our acquisition by Fortissimo Capital, we restructured our operations significantly, including introducing a new management team headed by our Chief Executive Officer, Daniel Birnbaum. Our new management team implemented a new corporate strategy focused on the penetration of new markets, consumer-driven product innovation and capitalizing on the consumer benefits of our products.
We are registered with the Israeli Registrar of Companies. Our registration number is 51‑395125‑1. Our purpose as set forth in our articles of association is to engage in any lawful act or activity.
In March 2010, we changed our corporate name from Soda-Club Holdings Ltd. to SodaStream International Ltd. On November 3, 2010, our ordinary shares commenced trading on the Nasdaq Global Select Market following our initial public offering, or an IPO. On December 15, 2015, our ordinary shares commenced trading on the TASE.
Our principal executive offices are located at Gilboa Street, Airport City, Ben Gurion Airport 7019900 Israel and our telephone number is +972‑3‑976‑2317. Our authorized representative in the United States and agent for service of process in the United States, SodaStream USA, Inc., is located at 136 Gaither Drive, Suite 200, Mount Laurel, NJ 08054. Our website address is www.sodastream.com. The 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.
Principal Capital Expenditures
Our capital expenditures for fiscal years 2015, 2016 and 2017, amounted to $53.7 million, $28.0 million and $23.4 million, respectively. Capital expenditures are defined as investment in property, plant and equipment and in intangible assets. The decrease in 2016 compared to 2015 was mainly due to the completion of the ramp-up of the Lehavim facility and the new logistics center on the Lehavim site and the decrease in 2017 compared to 2016 was mainly due to lower capital expenditures related to the Lehavim site. Our capital expenditures in 2017 were financed by cash flow from operations. We anticipate our capital expenditures in 2018 to primarily be related to completing construction of our new administration building on the Lehavim site, expanding our production capacity and capabilities, automation, investments in developing new products and improving our information technology systems. We anticipate our capital expenditures in 2018 to be financed from cash flow generated from operations.
We manufacture, distribute and sell home beverage carbonation systems that enable consumers to easily transform ordinary tap water into sparkling water and flavored sparkling water in seconds. We believe our sparkling water makers offer a highly differentiated and innovative solution to consumers of bottled and canned carbonated beverages. Our home beverage carbonation systems and other products promote health and wellness and empower people with simple, creative and fun ways to make water exciting and to drink more water. Our products are also environmentally friendly, cost-effective and are customizable and fun to use. In addition, our products offer convenience by eliminating the need to carry bottles and cans home from the supermarket, store them at home or regularly dispose of empty bottles and cans. Educating consumers about these benefits is a key element of our strategy to build awareness and strengthen our brand.
We believe that we are the world’s largest sparkling water company (in terms of volume consumption) and the world’s leading manufacturer of home beverage carbonation systems. Such belief is based on consumer surveys we commissioned that show that SodaStream has the largest market share in each of a dozen of the largest markets in which we operate. Based on, among other metrics, an estimated average of three CO2 refills purchased per household and a portion of sparkling water maker sales, we estimate that, as of December 31, 2017, there were approximately 12.5 million households that use our sparkling water makers, whom we refer to as active consumers.
We develop, manufacture and sell sparkling water makers and exchangeable carbon-dioxide (CO2) cylinders, as well as consumables, consisting of CO2 refills, reusable carbonation bottles and flavors to add to the sparkling water. As of December 31, 2017, our products are available through more than 80,000 individual retail stores in 45 countries, including approximately 10,000 individual retail stores in the United States. In 2017, we distributed our products directly in our significant markets and indirectly through local distributors in our less significant markets. Our products are sold under the SodaStream® brand name in most countries and under the Soda-Club® brand name or select other brand names in certain other countries. While our distribution strategy is customized for each market, we generally employ a multi-channel distribution approach that is designed to raise awareness and establish positioning of our product offerings, in specialty retail and direct marketing channels and in larger food, drug and mass retailers.
Our revenues increased by 15.2% from $413.1 million in 2015 to $476.1 million in 2016 and by 14.1% to $543.4 million in 2017. We had net income of $12.1 million, $44.5 million and $74.4 million in 2015, 2016 and 2017, respectively. From 2015 through 2017, our revenues from sparkling water makers and exchangeable CO2 cylinders increased from $131.7 million to $212.3 million and our revenues from sales of consumables increased from $272.3 million to $323.4 million.
According to GlobalData, the global carbonated beverage industry generated approximately $350 billion in sales turnover in 2017. In recent years, we have witnessed a significant shift toward “health & wellness” in the carbonated beverage industry, as consumers are abandoning traditional soft drinks in favor of what is popularly referred to as “Water+ beverages” and sparkling waters. For example, in the United States, consumers have shifted towards natural ingredients, natural sweeteners, reduced calories and products that are considered to promote “health & wellness.”
In addition to the health and wellness trend, we believe that consumers are also exhibiting an increased focus on value and personalization. Our products address these long-term trends in global consumer behavior, including the rapidly growing popularity of health and wellness products and environmental consciousness. Our products are environmentally friendly and offer a simple, fun and sustainable way to enjoy sparkling water by making water exciting.
Consumers initially purchase a “starter kit,” consisting of a sparkling water maker and one or two carbonation bottles. The starter kit also includes an exchangeable CO2 cylinder which is provided under license and can produce varying amounts of sparkling water, depending on the CO2 content and other factors.
Sparkling water makers. We offer a variety of sparkling water makers. Our sparkling water makers are free-standing, lightweight and compact, and have a stylish design. They are made of stainless steel and/or plastic and, other than the “Power” and “Fizzi One Touch” models, do not require electricity. The CO2 cylinder fits in a rear compartment and with a simple push, carbonates water. Our sparkling water makers are sold in a variety of designs and colors and accommodate different CO2 cylinder sizes.
Exchangeable CO2 cylinders. The basis of the SodaStream home beverage carbonation system is the carbonation of water by means of an aluminum or, in some cases, steel, cylinder containing compressed liquid CO2. The cylinder is inserted by the consumer into the sparkling water maker. Certain models of sparkling water makers can accommodate more than one size of cylinders, while others fit only one size. The actual amount of sparkling water produced per cylinder varies based on the CO2 content, the type of sparkling water maker used, user preference (the amount of carbonation released during each carbonation) and other factors. We only use beverage-grade CO2 in our cylinders. We also sell natural sourced CO2 (derived from natural underground sources) in certain markets, in addition to CO2 extracted from other sources.
CO2 refills. We provide beverage-grade CO2 refills through authorized retailers that participate in our cylinder exchange program. These retailers generally maintain a stock of filled cylinders in their inventory. Consumers typically exchange their empty cylinders at retail stores or through online orders for full cylinders and since the cylinders are provided under license, they only pay for the CO2. In some markets, direct home delivery and exchange is also available, and we use third-party carriers to exchange the empty cylinders for full ones. Empty cylinders are then delivered to a filling plant where they are inspected, cleaned and refilled for distribution. We conduct CO2 refilling in the United States, Australia, Germany, Israel, the Netherlands and South Africa and also at a third-party facility in New Zealand. We periodically evaluate opening additional refilling stations in our existing markets based on demand for CO2 refills and other factors.
Carbonation bottles. Our home beverage carbonation systems produce sparkling water in a high pressure-resistant plastic or glass bottle, which we manufacture specifically for repeated usage. These specially-designed carbonation bottles are the only bottles intended for use with our home beverage carbonation systems. The glass bottle, as well as some versions of the plastic bottle, is dishwasher-safe. For the high-end market, we offer sparkling water makers specifically intended to be used with glass bottles, which are appropriate for a more formal table setting. Carbonation bottles can easily be personalized and are offered in a variety of colors, designs and sizes. The plastic bottles are BPA-free and are designed to have a lifespan of four years. Consumers often purchase additional carbonation bottles to allow for several bottles of sparkling water and flavored sparkling water to be available at the same time.
Flavors. We work with leading international flavor and essence manufacturers which provide research and product development services, including sensory testing in order to enhance our flavor offerings and cater to consumers’ tastes and address market trends. Our flavors come in a highly concentrated form, customized for our home beverage carbonation systems. Our portfolio of flavors includes naturally flavored sparkling water mixes, as well as our classic flavors.
Other accessories. We also sell additional accessories for our products that are manufactured by third parties.
We mostly market our products through retail channels. We distribute our products directly in our significant markets and indirectly through our distribution partners in our other markets. A vast majority of our revenues are generated through the direct markets.
We generally employ a multi-channel distribution strategy in each geographical market that is designed to raise awareness and establish positioning of our product offerings, in specialty retail and direct marketing channels, including through e-commerce platforms such as Amazon and in larger food, drug and mass retailers. Our products are available at more than 80,000 individual retail stores in 45 countries, including stores of many of the largest retailers in our markets.
We have subsidiary offices and branches in countries in which we sell our products directly. In these markets, we utilize our own internal sales force and, in certain countries, sub-distributors as well.
In other markets, in which we sell indirectly through distribution partners, we contract with third-party distributors who facilitate distribution of our products. In addition to carrying a full selection of our products, the distributor also agrees to manage the reverse logistics needed for our customers to return empty CO2 cylinders and exchange them for filled CO2 cylinders. In 2017, our distributors accounted for approximately 11% of our total revenues. In February 2018, following the acquisition of our French distributor for €17.5 million (subject to customary post-closing price adjustments), such percentage is expected to decrease significantly.
We use distribution partners in order to expedite penetration into certain new markets. In prioritizing which markets to enter we consider certain factors, including the size of the carbonated beverage and sparkling water market, per capita consumption of carbonated beverages and sparkling water, the perceived quality of the tap water, household demographics, health and wellness and environmental consciousness. When we evaluate potential distribution partners, we take into consideration several factors, including their experience with selling and marketing consumer products to retail channels, existing sales, logistics and distribution capabilities, current product portfolio, financial strength and stability to market our products.
In addition, SodaStream Israel Ltd., our Israeli sales and marketing subsidiary, also serves as the exclusive distributor of Brita water filtration systems in Israel. Brita’s products sold by SodaStream Israel Ltd. include water containers and filter cartridges used with such water containers. The agreement is for an indefinite period and can be terminated by either party upon 12 months’ prior written notice from the end of the month in which notice is given.
In both our direct and indirect markets, we sell our products primarily at retail stores as well as online. We target major retailers with either a national footprint or a significant regional concentration.
Our retail distribution is an important element in bringing our products to potential consumers and thereby enabling new customers to acquire our home beverage carbonation systems. Additionally, we believe that the widespread availability and easy access to consumables, primarily CO2 refills, are key to securing ongoing customer retention and loyalty. We believe that one of our most important competitive advantages is our strong retail distribution network and in particular, that of our CO2 refill exchange program. We intend to further penetrate our existing markets by selectively increasing the number of stores in which our products are currently being sold.
Our marketing objective is to establish and position SodaStream as a sparkling water brand around health and wellness and environmental friendliness. A key element of our strategy to achieve this marketing objective is to build consumer awareness and to educate consumers about the benefits of our products. Consumer demand activities are designed primarily to increase the installed base of sparkling water makers as measured in terms of percentage of household penetration in each market. Secondarily, we promote “users for life” so as to generate ongoing demand for our consumables (CO2 refills, flavors and carbonation bottles). We believe that widespread availability and easy access to consumables are key to customer retention and loyalty.
Our marketing activities include brand and product marketing and management as well as sales support programs. We use a variety of vehicles, including advertising, direct marketing and public relations campaigns and social media campaigns, using both traditional and digital media, in-store demonstrations, infomercials and our websites to build brand awareness, educate consumers about the benefits of our home beverage carbonation systems, communicate the advantages of our products and establish brand positioning, all of which are designed to increase our installed base of sparkling water makers and active consumers base in our markets. We also use our marketing programs to support the sale of our products through new channels and to enter new markets. We conduct surveys and use third-party tracking programs in order to track our household penetration, usage behaviors and consumer opinions across markets, and to
measure the success of our marketing activities over time. Our internal marketing team supports sales at the point-of-sale through trade marketing, developing and executing product and brand initiatives, and consumer education.
Acquiring a new customer is only the beginning of a relationship with the customer. To this end, we continuously test and apply various marketing tools to improve customer retention. In addition to enhancing our product offerings and improving the user experience, we employ subscription programs, newsletters, warranties, trade-in promotions and various other programs to keep the customer engaged. We offer easy access to CO2 refills through mass distribution of our cylinder exchange program and in some markets direct-to-home delivery from online orders. We also encourage our consumers to purchase additional CO2 cylinders, which contributes to keeping customers actively using our products over time. In certain markets, we have implemented customer loyalty programs that reward customers for repeat purchases.
Our marketing activities are managed from our headquarters in Israel. Each market has a representative (either through one of our subsidiaries or through our distribution partner) who works closely with our marketing team to localize our marketing activities in accordance with the individual tastes and preferences in a particular country.
Manufacturing and production
We manufacture substantially all of our products ourselves in our own production sites or in sites of subcontractors under our guidelines and supervision. We believe that in light of our strict quality control and the safety and regulatory standards to which we are subject, self-manufacture is the best and most efficient way to ensure that our customers receive quality products. We manufacture our products primarily in Israel and conduct CO2 refilling in seven locations around the world.
In 2015, most of our manufacturing operations were moved to our new manufacturing facility located in the southern part of Israel, the Lehavim facility. The Lehavim facility houses various manufacturing functions, including metals (such as cylinder manufacturing and cylinder retesting), CO2 refills, plastic injection, bottle blowing and printing, machining and assembly. We manufacture our flavors that are distributed worldwide at our facility in Ashkelon, located on the Mediterranean coast of Israel. The lease for our manufacturing facility in Ashkelon ends in December 2019, with an option to extend the lease for two additional terms of one year each. If we are not successful in renewing such lease or in establishing an alternative manufacturing facility in a timely manner, the production of our flavors may be delayed, which could have a material adverse effect on our business, financial condition and results of operations.
Our future success requires that we have adequate capacity in our manufacturing facilities to manufacture sufficient products to support our current level of sales and the anticipated increased levels. We were able to meet demand in 2015, 2016 and 2017 and believe that the capacity of our current manufacturing facilities and subcontractors is sufficient to meet anticipated demand for our products through 2018.
We manufacture our products in accordance with applicable safety and regulatory requirements around the world. We also have implemented specific quality assurance procedures throughout the various stages and processes of manufacturing which are intended to ensure the quality of all of our products.
We use certain raw materials, some of which are commodities, to manufacture our sparkling water makers, carbonation bottles, CO2 cylinders and flavors. The most important of these materials are aluminum, brass, certain plastics, flavoring essences, sugar, CO2, sweeteners and fruit concentrate. We believe that these materials are readily available from multiple sources and that we have sufficient inventory to continue manufacturing during the time it would take us to locate and qualify an alternative source of supply. The cost of such raw materials has fluctuated in the past. From time to time, we engage in long-term purchase agreements and in hedging transactions to lower the impact of such fluctuations.
We maintain an innovation, design and product development department, which is engaged in devising new products that offer improved aesthetics and lifestyle appeal, as well as improved functionality and superior user
experience. Over the years, we have introduced several new models of sparkling water makers, including the “Source,” a sparkling water maker that combines beauty, functionality and efficiency; the “Crystal,” a higher-end model that utilizes glass carbonation bottles; the “Power,” an electrically powered innovative sparkling water maker; and the “Spirit,” which is sold as the “Fizzi” or the “Easy” in certain markets, an affordably priced and elegantly-designed sparkling water maker that incorporates the advanced “snap-n-lock” bottle mechanism. In 2015, we unveiled the “Mix,” a high-end carbonation machine that can carbonate almost any liquid. In March 2018, we announced the launch of the “Fizzi One Touch”, an electrically powered “Fizzi”. We are continuously seeking to enhance our flavor offerings to cater to consumers’ tastes and to address market trends, in connection therewith we announced in March 2018, the launch of new innovative flavors, including the “Nature”, which is rich in fruit, has no added sugar and contains no preservatives.
Our intellectual property portfolio is one of the means by which we attempt to protect our competitive position. We seek to protect our intellectual property, core technologies and other know-how, through a combination of patents, trademarks, trade secrets, non-disclosure and confidentiality agreements, licenses, assignments of invention and other contractual arrangements with our employees, consultants, partners, suppliers and customers, among others. We have a variety of trademarks registrations and pending applications, patents and pending patent applications and design registrations and pending applications which cover, among other things, the “snap-n-lock” mechanism and designs for most of the sparkling water makers we introduced in the last few years, including the “Power,” the “Source” and the “Spirit.” We place trademarks on all of our products, including carbonation bottles, CO2 cylinders and flavors. We have monitored and challenged the sale of products that we believe infringe our intellectual property rights in the past and we intend to continue to protect our intellectual property rights in the future.
We face competition from manufacturers of other home sparkling water makers in certain jurisdictions. New competitors may also enter the home carbonated beverage and sparkling water market. Current or future competitors may, for example, introduce products with features which may cause our consumers to stop using our systems or to use them less frequently, such as sparkling water makers that do not require the exchange of CO2 cylinders or that use other methods of carbonation. We also compete with the large global beverage companies for the dollars spent by consumers on non-alcoholic beverages. These include primarily manufacturers of carbonated soft drinks and sparkling water.
We also face competition with respect to some of our consumables, in particular in our CO2 refill business and our flavors. Third parties may manufacture and refill cylinders that can be used with our sparkling water makers. We have generally entered into agreements with distributors and retailers that prohibit them from providing our cylinders to third parties for refilling. Notwithstanding such arrangements, a court ruling in Germany allows consumers to have the CO2 cylinders refilled by third parties. With respect to our flavors, we face competition from various companies that produce syrups to add to sparkling or still water.
Our products, which include both food products and compressed gas, are subject to governmental regulation in most jurisdictions in which we do business. Food products, such as flavors and beverage-grade CO2, are subject to regulation both at regional levels such as the European Union, as well as on a national level. These regulations require us to vary product formulations and labeling. In addition, certain marketing claims regarding our flavors differ from jurisdiction to jurisdiction as a result of local regulations.
The transport of compressed gases, such as the CO2 in our cylinders, is regulated in most jurisdictions. The manufacturing process and cylinder features vary by jurisdiction, and we manufacture different cylinders, each of which is subject to a separate regulatory regime, for use in the European Union, the United States (Department of Transportation) and Canada (Transport Canada). The various regulatory bodies have different requirements for periodic re-testing of cylinders that vary from between five to 10 years, procedures for which we are largely self-certified. In addition, the transport of cylinders is regulated on an international level and all of our cylinders and cylinder packaging bear a “green diamond” precautionary symbol for a Class 2.2 product under the European Agreement Concerning the
International Carriage of Dangerous Goods by Road (ADR). In the United States and certain other jurisdictions, our cylinders are regulated as hazardous materials.
Our headquarters in Airport City, Israel include approximately 28,300 square feet of office space, which we lease under a lease agreement that terminates in April 2018 and is expected to be renewed by such time. If we are unsuccessful in renewing such lease, such non-renewal could result in additional expenses and the diversion of the attention of our management from running the day-to-day operations of our business. Our Lehavim facility is located on a plot of land comprising approximately 915,000 square feet in the southern part of Israel. In October 2015, we entered into a long-term lease agreement with the Israel Land Authority pursuant to which we lease the land where the Lehavim facility is situated for a term ending in February 2061, with an option to extend the lease for an additional term of 49 years. Our Ashkelon facility, located on the Mediterranean coast of Israel, is comprised of approximately 21,500 square feet of factory, warehouse and office space and is leased under a lease agreement that terminates in December 2019, with an option to extend the lease for two additional terms of one year each. Additionally, we have CO2 refilling facilities in the United States, Australia, Germany, Israel, the Netherlands and South Africa and also at a third-party facility in New Zealand.
Our European commercial and logistics center is managed from Rijen, the Netherlands. We have sales and marketing offices in Australia, Canada, Denmark, Finland, Germany, Israel, Italy, Japan, the Netherlands, Norway, South Africa, France, Argentina, Sweden, Switzerland, the United Kingdom and the United States. We believe that our existing facilities are adequate for our current needs and that suitable additional or alternative space will be available on commercially reasonable terms to meet our future needs.
We have entered into a development agreement with the Israel Land Authority with respect to an approximately 247,000 square feet plot of land which is adjacent to the land where our manufacturing facility in Lehavim is located for the potential expansion and/or further expansion of our manufacturing capabilities.
For a discussion of seasonality, see “Item 5.A. — Operating Results — Seasonality.”
Information Technology Systems
We believe that an appropriate information technology infrastructure is important in order to support our daily operations and the growth of our business.
We have experienced and expect to continue to experience actual or attempted cybersecurity attacks of our IT networks. Although none of these actual or attempted cybersecurity attacks have had a material adverse effect on our operations or financial condition, we cannot guarantee that any such incidents will not have a material adverse effect on our operations or financial condition in the future. We are constantly implementing new technologies and solutions to assist in prevention of potential and attempted cyberattacks, as well protective measures and contingency plans in the event of an existing attack. We have updated our IT infrastructure to enhance our ability to prevent and respond to such threats and in addition, we purchased insurance covering cybersecurity attack’s event management related to breach of personal information, security failure, systems failure and data protection. For further details see “Item 3. D. — Risk Related to our Business and Industry — Disruptions to our information technology, or IT, systems due to system failures or cybersecurity attacks may impact our operations, result in sensitive customer information being compromised, which would negatively materially adversely affect our reputation and business.”
C. Organizational Structure
Our company, SodaStream International Ltd., was formed in March 2007, for the purpose of fully controlling SodaStream Enterprises N.V. (formerly Soda-Club Enterprises N.V.). SodaStream Enterprises N.V., which is registered in the Netherlands Antilles, is wholly-owned by SodaStream International Ltd. Our operational activities are carried out
by SodaStream International B.V., which is registered in the Netherlands, and its direct and indirect subsidiaries. SodaStream International B.V. is a wholly-owned subsidiary of SodaStream Enterprises N.V.
The following table sets forth the subsidiaries owned, directly or indirectly, by us as of March 1, 2018:
Name of Subsidiary
SodaStream Enterprises N.V.
SodaStream International B.V.
Soda-Club Worldwide B.V.
SodaStream Industries Ltd.
SodaStream Israel Ltd.
SodaStream Österreich GmbH
SodaStream Australia PTY Ltd.
SodaStream (New Zealand) Ltd.
SodaStream (SA) (Pty) Ltd.
SodaStream USA, Inc.
Delaware (United States)
Soda-Club CO2 Ltd.
British Virgin Islands
Soda-Club Switzerland GmbH
Soda-Club (CO2) SA
SodaStream (CO2) SA
Soda-Club (CO2) Atlantic GmbH (LLC)
SodaStream (Switzerland) AG
SodaStream Nordics AB
SodaStream Canada Ltd.
OPM France SAS
Bebidas Sudamerica S.A.
D. Property, Plants and Equipment
For a discussion of property, plants and equipment, see “Item 4.B. — Business Overview — Manufacturing and production,” “Item 4.B. — Business Overview - Facilities” and “Item 5.A. — Operating Results — Application of critical accounting policies and use of estimates — Property, plant and equipment.”
Item 4A.UNRESOLVED STAFF COMMENTS
Item 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS
SodaStream manufactures home beverage carbonation systems, which enable consumers to easily transform ordinary tap water into sparkling water and flavored sparkling water in seconds. We develop, manufacture and sell sparkling water makers and exchangeable carbon-dioxide (CO2) cylinders, as well as consumables, consisting of CO2 refills, reusable carbonation bottles and flavors to add to the sparkling water.
As of December 31, 2017, our products are available through more than 80,000 individual retail stores in 45 countries. As of December 31, 2017, we distributed our products directly in our significant markets and indirectly through local distributors in our less significant markets.
Our products are sold under the SodaStream® brand name in most countries and under the Soda-Club® brand name or selected other brand names in certain other countries. While our distribution strategy is customized for each market,
we generally employ a multi-channel distribution approach that is designed to raise awareness and establish the positioning of our product offerings, in specialty retail and direct marketing channels and in larger food, drug and mass retailers.
We employ a “razor/razor blade” business model, which is designed to increase sales of sparkling water makers (the razor); and to generate recurring sales of higher-margin consumables, consisting of CO2 refills, flavors and carbonation bottles (collectively, the razor blades). As sales of our sparkling water makers increase, we expect that the subsequent sales of related consumables will result in increased gross profits due to the higher gross margins associated with our consumables. However, in order to further develop our customer base, we plan to continue to focus on increasing sales of our sparkling water makers.
Historically, our growth in revenues was driven by our heightened focus on promoting sparkling water maker sales in both existing markets and new markets to increase our installed base of sparkling water makers, particularly in North America and in Western Europe. Historically, the growth of our installed base of sparkling water makers in turn resulted in an increase in revenues from sales of our consumables. A key element of our strategy is to expand our active installed base of sparkling water makers by further penetrating existing markets, and by entering select new markets. Another key element of our strategy is to build consumer awareness and to educate consumers about the benefits of our products.
A. Operating Results
Key measures of our performance
Our revenues consist primarily of sales of sparkling water makers and recurring sales of higher-margin consumables, including CO2 refills, flavors and carbonation bottles. We derive revenues from the sale of goods to our customers, who may be consumers, retail partners or distributors, depending on the sales channel through which the goods are sold. The majority of our product distribution to our ultimate customers is through retail stores. Our distribution retail coverage includes many of the leading chain stores in the markets in which we operate. In some markets, we also distribute our sparkling water makers and consumables directly to consumers through telephone service centers or the internet.
We record revenues from sales of these items at the gross sales price, net of returns, trade discounts, rebates and provisions for estimated returns. We recognize revenues when persuasive evidence exists (usually in the form of an executed sales agreement) that the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods and the amount of revenues can be measured reliably. If it is probable that discounts will be granted and the amount can be measured reliably, then the discount is recognized as a reduction of revenue as the sales are recognized. The timing of the transfer of risks and rewards varies depending on the individual terms of the sale agreement. For sales of products in domestic markets, transfer usually occurs when the product is received at the customer’s warehouse, but for some international shipments transfer occurs upon loading the goods onto the relevant carrier.
The following tables present our revenues, by product type for the periods presented, as well as such revenues by product type as a percentage of total revenues:
Year Ended December 31,
Sparkling water makers and exchangeable CO2 cylinders
Sparkling water makers and exchangeable CO2 cylinders
We believe that the number of sparkling water makers and CO2 refills sold during each period is an important indicator of the expansion rate of our business. The number of sparkling water maker units sold is indicative of the growth of our customer base and the number of CO2 refills sold is indicative of sales of consumables to our active consumer base. In 2017, the number of sparkling water maker units that we sold increased by 24.3% and the number of CO2 refills that we sold increased by 10.6%, as compared to 2016. Based on, among other metrics, an estimated average of three CO2 refills purchased per household and a portion of sparkling water maker sales, we estimate that, as of December 31, 2017, there were approximately 12.5 million households that use our sparkling water makers, whom we refer to as active consumers.
We believe that the sale of every sparkling water maker can have a compounding effect because every sale increases the potential demand for our consumables, which consist of CO2 refills, flavors and carbonation bottles, over time. Each sparkling water maker that is sold comes with a filled, exchangeable CO2 cylinder, which is recorded in the revenue category referred to above as “Sparkling water makers and exchangeable CO2 cylinders.” A customer would not typically need to purchase a CO2 refill, which is recorded in the sales category referred to above as “Consumables,” for several months. Our general historical experience is that the growth in sales of consumables in a new market arises over a period of time following the growth in sparkling water maker sales and increases correspondingly to the growth in our active consumer base in such markets. These factors may result in a lag between the growth in sparkling water maker sales and growth in the sales of consumables.
While we anticipate that this trend will continue, a variety of factors, including customer retention rates, the growth of our reverse logistics network, our ability to continue to develop and implement our production and operating infrastructure in a way that would effectively support the growth in our target markets, weather and competition, could affect our results in the future.
Cost of revenues and gross margin
Our cost of revenues consists primarily of raw materials and components, as well as production and production-related labor, freight costs and other direct and indirect production costs. We require certain raw materials to manufacture our sparkling water makers, exchangeable CO2 cylinders, carbonation bottles and flavors, including, in particular, aluminum, brass, certain plastics, flavoring essences, sugar, CO2, sweeteners and fruit concentrate. In addition, cost of revenues includes the cost of delivery from the production site to our distribution warehouse where the product is sold. When we sell products to our third-party distributors, they usually collect their orders from our warehouses and bear the cost of delivery.
Gross profit and gross margin are influenced by each of the following factors:
The gross margins of our consumables are typically higher than the gross margin of our sparkling water makers. We have found that as markets mature, sales of our consumables become a larger portion of our total revenues, thus contributing to overall gross margins.
The gross margin on sales in markets where we distribute directly is generally higher than markets in which we use third-party distributors, due to the elimination of the external distributor’s margin. In certain markets, our expansion strategy is to work with third-party distributors who we believe will be better able to increase revenues in their market than we could if we distributed our products directly. However, in our key markets
targeted for expansion, we distribute directly, and thus we believe our gross margins will be positively impacted as the portion of our revenues from these markets increases.
Our cost of revenues, and therefore our gross profit, is impacted by several factors, including the prices of commodities and other materials such as aluminum, brass, plastics, flavoring essences, sugar, CO2, sweeteners and fruit concentrates; production labor costs; write-down of inventories to net realizable value; depreciation expenses of machinery and equipment; certain manufacturing costs, which are fixed in nature; and fuel prices, which affect our freight costs.
Our gross margin is exposed to exchange rate fluctuations. We are primarily exposed to Euro/U.S. Dollar and NIS/U.S. Dollar currencies movements, with the U.S. Dollar and Euro being the principal currencies of our sales and the U.S. Dollar and NIS being the currencies which a significant portion of our material purchasing and production costs is denominated. As a result, the higher the Euro/U.S. Dollar exchange rate and the lower the NIS/U.S. Dollar exchange rate, the higher our gross margin will be. We regularly purchase currency hedging options and enter into forward contracts to hedge against currency exchange risks, in particular, the weakening of the Euro against the U.S. Dollar or the strengthening of the NIS against the U.S. Dollar. See “Item 11 — Quantitative and Qualitative Disclosures About Market Risk.”
Price changes due to various factors, including market conditions, competition and cost fluctuations.
Our sales and marketing expenses consist primarily of wages, salaries and other employee remuneration to our marketing, selling, distribution and other sales-support employees; advertising and promotional expenses; warehousing and distribution costs and commissions.
Our warehousing and distribution expenses consist primarily of storage fees and the cost of delivering our products to our customers’ premises (central retailer warehouses, individual stores, homes, offices or other locations, as the case may be). The distribution of our products often involves freight costs and requires logistical planning and execution. In some countries, we also deliver our products directly to our customers’ homes. In these cases, we bear high distribution expenses for a small volume of deliveries. In certain cases, we are able to pass some of the delivery costs on to customers.
Our advertising and promotional expenses consist primarily of digital and traditional media advertising costs, trade and consumer marketing expenses and public relations expenses. We intend to continue investing in increasing our sales of sparkling water makers and consumables.
Our general and administrative expenses consist primarily of wages, salaries and other employee benefits for our managerial and administrative personnel, share-based payment expenses, rental fees and building maintenance, communications and support costs, as well as legal, professional advisors and audit and review costs.
Financial expenses (income)
Financial expenses or income, net, consist primarily of expenses relating to: (i) borrowing costs which are not capitalized, (ii) interest expense on loans and borrowings less interest income on deposits, (iii) foreign currency exchange expenses or income, (iv) gains or losses on derivative financial instruments and (v) gains or losses on financial investments.
The regular corporate tax rate in Israel in 2015 and 2016 was 26.5% and 25%, respectively. The corporate tax rate in Israel for 2017 was 24% and is to be reduced to 23% in 2018 and thereafter.
Non-Israeli subsidiaries are taxed according to the tax laws in their respective countries of organization. Certain non-Israeli subsidiaries benefit from tax incentives, such as reduced tax rates of approximately 10%.
Under the Investment Law and other Israeli legislation, we may be entitled to certain tax benefits, including reduced tax rates, accelerated depreciation and amortization rates for tax purposes on certain assets and amortization of other intangible property rights for tax purposes. For example, one of our Israeli subsidiary benefits from reduced tax rates of 7.5%. For more information about certain of the tax benefits available to us under Israeli law, see “Item 10.E. — Taxation — Israeli tax considerations and government programs.”
In addition, we have entered into transfer pricing arrangements that establish transfer prices for our inter-company operations. However, our transfer pricing procedures are not binding on the applicable taxing authorities. No official authority in any country has made a binding determination as to whether or not we are operating in compliance with its transfer pricing laws and regulations. Taxing authorities in any of the countries in which we operate could challenge our transfer prices and require us to adjust them to reallocate our income.
Because we operate in a number of countries, our income is subject to taxation in different jurisdictions with a range of tax rates. Therefore, our consolidated income tax position is subject to the distribution of our income before tax in the different jurisdictions in which we operate.
We estimate our effective tax rate for the coming years based on our planned future financial results in existing and new markets and the key factors for setting our tax liability, in particular, our transfer pricing policy and tax loss carry forwards. Accordingly, we estimate that our effective tax rate will range between 10% and 20% of our income before income tax. There can be no certainty that our plans will be realized and that our assumptions with regard to the key elements affecting tax rates will be accepted by the tax authorities. Therefore, our actual effective tax rate might be higher than our estimate.
Over the course of our business operations, we have accumulated tax loss carry forwards amounting to approximately $13.6 million as of December 31, 2017.
During the year ended December 31, 2017, we granted options to purchase 149,000 ordinary shares under our equity incentive plan and 153,254 restricted share units. The total amount of share-based compensation expense derived from the options and restricted share units granted in the year ended December 31, 2017, was $3.8 million. The remaining expense will be recognized over the vesting period. For certain arrangements with our chief executive officer, see “Item 6.B. — Compensation — Compensation of officers and directors — Certain arrangements with Daniel Birnbaum.”
We review our performance in distinct operating segments representing geographical regions. Each region has similar characteristics relevant to our business and usually includes several markets in which we sell our products.
The sales of our products in each market are managed either by wholly-owned subsidiaries or by external third party distributors. The reported performances of these markets are provided periodically and consolidated for presentation to our board of directors, which acts as our Chief Operating Decision Maker. The data received by the Chief Operating Decision Maker consists of revenues from external customers and segment results by market, which include items directly attributable to each market as well as those that can be allocated on a reasonable basis.
We have identified four reportable operating segments, each of which represents a geographical area with similar characteristics. The products sold in all of the segments are similar and generally produced at the same production sites. The identified segments are:
The Americas consists of the United States, Canada and other markets in North America, Central America and South America, which are significantly influenced by the consumption culture of the United States.
Western Europe consists of our markets in Western and Northern Europe, which are characterized by high standards of living and high price levels.
Asia-Pacific consists of our markets in Australia and Japan, together with other markets such as New Zealand and South Korea, which constitute one unit for the purpose of operations management due to their relative proximity to each other and distance from our main operational units.
Central and Eastern Europe, Middle East and Africa (CEMEA) consists of our markets in Central and Eastern Europe, Israel and South Africa. Most of these markets tend to be characterized by a lower price level in comparison to the other geographic markets in which we operate.
The following table presents our revenues by segment for the periods presented, as well as segment results from each segment. Segment results are calculated as follows: (i) for markets in which marketing is performed by third-party distributors, segment results represent revenues from external customers, less direct cost of revenues and less participation in advertising expenses for that market; and (ii) for markets in which marketing is performed by us, segment results represent revenues from external customers, less direct cost of revenues and less other operating expenses (general and administrative and sales and marketing expenses).
Year ended December 31, 2015
Year ended December 31, 2016
Year ended December 31, 2017
The following table presents the segments’ revenues, as a percentage of total reportable segments revenues:
One of our customers in the Americas accounted for 5.8%, 6.6% and 7.4% of our total revenues in 2017, 2016 and 2015, respectively.