|Item 1.Identity of Directors, Senior Management and Advisers|
|Item 2.Offer Statistics and Expected Timetable|
|Item 3.Key Information|
|Item 4.Information on The Company|
|Item 4A.Unresolved Staff Comments|
|Item 5.Operating and Financial Review and Prospects|
|Item 6.Directors, Senior Management and Employees|
|Item 7.Major Shareholders and Related Party Transactions|
|Item 8.Financial Information|
|Item 9.The Offer and Listing|
|Item 10.Additional Information|
|Item 11.Quantitative and Qualitative Disclosures About Market Risk|
|Item 12.Description of Securities Other Than Equity Securities|
|Item 13.Defaults, Dividend Arrearages and Delinquencies|
|Item 14.Material Modifications To The Rights of Security Holders and Use of Proceeds|
|Item 15.Controls and Procedures|
|Item 16A.Audit Committee Financial Expert|
|Item 16B.Code of Ethics|
|Item 16C.Principal Accountant Fees and Services|
|Item 16D.Exemptions From The Listing Standards for Audit Committees|
|Item 16E.Purchases of Equity Securities By The Issuer and Affiliated Purchasers|
|Item 16F.Change in Registrant's Certifying Accountant|
|Item 16G.Corporate Governance|
|Item 17.Financial Statements|
|Item 18.Financial Statements|
|Note 1 - General|
|Note 2 - Basis of Preparation|
|Note 3 - Significant Accounting Policies|
|Note 4 - Determination of Fair Values|
|Note 5 - Financial Risk Management|
|Note 6 - Operating Segments|
|Note 7 - Acquisition of Subsidiaries|
|Note 8 - Property, Plant and Equipment|
|Note 9 - Intangible Assets|
|Note 10 - Inventories|
|Note 11 - Other Receivables|
|Note 12 - Cash and Cash Equivalents and Bank Deposits|
|Note 13 - Capital and Reserves|
|Note 14 - Loans and Borrowings|
|Note 15 - Employee Benefits|
|Note 16 - Provisions|
|Note 17 - Other Current Liabilities|
|Note 18 - Other Income, Net|
|Note 19 - General and Administrative Expenses|
|Note 20 - Sales and Marketing Expenses|
|Note 21 - Financial Expenses (Income), Net|
|Note 22 - Income Tax|
|Note 23 - Operational Leases|
|Note 24 - Financial Instruments|
|Note 25 - Contingencies|
|Note 26 - Net Income per Share|
|Note 27 - Share-Based Payments|
|Note 28 - Related Parties|
|Note 29 - Group Entities|
|Balance Sheet||Income Statement||Cash Flow|
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|o||REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934|
|x||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended December 31, 2012
|o||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the transition period from _______ to _______
|o||SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
Date of event requiring this shell company report………………………
Commission file number 001-34929
SODASTREAM INTERNATIONAL LTD.
(Exact name of Registrant as specified in its charter)
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)
Airport City70100, Israel
(Address of principal executive offices)
Chief Executive Officer
SodaStream International Ltd.
Airport City 70100, Israel
Telephone: +972 (3) 976-2301
Facsimile: +972 (3) 973-6673
(Name, telephone, e-mail and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
|Title of each class||Name of each exchange on which registered|
|Ordinary Shares, par value NIS 0.645 per share||The Nasdaq Global Select Market|
Securities registered or to be registered pursuant to Section 12(g) of the Act: None.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: As of December 31, 2012, the registrant had outstanding 20,611,208 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 x No o
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 o No x
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 x No o
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 o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, or a non-accelerated filer. See the definitions of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
|Large accelerated filer x||Accelerated filer o||Non-accelerated filer o|
Indicate by check mark which basis for accounting the registrant has used to prepare the financing statements included in this filing:
|U.S. GAAP o||International Financial Reporting Standards as issued by the |
International Accounting Standards Board x
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. o Item 17 o 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 o No x
TABLE OF CONTENTS
|Special Note Regarding Forward-Looking Statements||1|
|Item 1. Identity of Directors, Senior Management and Advisers||1|
|Item 2. Offer Statistics and Expected Timetable||1|
|Item 3. Key Information||2|
|Item 4. Information on the Company||15|
|Item 4A. Unresolved Staff Comments||23|
|Item 5. Operating and Financial Review and Prospects||23|
|Item 6. Directors, Senior Management and Employees||37|
|Item 7. Major Shareholders and Related Party Transactions||49|
|Item 8. Financial Information||52|
|Item 9. The Offer and Listing||53|
|Item 10. Additional Information||54|
|Item 11. Quantitative and Qualitative Disclosures About Market Risk||63|
|Item 12. Description of Securities Other than Equity Securities||64|
|Item 13. Defaults, Dividend Arrearages and Delinquencies||64|
|Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds||64|
|Item 15. Controls and Procedures||64|
|Item 16. [Reserved]||65|
|Item 16A. Audit Committee Financial Expert||65|
|Item 16B. Code of Ethics||65|
|Item 16C. Principal Accountant Fees and Services||65|
|Item 16D. Exemptions from the Listing Standards for Audit Committees||66|
|Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers||66|
|Item 16F. Change in Registrant’s Certifying Accountant||66|
|Item 16G. Corporate Governance||66|
|Item 17. Financial Statements||66|
|Item 18. Financial Statements||66|
|Item 19. Exhibits||66|
|Index to Consolidated Financial Statements||F-1|
In this annual report, the terms “SodaStream,” “we,” “us,” “our” 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 European Union; references to “U.S. Dollars,” “$” or “dollars” are to U.S. dollars; and references to “NIS” are to New Israeli Shekels.
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. Fizz ChipTM is one of our 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 (“Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (“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 can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “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:
|•||our continued expansion into the United States;|
|•||our plans to increase our installed base in our markets and generate ongoing demand for consumables;|
|•||our intent to use certain marketing techniques for expansion into new markets;|
|•||the estimated cost of constructing, and the timing of completion of, an additional manufacturing facility;|
|•||our intention to increase the number of stores in each region where we sell our products;|
|•||our belief that the sale of soda makers will increase the sale of consumables;|
|•||future product developments and our plans for the SodaStream Inside program, including our plans to license our proprietary carbonating technology to third parties;|
|•||our intent to enter new markets in collaboration with distributors;|
|•||our ability to continue to lower production costs and increase gross margins; and|
|•||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.|
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 we have included in this annual report are based on information available to us on the date of this annual report. 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 (“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, 2012 and the consolidated balance sheet data as of December 31, 2011 and December 31, 2012 are derived from our audited consolidated financial statements appearing elsewhere in this annual report. The consolidated statements of operations data for the years ended December 31, 2008 and 2009 and the consolidated balance sheet data as of December 31, 2008, 2009 and 2010 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 information that is not derived from our financial statements.
Beginning with the period commencing on January 1, 2012, we changed our reporting currency to the U.S. Dollar. Previously, we had presented our annual and quarterly consolidated balance sheets and related consolidated statements of operations and cash flows in Euros. The change in reporting currency is to better reflect the importance of the U.S. market to our current and future business plans. The comparative periods were translated (restated) into the new reporting currency using the exchange rate as of January 1, 2012 of €1.00 = $1.2973.
|(in thousands, except share||Year Ended December 31,|
|and per share amounts)||2008||2009||2010||2011||2012|
|Consolidated statements of operations data:|
|Cost of revenues||58,655||60,445||96,077||131,405||200,491|
|Sales and marketing||41,752||45,006||74,020||99,170||153,009|
|General and administrative||16,443||17,039||24,047||29,829||37,767|
|Other income, net||(25||)||(123||)||(257||)||(158||)||(484||)|
|Total operating expenses||58,170||61,922||97,810||128,841||190,292|
|Interest expense (income), net||3,557||2,623||1,903||(1,526||)||169|
|Other financial expenses (income), net||2,146||(322||)||(2,291||)||(625||)||767|
|Total financial expenses (income), net||5,703||2,301||(388||)||(2,151||)||936|
|Income before income tax||7,136||11,578||14,915||30,858||44,597|
|Net income per ordinary share:|
|Shares used in computing net income per ordinary share:|
|Year Ended December 31,|
|Other financial and operating data (unaudited):|
|Total number of soda makers sold||877||1,057||1,922||2,710||3,499|
|Total number of CO2 refills sold (1)||7,700||8,506||10,299||13,292||16,543|
|Adjusted EBITDA (3)||$||14,276||$||17,139||$||24,384||$||40,671||$||61,079|
|Adjusted net income (3)||$||1,583||$||9,973||$||16,893||$||32,874||$||50,049|
|Cash dividends declared||$||-||$||-||$||-||$||-||$||-|
|As of December 31,|
|Consolidated balance sheet data:|
|Cash and cash equivalents||$||5,642||$||5,429||$||68,627||$||34,769||$||62,068|
|Working capital (4)||9,619||6,598||35,241||78,278||95,137|
|Loans and borrowings (including short-term obligations)||23,778||16,546||8,761||4,006||-|
|Total shareholders’ equity||12,078||21,608||140,267||218,982||274,490|
|(1)||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.|
|(2)||EBITDA is a non-IFRS measure and is defined as earnings before interest expense, 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 interest expenses, net), tax positions (such as the impact on periods or companies of changes in effective tax rates) and the age and book depreciation and amortization of fixed and intangible assets, respectively (affecting relative depreciation and amortization expense, respectively).|
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.
|(3)||Adjusted EBITDA is a non-IFRS measure and is defined as earnings before interest, income tax, depreciation and amortization, and further eliminates the effect of non-cash share-based compensation expense (the “Share-Based Compensation”) and a discontinued management fee expense paid to Fortissimo Capital Fund GP, L.P. in 2008, 2009 and 2010 (the “Fortissimo Payments”). Adjusted net income is a non-IFRS measure and is defined as net income calculated in accordance with IFRS as adjusted for the impact of Share-Based Compensation and for the impact of the Fortissimo Payments. We use Adjusted net income and Adjusted EBITDA as measures of operating performance because they assist us in comparing performance on a consistent basis, as they remove from our operating results the impact of one-time costs associated with non-recurring events and non-cash items such as Share-Based Compensation, which can vary depending upon accounting methods. We believe that 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 interest expense, net), tax positions (such as the impact on periods or companies of changes in effective tax rates) and the age and book depreciation and amortization of fixed and intangible assets, respectively (affecting relative depreciation and amortization expense, respectively) and that 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.|
|(4)||Working capital is defined as (i) total current assets, excluding cash and cash equivalents, minus (ii) total current liabilities, excluding loans and borrowings and shareholders’ loans.|
|Year Ended December 31,|
|Reconciliation of net income to EBITDA and to adjusted EBITDA:|
|Interest expense (income), net||3,557||2,623||1,903||(1,526||)||169|
|Income tax expense||6,448||2,326||2,295||3,373||737|
|Depreciation and amortization||2,563||2,129||3,293||5,950||10,124|
|Year Ended December 31,|
|Reconciliation of net income to adjusted net income:|
|Income tax effect of the foregoing||(125||)||(88||)||-||-||-|
|Adjusted net income||$||1,583||$||9,973||$||16,893||$||32,874||$||50,049|
|B.||Capitalization and Indebtedness|
|C.||Reasons for the Offer and Use of Proceeds|
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 (“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, primarily the United States, and our failure to do so would have a material adverse effect on our future growth and prospects.
A key element of our strategy is to grow our business by expanding sales of our soda makers, CO2 refills and other related consumables in certain existing markets that we believe have high growth potential and in select new markets. In particular, we are focusing our growth efforts on the United States, the world’s largest market for carbonated beverages and our most important potential growth market. Our success depends, in large part, upon long-term consumer acceptance and adoption of our products. Consumer tastes and preferences differ in the markets into which we are expanding as compared to those in which we already sell a significant amount of products. We will face several challenges in achieving consumer acceptance and adoption of our home beverage carbonation systems in those markets, including consumers’ desire to carbonate beverages at home rather than purchasing carbonated beverages and consumers’ willingness to exchange empty CO2 cylinders for filled CO2 cylinders. There can be no assurance that we will meet any of these challenges in our existing markets or new markets we are targeting, and the failure to do so would adversely affect our growth in a particular market and may adversely affect our strategy, future growth 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 future growth and prospects.
Our products are ultimately sold to consumers and, therefore, our future growth depends in large part on our ability to create awareness of our products and our brand. To create and maintain this awareness, we engage in extensive advertising and promotional campaigns in certain key markets that we believe have significant growth potential. Our future growth and profitability 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 system and brand;|
|•||determine the appropriate creative message and media mix for future expenditures;|
|•||create and tailor specific advertisements and promotion campaigns for each country in which we distribute; and|
|•||effectively manage advertising costs, including creative and media costs, to maintain acceptable costs per sale and operating margins.|
We have significantly expanded our U.S. retail presence over the last year; however, we believe that our ability to drive sales of our products depends on raising awareness of our brand. The United States differs from most European markets because of the higher propensity in the United States to consume carbonated beverages other than sparkling water. This is requiring us to market our products differently than we have in our key European markets. We allocate a significant portion of our annual media spend on marketing campaigns targeted at the United States. These campaigns will require significant financial resources and may require additional funds depending on the results they generate.
There can be no assurance that our marketing campaigns will result in increased revenues or increased product or brand awareness, 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 and results of operations.
Our ability to grow our business successfully depends on whether we can develop and implement a production and operating infrastructure that can 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 develop and implement a production and operating infrastructure including, among other things, infrastructure and logistics for our products’ distribution and supply chain, quality assurance controls, product development and 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 or otherwise. The development and implementation of our infrastructure will require significant additional investment as our business grows and becomes increasingly complex in these markets. Our future results will depend on management’s ability to successfully implement these initiatives on a larger scale, particularly in the United States. Failure to do so could negatively impact our efforts to increase our sales in these markets and have a material adverse effect on our future growth 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 plans. We believe that the capacity of our current manufacturing facilities and subcontractors is sufficient to meet anticipated demand for our products through 2014. The lease of one of our major manufacturing facilities will expire during 2015, and there is a risk we will not be able to renew the lease agreement or that the renewal will be on less favorable terms. We currently anticipate needing additional manufacturing capacity in the future. We intend to add additional manufacturing capacity by completing the construction of an additional manufacturing facility in southern Israel.
Pending the construction of such an additional manufacturing facility, we are investing in the expansion of our manufacturing capabilities through other means, primarily by increasing the manufacturing capacity at our existing facilities and the use of subcontractors for certain products and components. In addition, we have purchased a facility in Alon Tavor in Israel where we have the following manufacturing functions: plastic injection, painting, carbonation parts assembly, printing and assembly.
We may not be successful in continuing to develop or maintain our presence in retail networks for the sale of our home beverage carbonation systems 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 future growth and prospects.
Our growth in both existing markets 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 are sold. Our ability to successfully expand in our target markets depends, in large part, on whether we are able to establish relationships with strong retailers in those markets for the sale of our home beverage carbonation systems and the exchange of our empty CO2 cylinders. There can be no assurance that we will be successful in continuing to establish or maintain relationships with large retailers in the markets we are targeting for growth, or that if successful, we will do so in a time frame consistent with our projections or 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 and may adversely affect our future growth and prospects.
We generally rely on distributors of our home beverage carbonation systems and consumables for a significant portion of our revenues in a number of our most profitable markets.
We distribute our home beverage carbonation systems and consumables through exclusive relationships with third-party distributors in 24 countries, representing 25% of our revenues in 2012. Our distributors operate in a number of our more mature markets and, in particular, one country in Western Europe that accounts for a little over 10% of our revenue contributes a significantly higher proportion of our operating income. Our distribution agreements are generally exclusive agreements for a given territory with a five-year term and option to extend; however, our contracts contain performance criteria to maintain exclusivity. If any distributor fails to meet its distribution targets, we may attempt to terminate our distribution agreement with that distributor. We may not be successful in terminating our distribution agreements with our distributors and even if we are successful, we may have to pay statutory compensation to such distributors or fines, and we may experience a delay in retaining new distributors. Because we rely on third-party distributors, we have less control than when we distribute directly and can be adversely impacted by the actions of our distributors. Furthermore, our distributors also undertake to manage the reverse logistics needed for customers to return empty CO2 cylinders and exchange them for filled CO2 cylinders. In the event that any of our distributors does not successfully manage reverse logistics, it will make it more difficult for our customers to obtain replacement CO2 cylinders, which will 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, which would in turn, materially and adversely affect our business and results of operations.
We may face competition from sales of consumables and, in particular, CO2 cylinders, which could adversely impact our revenues and profitability.
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, whether sold with the system or as a separate component, and protect our ownership through contractual means. 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 we retain title to the cylinders and that their use of the cylinders is under license. Nevertheless, these contractual arrangements have not always been effective, and in a number of locations, suppliers of CO2 seek, or have sought in the past, to refill our exchangeable CO2 cylinders or other exchangeable CO2 cylinders marketed as compatible with our systems. In addition to creating safety and public health risks, such sales of consumables by competitors may result in lost sales opportunities for us, decrease our market share and could cause negative publicity if these products cause damage when used with our products.
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 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 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. For example, 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 on unauthorized third parties 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 and results of operations.
On November 16, 2009, Vikingsoda AB filed a complaint with the Swedish Competition Authority, or the SCA, alleging that two of our subsidiaries, together with our then Swedish distributor, Empire AB, were guilty of abuse of dominant position (we have since acquired the distribution business of our products in the Nordic countries from Empire AB. In December 2009, the SCA asked one of our subsidiaries and Empire AB to respond to such allegations. On March 5, 2012, the SCA provided us with notice that it has decided to terminate, with no further action, its investigation with respect to potential abuse of our dominant position in the Swedish market.
Such sales of consumables by competitors could cause negative publicity if these products cause damage when used with our products and may adversely impact our revenues and profitability.
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 manufacturers of one or more of the other components of our home beverage carbonation systems, besides CO2 cylinders, including the soda makers, carbonation bottles and flavors. We anticipate that our success may attract additional competition, both from other manufacturers of home beverage carbonation systems and consumables and the manufacturers of carbonated beverages. 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 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 and results of operations.
We also face competition from manufacturers who sell counterfeit reproductions of our soda makers. Although we monitor and attempt to take action against such manufacturers where possible, there can be no assurance that we will be successful in deterring competitors from manufacturing and selling counterfeit reproductions of our products. These actions may result in lost sales opportunities and harm to our 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 companies that sell sparkling water and carbonated soft drinks. A number of these competitors are substantially larger than we are and have significantly greater financial, sales and marketing, manufacturing and other resources than are available to us, as well as established brands and greater brand awareness. These competitors may use their resources and scale to respond more rapidly than us to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities.
If any component of our home beverage carbonation systems is misused, the system may fail and cause personal injury or property damage. We may be subject to product liability claims as a result of any such failure, which will likely increase our costs and adversely affect our business and reputation.
Although we include explicit instructions for the operation of our home beverage carbonation systems and have placed safety warnings on all of 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 bottle to crack during the carbonation process;|
|•||carbonating substances other than water with our soda maker, which could cause the soda maker to fail and possibly cause damage to the other components of our home beverage carbonation system; and|
|•||subjecting our exchangeable CO2 cylinders to pressure beyond their measured stress resistance, which could cause the cylinder to burst.|
The 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 system, including by using third-party consumables with our system, could lead to failure or malfunction of the system 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, including the tap water used in the soda maker.
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 and adversely impact our reputation, financial condition or results of operations.
Our product liability insurance for personal injury and damage to property may not be sufficient or available to cover any successful product liability claim, or similar claims, against us, which could materially adversely impact our financial condition. Whether or not a claim against us would be successful, defense of a claim may be costly and the existence of any claim may adversely impact our reputation, financial condition or results of operations.
We may be unable to maintain our customers in markets where we have an established presence due to changes in consumer preferences, perceptions and spending habits.
Our long-term revenue growth and profitability depend upon our ability to implement our business model of selling soda makers to new consumers and our consumables, particularly our CO2 refills and flavors, to consumers who already own our soda makers. Since we derive our highest profit margins from our consumables, the continued use of our systems by, and the repeat sales of our consumables to, consumers who have already purchased our home beverage carbonation systems is important to our business. In markets where we have an established presence, we face the challenge of maintaining customers due to changes in consumer preferences, perceptions and spending habits, 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 navigate quickly and respond accordingly to such changes, including through creative initiatives, such as new product offerings and special promotions. Our failure to respond effectively to changes in consumer behavior could result in a reduction in the number of our customers, which would have a material adverse effect on our business and results of operations.
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 and results of operations.
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, the successful independent development by third parties of the same or similar confidential or proprietary innovations or changes in the supply or distribution chains that render our rights obsolete. 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 include the ability to obtain, protect and enforce patents and trade secrets and other know how relating to our technology. Our current patent portfolio is limited and certain patents of ours that cover aspects of our products have expired. Although we hold additional utility patents and design registrations and patents as well as have outstanding 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. or foreign applications 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 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 our confidential information. Agreements with certain of our employees also typically contain provisions restricting employment with our competitors for a certain period 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 and trade secrets could be disclosed to third parties, or third parties could independently develop the same or similar information or technology, which could cause us to lose any competitive advantage resulting from such know-how or trade secrets.
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 third-party uses of our trademarks and designs, and there may be other third parties using trademarks or names similar to ours of whom 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, Brazil, Russia and others, in which legal protection of intellectual property rights is less robust than in the 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 machines 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, we could experience a material adverse effect on our business, brand, financial condition and results of operations. 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 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 rights infringe, or may infringe, their proprietary rights.
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 rights 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 management, cause significant delays and materially disrupt the conduct of our business. As a consequence of such claims, we could be required to pay a damage award, develop non-infringing products, enter into royalty-bearing licensing agreements, stop selling our products or re-brand our products. Litigation is inherently uncertain and any adverse decision could result in a loss of our proprietary rights, subject us to liabilities, require us to seek licenses from others, which may not be available on reasonable terms, if at all, and otherwise negatively affect 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, our business, financial condition and results of operations could be materially adversely affected.
If our distributors or retailers return a large number of empty exchangeable CO2 cylinders without exchanging them for full ones, we would incur costs with no corresponding revenue.
We retain the ownership of the exchangeable CO2 cylinders included in our home beverage carbonation systems and in most cases, collect a deposit for each exchangeable CO2 cylinder from the distributors and retailers who receive them. The amount of the deposit varies from country to country and also changes over time as market conditions vary in a particular country. In addition, in some countries, including certain major markets in Northern and Western Europe, consumers have paid an advance rental fee when they received their first exchangeable CO2 cylinder. A portion of this fee 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 fee or the deposit, which could have a material adverse effect on our financial condition and profitability.
We are subject to fluctuations in currency exchange rates and may not have adequately hedged against them.
Fluctuations of the Euro and the NIS against the U.S. Dollar are the most significant currency exchange rate fluctuations that we are exposed to because our sales are primarily denominated in the U.S. Dollar and the Euro. Significant material purchasing and production costs and operational expenses are denominated in the U.S. Dollar, Euro and NIS. Although we currently engage in hedging transactions to minimize our currency risk, future currency exchange rate fluctuations that we have not adequately hedged could adversely affect our profitability. 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.
Our business experiences seasonal fluctuations because demand for soft drinks is highest in the summer months, while in colder months, consumers tend to drink fewer carbonated beverages. As a result, we ordinarily experience a decline in sales of all of our products during the winter months, other than in December, when we experience an increase in sales as a result of the holidays. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. The impact on sales volume and operating results due to the timing and extent of these factors can significantly impact our business. For these reasons, 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 than anticipated tax liabilities.
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 there is a risk that 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 we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates.
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.
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. In particular, the tax authorities in the United States, our most important potential growth market, have increased their focus on transfer pricing procedures generally, which could result in a greater likelihood of a challenge to our transfer prices and the risk that we will be required to adjust them and reallocate our income, which could result in a higher effective tax rate than that to which we are currently subject. Any change to the allocation of our income as a result of review by taxing authorities could have a negative effect on our profitability.
In addition, the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment and there are many transactions and calculations where the ultimate tax determination is uncertain. 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 results in the period or periods for which such determination is made. We have created reserves with respect to such 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.
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 we must comply with are those governing the manufacturing and transportation of our exchangeable CO2 cylinders. In the United States, our most important target market, 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 comply 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 potential criminal sanctions, which could have a material adverse effect on our business, 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. Our inability to plan and develop effective procedures to address these laws and regulations, and the need to comply with new or revised laws or regulations, or new interpretations or enforcement of existing laws and regulations, may affect our ability to reach our manufacturing and distribution targets, having an overall material adverse effect on our sales and profitability.
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, various governmental authorities in the United States have considered enacting a tax on sugar-sweetened beverages, including carbonated soft drinks. If such a tax were enacted and if it were to apply to our flavors, the sales and consumption of our non-diet flavors might decrease and thereby have a material adverse impact on our sales and profitability.
An increase in the cost or shortage of supply of the raw materials for our products could have a material adverse effect on our business and results of operations.
We use certain raw materials to produce our soda makers, exchangeable CO2 cylinders and consumables. The most important of these materials are aluminum, brass, CO2, certain plastics and sugar. 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 widely due to movements in currency exchange rates, government policies and regulations, crop failures or shortages, weather conditions or other unforeseen circumstances. To the extent that any of the foregoing or other unknown 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 and results of operations could be materially and 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 we are unable to retain alternative sources of supply, or cannot 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.
A majority of our products are currently produced at a few locations in Israel and in a disputed territory sometimes referred to as the "West Bank," and a portion of our manufacturing takes place in China, all of which could experience business interruptions, which could result in our inability to produce certain of our products for some period of time, which would have a material adverse effect on our business and results of operations.
We currently produce the majority of our products, including certain key components, at a few manufacturing facilities in Israel, including one in a disputed territory. A natural disaster or other unanticipated catastrophic events, including power interruptions, water shortages, storms, fires, earthquakes, terrorist attacks and wars, could significantly impair our ability to manufacture our products at our facilities and operate our business. A facility and certain equipment located in a facility would be difficult to replace and could require substantial replacement lead-time. Catastrophic events could also destroy any inventory located in a facility. The occurrence of such an event could lead to a halt in production, which would materially and adversely affect our business and results of operations. We manufacture some of the components of our home beverage carbonation systems through third parties in China. Any disruption in production or inability of our manufacturers in China to produce adequate quantities to meet our needs, whether as a result of a natural disaster or other causes, could impair our ability to operate our business on a day-to-day basis and to meet the growing demand for our products. Furthermore, since these manufacturers are located in China, we are exposed to the possibility of product supply disruption and increased costs in the event of changes in the policies of the Chinese government, political unrest or unstable economic conditions in China. Any of these matters could materially and adversely affect our business and results of operations.
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 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 reputation, financial condition or results of operations.
Higher energy costs and other factors affecting the cost of producing, transporting and distributing our products could adversely affect our financial results.
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 products. All of these costs may fluctuate due to a number of factors outside of our control, including government policy and regulation 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 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 and adversely affected.
Adverse conditions in the global economy could negatively impact our customers’ demand for our products.
Consumer purchases of discretionary items tend to decline during recessionary periods, when disposable income is lower, and 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, and bankruptcies, among other things. A prolonged economic downturn or recession in any of the countries in which we conduct significant business or in any of the markets we are targeting for expansion, including the United States, may cause significant readjustments in both the volume and mix of our product sales, which could materially and adversely affect our business and results of operations.
We depend on the expertise of key personnel. If these individuals leave without replacements, our operations could suffer.
Our Chief Executive Officer, Daniel Birnbaum, and certain other members of our senior management were retained in 2007 following our acquisition by Fortissimo Capital Fund GP, L.P. (“Fortissimo Capital”). Given their extensive knowledge of the home beverage carbonation industry and the limited number of direct competitors in that industry, we believe that it would be difficult to find replacements should any of them leave. Our inability to find suitable replacements for any of the members of our senior management team, particularly Mr. Birnbaum, would adversely impair our ability to implement our business strategy and could have a material adverse effect on our business and results of operations.
We may need to raise additional capital in the future and may be unable to do so on acceptable terms.
Based on current expectations, we believe that our cash on hand, cash flows from operations and available unutilized credit lines from financial institutions will be sufficient to finance our strategic plans, including the construction of our new manufacturing facility in southern Israel, our expansion in markets in which we currently sell our products and into certain new markets, for the foreseeable future. However, in the future, we may require additional capital in order to finance even further expansion or potential acquisitions. Our ability to satisfy our future capital needs, if any, will depend upon the costs of such financing and the availability of attractive terms for additional financing. 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 additional debt would result in increased debt service obligations resulting in further operating and financing covenants that might restrict our ability to pay dividends to our shareholders. If we were to issue equity to meet our financing needs, it would dilute the holdings of our existing shareholders. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
Compliance with new regulations regarding the use of conflict minerals may disrupt our operations and harm our operating results.
In August 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted new requirements for companies that use certain minerals and derivative metals (referred to as "conflict minerals" regardless of their actual country of origin) in their products. These metals, which include tantalum, tin, gold and tungsten, may be present in our products as component parts. These requirements will require us to investigate whether these metals are in our products, and if so, disclose whether or not the conflict minerals that are used in the products originated from the Democratic Republic of the Congo or adjoining countries. There will be costs associated with these investigation and disclosure requirements, in addition to the potential costs of remediation and other changes to products, processes or sources of supply as a consequence of such activities. In addition, the implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products. Also, we may face reputational challenges if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the procedures we may implement or if we are unable to replace any conflict minerals used in our products that are sourced from the Democratic Republic of the Congo or adjoining countries, as there may not be any acceptable alternative sources of the conflict minerals in question or alternative materials that have the properties we need for our products. We may also encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free. If we are not able to meet customer requirements, customers demand for our products may decline, and we may have to write off inventory in the event that it cannot be sold. These changes could also have an adverse impact on our ability to manufacture and market our products.
Risks Related to our Location in Israel
As one of our manufacturing facilities is located in disputed territory sometimes referred to as the "West Bank," rising political tensions and negative publicity may negatively impact demand for our products or require us to relocate additional manufacturing activities to other locations, either of which may adversely affect our business.
One of our manufacturing facilities is located in Mishor Adumim, an industrial zone under Israel's authority and whose governing responsibility is the subject of dispute between Israel and the Palestinian Authority. Mishor Adumim is currently under Israeli jurisdiction and authority according to the Oslo Accords signed with the Palestinian Authority. There has recently been negative publicity, primarily in Western Europe, against companies with facilities in these disputed territories. A number of political groups have called for consumer boycotts of Israeli products originating in these disputed territories, including our products. Though we manufacture our products in other locations in Israel (Alon Tavor, Ashkelon, Kiryat Shmona, etc.) and elsewhere in the world, and are currently building a new manufacturing site in southern Israel, this may not persuade such political groups sufficiently to end their call to boycott our products. In addition, the Palestinian Authority has adopted legislation that may prohibit or restrict Palestinians from working for Israeli companies with productions facilities located in disputed territories. Further, recently there have been voices in the European Union and other countries calling to mark the country of origin of products produced in the disputed territories as being produced in Israeli settlements. For these reasons, we may in the future be required to transfer additional manufacturing activities to a location outside of the disputed territories, which may divert the attention of management, require the expenditure of significant capital resources and, depending on whether such move would be outside of a priority manufacturing area under Israeli tax law, may limit certain tax benefits. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
We conduct operations in Israel and in a disputed territory sometimes referred to as the "West Bank," 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 a significant portion of our manufacturing facilities are located in Israel, and one of our manufacturing facilities is located in an industrial zone under Israel's authority and whose governing responsibility is the subject of dispute between Israel and the Palestinian Authority. 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. A state of hostility, varying in degree and intensity, has caused security and economic problems in Israel. Although Israel has entered into peace treaties with Egypt and Jordan, and various agreements with the Palestinian Authority, there has been a marked increase in violence, civil unrest and hostility, including armed clashes, between the State of Israel and the Palestinians, since September 2000. The establishment in 2006 of a government in the Gaza Strip by representatives of the Hamas militant group has created heightened unrest and uncertainty in the region. In mid-2006, Israel engaged in an armed conflict with Hezbollah, a Shiite Islamist militia group based in Lebanon, and in June 2007, there was an escalation in violence in the Gaza Strip. From December 2008 through January 2009 and again in November 2012, 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.
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 new 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. In addition, Iran has publicly threatened to attack Israel and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in the region, such as Hamas in Gaza and Hezbollah in Lebanon. This situation may potentially escalate in the future to violent events which may negatively affect Israel. Continued hostilities between Israel and its neighbors and any future armed conflict, terrorist activity or political instability 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.
In addition, several countries restrict doing business with Israel. The State of Israel and Israeli companies have been and are today subjected to economic boycotts. The interruption or curtailment of trade between Israel and its present trading partners 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.
Generally, all male adult citizens and permanent residents of Israel under the age of 42 (or older, for citizens who hold certain positions in the Israeli armed forces reserves) are, unless exempt, obligated to perform 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 officers and 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 executive officers or 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 that are available to us require us to continue to meet various conditions and may be terminated or reduced in the future, which could increase our costs and taxes.
One of our subsidiaries received investment grants and is eligible for tax benefits under the Israeli Law for the Encouragement of Capital Investments, 5719-1959 (the “Investment Law”), and the Israeli Law for the Encouragement of Industry (Taxes), 5729-1969. This subsidiary has been granted six separate encouragement of investment programs, of which one has been approved under the amendment to this law but it has not yet received tax benefits from this program. To remain eligible for these tax benefits, this subsidiary must continue to meet certain conditions stipulated in the Investment Law and its regulations, as amended, and the criteria set forth in the specific certificate of approval. If this subsidiary does not meet these requirements, the tax benefits would be canceled and it could be required to refund any tax benefits and investment grants that it received in the past. Further, in the future, these tax benefits may be reduced or discontinued.
In April 2005 and January 2011, substantial amendments to the Investment Law became effective under which the criteria for new investments qualified to receive tax benefits were revised and, in some cases, companies were given the choice whether or not to opt into the new benefit regimes or to remain subject to the previous benefit regimes. In the future, we may not be eligible to receive additional tax benefits under this law. The termination or reduction of these tax benefits would increase our tax liability, which would reduce our profits. Additionally, if we increase our activities outside of Israel through acquisitions, for example, our expanded activities might not be eligible for inclusion in future Israeli tax benefit programs. See “Item 10.E — Taxation — Israeli tax considerations and government programs — Law for the encouragement of capital investments, 5719-1959.”
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. None of our executive officers or directors is a resident 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.
Your rights and responsibilities as our shareholder are governed by Israeli law, which differs in some respects from the rights and responsibilities of shareholders of U.S. corporations.
Since we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by our articles of association and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in U.S.-based 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 of the company’s authorized share capital, a merger and approval of related party transactions that require shareholder approval. In addition, 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 the company has a duty of fairness towards the company. However, Israeli law does not define the substance of this duty of fairness. 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 may in the future elect to follow certain 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 Marketplace Rules of the Nasdaq Global Select Market (the “Nasdaq Marketplace 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, director nomination procedures and quorum requirements at shareholders’ meetings. In addition, we may elect to follow Israeli corporate governance practices instead of the Nasdaq requirements 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 domestic issuers. 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 our officers, directors, and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act.
Provisions of our articles of association and of Israeli law 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 a classified board of directors and 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. 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 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. See “Item 10.B — Memorandum and Articles of Association — Acquisitions under Israeli law.” These provisions of Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult for a third-party to acquire us, even if doing so would be beneficial to our shareholders, 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.
Our ordinary shares were first offered publicly in our initial public offering (“IPO”) in November 2010, at a price of $20.00 per share, and our ordinary shares have subsequently traded as high as $79.72 per share and as low as $23.15 and is currently trading at $49.64 per share as of March 31, 2013.
In the recent past, stocks generally have 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 revenue;|
|•||quarterly variations in our results of operations or in our competitors’ results of operations;|
|•||announcements or introductions of new products by us or competitors;|
|•||the recruitment or departure of key personnel;|
|•||changes in earnings’ estimates, investors’ perceptions or recommendations by securities analysts or our failure to achieve analysts’ earnings estimates;|
|•||developments in our industry;|
|•||sales of 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 and 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, our stock price and trading volume could decline.
The trading price for our ordinary shares is 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 currently 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 cease coverage of our company, we could lose visibility in the market for our ordinary shares, which in turn could cause our stock price 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. Instead, we plan to retain any earnings to maintain and expand our existing operations. In addition, our ability to pay dividends might be limited by the terms 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.
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 may use the market capitalization method for certain periods. 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, and the market price may affect the determination of whether we will be considered a passive foreign investment company, 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.”
|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 machine being invented in London in 1903. During the 1970s and 1980s, the SodaStream home carbonation beverage system gained substantial popularity in certain markets. In 1998, Soda Stream Ltd. was acquired by Soda Club Enterprises NV, which, at the time, was its Israeli distributor.
In March 2007, 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 NV 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, including being environmentally-friendly and wellness-promoting.
We are registered with the Israeli Registrar of Companies in Jerusalem. Our registration number is 51-395125-1. Our purpose as set forth in our articles of association is to engage in any legal business.
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 IPO.
Our principal executive offices are located at Gilboa Street, Airport City, Ben Gurion Airport 70100 Israel and our telephone number is +972-3-976-2301. Our authorized representative in the United States and agent for service of process in the United States, SodaStream USA, Inc., is located at One Mall Drive, Cherry Hill, New Jersey 08002. Our website address is www.sodastream.com. The information contained therein or connected thereto shall not be deemed to be incorporated into this annual report.
Principal Capital Expenditures
Our capital expenditures for fiscal years 2012, 2011 and 2010 amounted to $38.2, million, $ 22.2.million and $8.6 million, respectively. Capital expenditures are defined as investment in property, plant and equipment and in intangible assets. We anticipate our capital expenditures in fiscal year 2013 to be for the expansion of our production capacity and capabilities, including the construction of our new manufacturing facility in southern Israel; improvements to and expansion of our distribution and corporate facilities to support our growth; and investment and improvements in our information technology systems. We anticipate our capital expenditures in 2013 to be financed from the proceeds of our IPO in November 2010, our follow-on offering in April 2011, cash flow generated from current activities, utilization of existing unutilized credit lines and potentially from new credit lines.
SodaStream manufactures home beverage carbonation systems, which enable consumers to easily transform ordinary tap water instantly into carbonated soft drinks and sparkling water. We believe our soda makers offer a highly differentiated and innovative solution to consumers of bottled and canned carbonated soft drinks and sparkling water. Our products are environmentally friendly, cost-effective, promote health and wellness and are customizable and fun to use. In addition, our products offer convenience by eliminating the need to carry bottles home from the supermarket, to store bottles at home or to regularly dispose of empty bottles. Educating consumers of these benefits is a key element of our strategy to build awareness, particularly as we continue to expand into new markets. We believe that we are the world’s leading manufacturer of home beverage carbonation systems. Such belief is based on consumer surveys we commissioned that show SodaStream has the largest market share in each of a dozen of the largest markets in which we operate and the lack of a competing home beverage carbonation system in the significant majority of other markets around the world, including the United States. We continue to grow our installed base and estimate, based on consumer surveys and sales of CO2 refills, that there are currently approximately 6.0 million households who create a carbonated beverage using our system at least once every two weeks, whom we refer to as active consumers, with many of the largest carbonated soft drink and sparkling water markets still remaining virtually untapped.
We develop, manufacture and sell soda makers and exchangeable carbon-dioxide (CO2) cylinders, as well as consumables, consisting of CO2 refills, reusable carbonation bottles and flavors to add to the carbonated water. We currently sell our products through more than 60,000 retail stores in 45 countries, including 30 countries that we have entered since the beginning of 2007. In 2012, we added more than 10,000 new stores of which more than 5,000 stores were added in the United States for a total of approximately 15,000 stores in the United States. We distribute our products directly in 21 countries and indirectly through local distributors in our remaining 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, first in specialty retail and direct marketing channels and then in larger food, drug and mass retailers.
From 2010 through 2012, our revenues grew at a compound annual growth rate of 44.7% from $208.4 million to $436.3 million. We had net income of $12.6 million, $27.5 million and $43.9 million in 2010, 2011 and 2012, respectively. Similarly, from 2010 through 2012, our revenues from soda makers and exchangeable CO2 cylinders grew from $87.2 million to $185.9 million, while our revenues from sales of consumables grew from $113.4 million to $241.9 million. Our sales in the United States have increased from $4.4 million in 2007 to $143.0 million in 2012. Between 2007 and 2012, we further penetrated key existing markets, including Australia, the United Kingdom, France and Italy, where we previously had minimal presence.
Our products address several long-term trends in global consumer behavior, including the rapidly growing popularity of environmentally-friendly (or “green”) products. In the United States, consumers have adopted more environmentally conscious behavior in recent years.
In addition to this environmental trend, we believe that several other important consumer trends influence demand for our products. Consumers continue to increasingly prioritize health and wellness, including by favoring more natural and fresh food and beverage products. Consumers are also exhibiting an increased focus on value, including by increasingly favoring private label products, “do it yourself” alternatives and eating more at home instead of at restaurants.
Consumers initially purchase a “starter kit,” consisting of a soda maker, one or two carbonation bottles together with hermetically-sealing bottle caps and, in some markets, samples of a variety of flavors. The starter kit also includes an exchangeable CO2 cylinder which is provided under license and can produce between 30 and 130 liters of carbonated beverages, depending on the size. Such systems are typically sold in the United States at prices ranging from $79.95 for a basic plastic model that uses a plastic carbonation bottle, to $199.95 for the higher-end Penguin model that has stainless steel components and utilizes glass carbonation bottles.
Soda makers. We currently offer a broad range of soda makers. Our soda makers are free-standing, lightweight and compact, and have a stylish design. They are made of stainless steel and/or plastic. Except for one of our newest models, the "Revolution," our soda makers do not require electricity. The CO2 cylinder fits easily in a rear compartment and by the push of a button carbonates water. Our soda makers are sold in a variety of styles and 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 steel cylinder containing compressed liquid CO2. The cylinder is inserted by the consumer into the soda maker. Certain models of soda makers can accommodate different size cylinders, while others fit only the “standard” 60-liter cylinder. The actual amount of beverage produced per cylinder varies based on the CO2 content, the type of soda maker used and user preference (the amount of carbonation released during each carbonation). We only use beverage-grade CO2 in our cylinders, the same as that used by the world’s major soft drink companies. We recently introduced natural sourced CO2 (derived from natural underground sources) in certain markets, in addition to CO2 extracted from the atmosphere.
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 pay only the price of 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 (including third-party facilities) in Australia, Germany, Israel, the Netherlands, New Zealand, South Africa, Sweden and the United States. We periodically evaluate opening additional refilling stations in our existing markets based on demand for CO2 refills and other factors. Consumers in the United States typically pay either $14.99 for a 60-liter CO2 refill or $29.99 for a 130-liter CO2 refill.
Carbonation bottles. Our home beverage carbonation system produces 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 system. The glass bottle, as well as some versions of the plastic bottle, are dishwasher-safe. For the high-end market, we offer two soda 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 three years. Consumers often purchase additional carbonation bottles to allow for several bottles of carbonated soft drinks or sparkling water to be available at the same time. Consumers in the United States typically pay $19.99 for two additional plastic one liter carbonation bottles and $14.99 for two additional plastic half liter carbonation bottles or for one additional glass carbonation bottle.
Flavors. We work closely with a leading international flavor and essence manufacturer who provides research and product development services, including sensory testing in order to constantly broaden and adapt the range of flavors to consumer tastes. Flavors come in a highly concentrated form, customized for our home beverage carbonation system. Flavors are usually sold in 500 ml or 750 ml bottles, which typically produce 12 or 18 liters of carbonated soft drinks. In 2012, we launched the SodaCaps that are single-serve disposable capsules that add a pre-measured amount of flavor to SodaStream carbonating bottles, resulting in a consistently flavored beverage each time and offering the consumer a new improved user experience. Our current product range consists of more than 100 flavors, including a large variety of fruit flavors. We also offer flavors that are designed to appeal to consumers of a range of leading carbonated soft drink brands, as well as “enhanced” flavors, including fruit, energy, isotonic and natural blends. Most flavors are available in both regular and diet versions, and we are increasingly producing a larger variety of natural and “enhanced” flavors (green tea essence, pomegranate, and vitamin-enhanced) to meet growing consumer demand in these areas. As part of our strategy, we recently entered into strategic co-branding transactions with Kraft Foods, Inc. relating to Crystal Light lemonade, Country Time lemonade and Kool-Aid, with Campbell Soup Company relating to V-8 Splash and V-8 Fusion and Ocean Spray Cranberries Inc. relating to cranberry-based beverages and other beverages. These collaborations allow us to offer our consumers a variety of well-known brands and flavors. As part of our focus on better-for-you beverages, we do not use high-fructose corn syrup in our flavors, and we offer diet versions without aspartame and saccharin. In addition, we address local tastes by producing flavors geared for individual markets such as ginger beer (South Africa), root beer (United States), must (Scandinavia) and chinotto (Italy). We also offer special “limited edition” flavors for holidays or seasonal campaigns such as apple-cinnamon, vanilla-lemon, pear-honey, papaya-lime and mango-coconut. Consumer “starter kits” usually include flavor sample packs to provide the consumer with an opportunity to become acquainted with our flavors. Consumers in the United States typically pay between $4.99 or $9.99 for a 500 ml bottle of one of our flavors, which would usually produce 12 liters of carbonated soft drinks.
Other accessories. We also sell additional accessories for our products, including bottle cleaning materials and ice cube trays shaped to produce ice cubes that fit in our carbonation bottles. These products are manufactured by third parties.
We mostly market our products through retail channels. We distribute our products in 45 markets, 21 directly and the remainder indirectly through our exclusive distribution partnerships.
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, first in specialty retail and direct marketing channels and then in larger food, drug and mass retailers. Our products are sold at more than 60,000 stores worldwide, including many of the largest retailers in our markets.
We historically opened subsidiary offices in countries in which we sold our products. In these markets, we typically utilize our own internal sales force and, in certain countries, sub-distributors as well. Following our purchase of our Nordics distribution from Empire AB, in January 2012, and our Canadian distribution from Simply Ecological Products Ltd, in August 2012, we distribute our products directly in 21 countries.
In 2007, we implemented a new distribution strategy and, in order to expedite penetration into certain new markets, we contracted with third-party distributors who facilitate distribution of our products. In 2012, our distributors accounted for 25% of our total revenues. The gross margin on sales is generally higher in markets where we distribute directly than markets in which we use third party distributors
Distributors sell to retailers in their relevant markets either through their own sales force or through wholesalers and agents, or a combination of these. Sales activities follow typical retail sales processes, including initial pitches and offers, periodic product range and price reviews, offers for seasonal or limited edition activities and promotions. Merchandising and demonstrations of the products are managed by the distributor in cooperation with the retailers. Delivery to retailer chains can be to central warehouses or to individual stores depending upon the specific agreements with the retailer.
To ensure promotion of our brand in our indirect markets, we provide our distributors with various forms of marketing materials. In all cases, materials that use our brand — including our trademarks, all promotions, and all sales and marketing materials — must be prepared or approved by us. We agree with our distributors on an annual advertising and promotional budget, of which we contribute a portion.
When we evaluate potential distributors, 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 suitability to market our products. Distributors are given exclusivity over a particular territory for a given period, so long as they achieve certain requirements relating to minimum purchase amounts and marketing investments. These requirements are set by us after consultation with the distributor. We attempt to set realistic targets for the distributor that are achievable if the distributor dedicates sufficient resources to the distribution of our products. We work closely with our distributors to assist them in preparing and executing a multi-year strategy. Most distributors also operate e-commerce sites in their countries as well as our website in their local language. During the past five years, we significantly increased the number of countries where our products are sold by appointing exclusive distributors, including in Brazil, Chile, Colombia, Cyprus, Czech Republic, France, Hungary, Ireland, Italy, Japan, Malta, Mexico, Philippines, Portugal, Romania, Russia, Slovakia, Slovenia, South Korea, Taiwan and Ukraine.
We continue to penetrate new markets in collaboration with distributors. Factors that we consider in prioritizing which markets to enter include: the size of the carbonated soft drink and carbonated water market, per capita consumption of carbonated beverages, the perceived quality of the tap water, household demographics and environmental and health consciousness.
Our distribution agreements are generally exclusive agreements for a given territory with a five-year term and an option to renew; however, our contracts contain performance criteria to maintain exclusivity. Distributors are required to meet annual purchase targets defined as monetary amounts for the first year or two of the distribution contract, as well as to meet certain defined growth targets for each of the subsequent years until the end of the contract (usually five years). In addition, annual and semi-annual discussions with distributors often include more specific volume targets per product type. Distributors that do not meet their defined purchase targets can be terminated by notice during the first quarter following the year in which they failed to achieve the target. The termination takes effect six months after the notice is given.
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 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. SodaStream’s primary responsibilities under the agreement include purchasing, distributing and promoting the sale of Brita’s products in Israel, after obtaining all legal approvals necessary for the importation and sale of such products in Israel. 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 over the Internet. We target major retailers with either a national footprint or a significant regional concentration. Set forth below is a representative list of our current retailer relationships:
|Western Europe||Central and Eastern |
Europe, Middle East
|Ahlens||ACE||Bed Bath & Beyond||Assorted Homeware|
|Auchan||Ahold||Best Buy||Automatic Centre|
|The Conrad Shops||Blue Square||Crate and Barrel||Bunnings|
|Coop||Clicks||El Palacio de Hierro||Clive Peeters|
|Electrolux Home||General Trade||Le Gourmet Chef||Harris Scarfe|
|Elkedjan||Home Center||Linen Chest||IGA|
|Euronics||InterSpar||London Drugs||John Danks|
|Harvey Nichols||Makro||Planet Organic||M10|
|ICA||Media Markt||Sam’s Club||Mitsukoshi|
|Jarnia John||Pick’n Pay National||Sur La Table||Target|
During 2012, we began selling our products at more than 10,000 additional retail stores with our home beverage carbonation system, bringing our total worldwide retail distribution to more than 60,000 stores. Our continuously increasing retail distribution is an important element in bringing our products to potential consumers and thereby generating the acquisition of our system by new customers. Additionally, we believe that the widespread availability and easy access to consumables (primarily gas refills and flavors) are key to securing ongoing customer retention and loyalty. Indeed, one of our most important competitive advantages is our strong network of retail distribution, in particular, that of our gas refill exchange program.
In addition, we intend to further penetrate our existing markets by increasing the number of stores in which our products are currently being sold in each region. In 2012, we have continued to expand our presence in the United States and significantly increased the retail distribution of our products in the United States by adding more than 5,000 stores.
Our marketing objective is to establish and position carbonated beverages created using our soda makers as an attractive alternative to canned and bottled carbonated soft drinks and to position the brand as desirable, yet accessible, as a mass market solution. Consumer demand activities are designed primarily to increase the installed base of soda makers as measured in terms of percentage household penetration in each market. Secondarily, we promote “users for life” so as to generate ongoing demand for our consumables (the CO2 refills, carbonation bottles and flavors). 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, in-store demonstrations, infomercials and our website to build brand awareness, educate new consumers about the benefits of 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 active user households in our markets. As an example, in the fourth quarter of 2011, more than 20,000 in-store demonstrations of our products were carried out in the United States, and we launched our first television commercial campaign in that market. During the first quarter of 2013, we aired our first ever Super Bowl commercial to reach more than 100 million viewers.. We also use our marketing programs to support the sale of our products through new channels and to enter new markets. Our internal marketing team supports sales at the point-of-sale through trade marketing, developing and executing product and brand initiatives, and consumer education.
We challenge consumers to re-think the way they obtain carbonated drinks and consider home carbonation, specifically our home beverage carbonation system, as a viable alternative. This consumer education is done through various vehicles, including direct advertising, promotional activity, especially in-store demonstrations at the point of sale, and public relations campaigns and activities. We use both traditional media (TV, print and out-of-home) as well as digital media (pay-per-click, search engine optimization and affiliate marketing) in these efforts, as well as infomercials. 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.
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 continuously offering the customer new flavors, we employ subscription programs, newsletters, warranties, trade-in promotions and various other programs to keep the customer engaged. Moreover, seasonal flavors and “limited edition” promotional bottles are also directed at customer retention. Finally, we offer easy access to CO2 refills through mass distribution of our exchange cylinder program and direct-to-home delivery from web orders. We also encourage our consumers to purchase additional CO2 cylinders, which also 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.
We believe we are also an attractive partner to municipalities and public water companies. For such entities, we provide various benefits, including a reduction in the amount of waste required to be disposed and enabling municipalities to improve the image of their tap water. During the past four years, we have entered into a number of partnership programs with municipal authorities and public water providers. Among these are Veritas, the water company of Venice, Italy; the municipality of Trenta, Italy; and WasserVien of Munich and Dresden, Germany and of Vienna, Austria. We are currently exploring several similar partnership programs in certain other markets around the world. These programs typically involve education and special offers for the customers of the municipal water utility, distributed inside the envelopes with the monthly utility bill. These joint programs have included retail tie-in and public relations coverage for us. Municipal partnerships are an important endorsement and source of high-quality public relations for us.
Our marketing activities are managed from our headquarters in Israel. Each market has a representative (either through our subsidiary or through our distributor 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 most 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 now manufacture our products in over 20 locations around the world. Most of our products are manufactured at our facilities in Mishor Adumim, in disputed territory sometimes referred to as the "West Bank," in Alon Tavor, in northern Israel, and in Ashkelon, on the Mediterranean coast of Israel. In the Mishor Adumim facility, we have various manufacturing functions, including metals, bottle blowing, machining, assembly, cylinder manufacturing, CO2 refills and cylinder retesting. In Alon Tavor, we have plastic injection, painting, carbonation parts assembly, printing and assembly. In Ashkelon, we manufacture the flavors that are distributed worldwide.
We also outsource the production of certain components of our products to subcontractors in Israel and in China. In addition, we conduct CO2 refilling in Australia, Germany, Israel, the Netherlands, New Zealand, South Africa, Sweden and the United States. We primarily manufacture our CO2 cylinders ourselves, but in certain cases we also purchase empty CO2 cylinders from other suppliers who have passed our rigorous safety standards. We have recently announced a strategic manufacturing agreement with Cott Beverages Inc., a subsidiary of Cott Corporation, to produce flavors made specifically for our carbonation system in their production facility in the United States.
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 that may result from our growth plans. We were able to meet higher than expected demand in 2011 and 2012 and believe that the capacity of our current manufacturing facilities and subcontractors is sufficient to meet anticipated demand for our products through 2014. We currently anticipate needing additional manufacturing capacity in the future as the demand for our products continues to increase. We intend to meet this future need for additional manufacturing capacity by constructing an additional manufacturing facility in southern Israel. Pending the construction of such an additional manufacturing facility, we are investing in expanding our manufacturing capabilities through other means, primarily by expanding the manufacturing capacity at our existing facilities and by increasing the use of subcontractors for certain products and components.
We are currently constructing an additional facility in the southern part of Israel (construction commenced in the third quarter of 2012) that will be approximately 915,000 square feet. We expect to complete the first phase gradually within approximately 18 to 30 months from the commencement of construction. Upon completion of the first phase, the new site will have all production capabilities necessary to produce all of our products. The second phase will increase the capacity of the site. The total anticipated capital expenditures required for the construction is approximately $90.0 million of which the first phase is approximately $49.0 million. The new facility is being built in an industrial park that has provided governmental grants and is considered a priority manufacturing area, which provides tax benefits under Israeli law.
We manufacture our products in accordance with relevant safety and regulatory bodies around the world. We also have implemented specific quality assurance procedures throughout the various stages and processes of manufacturing to ensure the quality of all of our products.
We use certain raw materials to manufacture our soda makers, carbonation bottles, CO2 cylinders and flavors. The most important of these materials are aluminum, brass, certain plastics, flavor ingredients and sugar. 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. We engage in long-term purchase agreements and in hedging transactions to lower the impact of such fluctuations.
We maintain an active 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 user experience. Since 2007, we have introduced several new and more up-scale models of soda makers, some of which use glass or dishwasher-safe plastic carbonation bottles. Recently, we introduced the “Source,” an elegantly-designed soda maker by Yves Behar that combines beauty, functionality and efficiency, and the “Revolution,” a new, electrically powered innovative soda maker that offers many new features, such as “touch-button” activation, providing a choice of carbonation levels (low, medium, high, turbo), a “snap-n-lock” mechanism for easy bottle insertion and removal and an LED display indicating carbonation progress and CO2 usage status. We are continuously introducing new flavors, such as all-natural cola, root beer and ginger ale, and have increasingly expanded the variety of natural and “enhanced” flavors, including fruit, energy and isotonic blends, to satisfy evolving consumer tastes. As part of our focus on better-for-you beverages, we do not use high-fructose corn syrup in our flavors and offer certain of our diet versions with Splenda® or with Stevia and without aspartame and saccharin. We also address local tastes with flavors designed for individual markets. We have recently entered into strategic co-branding transactions with Kraft Foods, Inc. relating to Crystal Light lemonade, Country Time lemonade and Kool-Aid, with Campbell Soup Company relating to V-8 Splash and V-8 Fusion and Ocean Spray Cranberries Inc. relating to cranberry-based beverages, among others.
We constantly continue to innovate and improve our products, and are currently developing several new and improved soda makers and other products. Additionally, we launched a program in 2012 that we refer to as “Powered by SodaStream,” whereby we collaborate with third parties to become the CO2 providers for their carbonation devices. For example, in 2013, we partnered with Samsung, a leading home appliance brand, to launch the first ever refrigerator that offers sparkling water. In 2012, we partnered with Breville to develop and provide CO2 to their premium home carbonation system. We expect to benefit from the consumable sales that are generated from these appliances in the after-market. Consumers using these products will become our customers when they need to purchase additional CO2 and other consumables, which would increase our household penetration base and generate higher-margin sales of consumables. We hope to expand this program to include the licensing of our proprietary carbonating technology to third parties.
In 2012, we introduced our SodaCaps that are innovative, patent pending, single-serve disposable capsules that add a pre-measured amount of flavor to SodaStream carbonating bottles, resulting in a consistently flavored beverage and an improved user experience.
In addition, in 2012, we also announced the AquaBar by Italian designer Stefano Giovannoni that is a point of use water station, which caters to a full range of home water needs, including sparkling water.
Our intellectual property portfolio is one of the means by which we attempt to protect our competitive position. We have a variety of trademarks registrations and pending applications, patents and pending applications and design registrations and pending applications, some of which we acquired as part of our acquisition of certain assets of Wassermaxx in 2009. We rely on a combination of trademark and patent protection for our products, with a focus on trademarks. We are constantly seeking ways to protect our intellectual property through registrations in relevant jurisdictions. As our patent portfolio is limited, and as certain of the more basic patents on our technology have expired, we have increasingly turned to design registrations to protect the unique proprietary designs of our products. We have actively monitored and challenged the sale of products that we believe infringe our intellectual property rights in the past, and we intend to continue to actively protect our intellectual property rights in the future to the fullest extent possible. We place trademarks on all of our products, including carbonation bottles, CO2 cylinders and flavors. To protect our know-how and trade secrets, we generally require our employees with access to our know-how and trade secrets to enter into agreements acknowledging our ownership of all inventions and intellectual property rights that they develop during the course of their employment and to agree not to disclose our confidential information. In addition, we typically include non-compete and confidentiality provisions, as well as provisions acknowledging our ownership of all intellectual property rights, in our distributor and supplier agreements.
We face limited competition from manufacturers of other home soda makers in certain jurisdictions. Since we are active in the carbonated soft drink and sparkling water markets, 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 soda makers. We have generally entered into agreements with distributors and retailers that prohibit third parties from refilling our empty cylinders. Notwithstanding such arrangements, a court ruling in Germany allows consumers, as well as retailers who are not party to written agreements with SodaStream, to refill cylinders with CO2 supplied by third parties. See “Item 8.A — Consolidated Statements and Other Financial Information — Legal proceedings.” We may in the future become subject to similar rulings in other jurisdictions. With respect to our flavors, we face competition from various companies that produce soft drink syrups and fruit-flavored mixes to add to sparkling or still water.
Although manufacturers of consumer products may enter the home beverage carbonation system market as the industry grows, we believe that it will be difficult for new entrants to provide a complete product system to consumers. In particular, we believe that the reverse logistics needed for our customers to return empty CO2 cylinders and exchange them for filled CO2 cylinders at retail stores, currently comprised of a pool of several million cylinders globally, will be difficult and expensive for others to replicate.
Our products, which include both food products and compressed gas, are regulated by governments 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, Switzerland (SVTI), 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 ten 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 cylinder packaging bears the international “green diamond” symbol for a Class 102 product. In the United States and other jurisdictions, our cylinders are regulated as hazardous materials.
Our headquarters in Airport City, Israel is comprised of approximately 28,308 square feet of office and warehouse space under a lease that terminates in April 2018. We also lease our Israeli manufacturing facilities. Our Mishor Adumim facility, in a disputed area which is often referred to as the “West Bank,” is comprised of 164,214 square feet of factory, warehouse and office space under a lease that terminates in July 2013. This is subject to automatic extension for five one-year periods unless we notify the lessor that we do not wish to extend the lease. Our facility in Alon Tavor, which is located in northern Israel, is comprised of 40,000 square feet of factory space and is subject to a lease that terminates in December 2049. Our Ashkelon facility, on the Mediterranean coast of Israel, is comprised of approximately 21,528 square feet of factory, warehouse and office space under a lease that terminates in March 2015. Our facility in Limburg, Germany is comprised of 48,987 square feet of factory, office and warehouse space under a lease that terminates in August 2017. This location is used for sales and marketing activities as well as gas refilling. Additional gas refilling takes place in Australia, Israel, the Netherlands, New Zealand, South Africa, Sweden and the United States.
Our European commercial and logistics center is managed from Rijen, the Netherlands. We have marketing and sales subsidiary offices in Australia, Canada, Denmark, Finland, Germany, Israel, Italy, the Netherlands, Norway, South Africa, 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 begun construction of an additional facility in the southern part of Israel. See “— Manufacturing and production.”
For a discussion of seasonality, please refer to “Item 5.A — Operating Results — Seasonality.”
We were formed in March 2007, for the purpose of fully controlling Soda-Club Enterprises N.V. (“SCNV”). Our operational activities, our subsidiary SCNV and all the subsidiaries of SCNV (together referred to as the “Group” and individually as “Group companies” or “Group entities”) are managed by SCNV’s wholly owned subsidiary, SodaStream International B.V. (formerly Soda-Club International B.V.), registered in the Netherlands.
The following table sets forth the subsidiaries owned, directly or indirectly, by us as of March 31, 2013:
|Name of Subsidiary||Jurisdiction||Ownership Interest|
|SodaStream Enterprises N.V.||Netherlands Antilles||100||%|
|SodaStream International B.V.||The Netherlands||100||%|
|Soda-Club Worldwide B.V.||The Netherlands||100||%|
|SodaStream Industries Ltd.||Israel||100||%|
|SodaStream Israel Ltd.||Israel||100||%|
|SodaStream Österreich GmbH||Austria||100||%|
|SodaStream Australia PTY Ltd.||Australia||100||%|
|SodaStream (New Zealand) Ltd.||New Zealand||100||%|
|SodaStream (SA) (Pty) Ltd.||South Africa||100||%|
|SodaStream USA, Inc.||Delaware (United States)||100||%|
|SodaStream Direct, LLC||Delaware (United States)||100||%|
|Soda-Club CO2 Ltd.||British Virgin Islands||100||%|
|Soda-Club (Europe) Limited||United Kingdom||100||%|
|Soda-Club Switzerland GmbH||Switzerland||100||%|
|Soda-Club (CO2 ) SA||Switzerland||100||%|
|SodaStream (CO2 ) SA||Switzerland||100||%|
|Soda-Club (CO2 ) Atlantic GmbH (LLC)||Switzerland||100||%|
|SodaStream (Switzerland) AG||Switzerland||100||%|
|Soda-Club Worldwide BV Sp. Z.O.O Oddzial w polsce Branch||Poland||100||%|
|SodaStream Worldwide Trading Company Branch||United Kingdom||100||%|
|Soda-Club Worldwide BV Holland Filial (Sweden) Branch||Sweden||100||%|
|SodaStream Nordics AB||Sweden||100||%|
|Soda-Club Worldwide BV (France) Branch||France||100||%|
|Soda-Club Worldwide BV (Greece) Branch||Greece||100||%|
|SodaStream Professional S.r.l.||Italy||100||%|
|SodaStream International BV Norwegian Branch||Norway||100||%|
|SodaStream Denmark Branch Filial of SodaStream International BV, Holland||Denmark||100||%|
|SodaStream International BV Branch in Finland||Finland||100||%|
|SodaStream Canada Ltd.||Canada||100||%|
|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 instantly into carbonated soft drinks and sparkling water. We develop, manufacture and sell soda makers and exchangeable carbon-dioxide (CO2) cylinders, as well as consumables, consisting of CO2 refills, reusable carbonation bottles and flavors to add to the carbonated water.
We currently sell our products through more than 60,000 retail stores in 45 countries, including 30 new countries that we have entered since the beginning of 2007. Following the purchase of our Nordics distribution from Empire AB, our former distributor, in January 2012, and the purchase of our Canadian distribution from Simply Ecological Products Ltd, our former distributor, in August 2012, we distribute our products directly in 21 countries and indirectly through local distributors in our remaining 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, first in specialty retail and direct marketing channels and then in larger food, drug and mass retailers.
We have an attractive “razor/razor blade” business model, which is designed to increase sales of soda makers (the razor); and to generate recurring sales of higher-margin consumables, consisting of CO2 refills, carbonation bottles and flavors (collectively, the razor blades). As sales of our soda makers increase, we expect that the subsequent sales of related consumables will result in increased gross profits due to the higher gross margin associated with our consumables. However, in order to further develop our customer base, we plan to continue to focus on increasing our soda maker sales and expect soda maker sales to continue to be a growing component of our overall revenue. We therefore do not foresee a material overall increase in gross margin over the next few years.
Our revenue grew by 38.6% from $208.4 million in 2010 to $289.0 million in 2011 and by 51.0% to $436.3 million in 2012. The growth in 2012 was achieved by year-over-year growth in each of our regions, led by Asia-Pacific, in which revenue increased by 101.7% in 2012 compared to 2011. This was followed by the Americas in which revenue increased in 2012 by 88.0% compared to 2011, the majority of which came from the United States; Western Europe, in which revenue increased by 33.4% in 2012 compared to 2011; and CEMEA, in which revenue increased by 3.4% in 2012 compared to 2011. By product, our two major segments — soda makers and exchangeable CO2 cylinders, and consumables — delivered revenue growth of 48.0% and 54.1%, respectively, in 2012. Within the consumables product segment, in 2012, CO2 refills increased 24.0% to 16.5 million units, and flavors increased 49.0% to 28.1 million units.
We believe that our growth in revenue has been driven by our heightened focus on promoting soda maker sales in both existing markets and new markets to increase our installed base of soda makers, particularly in Western Europe, but also in North America and Asia-Pacific. The growth of our installed base of soda makers has in turn resulted in an increase in revenue from sales of consumables.
Our strategy is to expand our active installed base of soda makers by further penetrating existing markets and by entering new markets. We intend to continue initiating select marketing activities, including aggressive public relations campaigns, in-store demonstrations, TV advertising, point-of-sale advertising and regional and national media advertising campaigns in order to both inform consumers of our product offerings and test the effectiveness of various demand-creation vehicles. A key part of our strategy is to grow our revenue in the United States, which has become our largest individual market. We also plan on accelerating our efforts and devoting resources to increase our active customer base in all of our other markets.
Key measures of our performance
Our revenue consists primarily of sales of soda makers and recurring sales of higher-margin consumables, including CO2 refills, carbonation bottles and flavors. We derive revenue 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 soda makers and consumables directly to consumers through telephone service centers or the Internet.
We record revenue from sales of these items at the gross sales price, net of returns, trade discounts, rebates and provisions for estimated returns. We recognize revenue when the significant risks and rewards of ownership have been transferred to the buyer, collection of payment 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 revenue can be measured accurately.
The following tables present our revenue, by product type for the periods presented, as well as such revenue by product type as a percentage of total revenue:
|(in thousands)||Year Ended December 31,|
|Soda makers and exchangeable CO2 cylinders||$||87,177||$||125,595||$||185,875|
|Year Ended December 31,|
|Soda makers and exchangeable CO2 cylinders||41.8||%||43.5||%||42.6||%|
We believe that the number of soda makers and CO2 refills sold during each period is an important indicator of the expansion rate of our business. The number of soda maker units sold is indicative of the growth of our customer base and the number of CO2 refills sold is indicative of consumables sales to our active customer base. The number of soda maker units that we sold in 2012 increased by 82.0% compared to 2010 and the number of CO2 refills increased by 60.0%. We estimate, based on consumer surveys and sales of CO2 refills, that there are currently approximately six million households who create a carbonated beverage using our system at least once every two weeks, whom we refer to as active consumers, with many of the largest carbonated soft drink and sparkling water markets still remaining virtually untapped.
We believe that the sale of every soda 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 soda maker that is sold comes with a filled exchangeable CO2 cylinder, which is recorded in the revenue category above referred to as “soda makers and exchangeable CO2 cylinders.” A customer would not typically need to purchase a CO2 refill, which is recorded in the sales category above referred to as “consumables,” for several months. Consequently, our general historical experience is that the initial growth in consumables after we enter a new market is slower than growth in soda maker sales, but that the sale of consumables increases correspondingly once we have established an active customer base. This may results in a lag between the growth in soda 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, weather and competition could affect our results in the future. Our distributors operate in a number of our more mature markets and, in particular, one country in Western Europe that accounts for a little over 10% of our revenue contributes a significantly higher proportion of our operating income. In some of the markets in which our products are sold, we operate through local distributors. Distributors are required to meet annual purchase targets defined as monetary amounts for the first or second year of the distribution contract, as well as defined growth targets for each of the subsequent years until the end of the contract (usually five years). In addition, annual and semi-annual discussions with distributors often include more specific volume targets per product type. Distributors that do not meet the defined purchase targets stated in the contract (the annual purchase targets) can be terminated by notice during the first quarter following the year in which they failed to achieve the target. The termination takes effect six months after the notice is given.
Cost of revenue and gross margin
Our cost of revenue 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 soda makers, exchangeable CO2 cylinders, carbonation bottles and flavors, including, in particular, aluminum, plastics, flavoring essences, brass, sugar, CO2, sweeteners and fruit concentrate. In addition, cost of revenue includes the cost of delivery from the production site to the distribution warehouse. When we sell products to our third-party distributors, they usually collect their orders from our warehouses and bear the cost of delivery. We have opened regional refilling stations and plan to open additional regional refilling stations in new markets to lower the freight costs of filling exchangeable CO2 cylinders.
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 soda makers. We have found that as markets mature, sales of our consumables become a larger portion of our total revenue, thus increasing overall gross margins.|
|·||The gross margin on sales in markets where we distribute directly is generally higher than markets in which we use external distributors, due to the elimination of the external distributor’s margin. In many markets, our expansion strategy is to work with third-party distributors who we believe will have a better ability to increase revenue in their market than we could if we distributed our products directly. However, in several of our key markets targeted for expansion, including the United States, we distribute directly, and thus we believe our gross margins will be positively impacted as the portion of our revenue from these markets increases.|
|·||Our cost of revenue, and therefore our gross profit, is impacted by several factors, including the commodity prices of aluminum, plastics, flavoring essences, brass, sugar, CO2, sweeteners and fruit concentrates; production labor costs; and fuel prices, which affect our freight costs.|
|·||Our gross margin is exposed to exchange rate fluctuations. We are primarily exposed to U.S. Dollar/Euro and U.S. Dollar/NIS currencies movements, with the U.S. Dollar and Euro being the principal currencies of our sales and the U.S. Dollar, Euro and NIS a significant portion of our material purchasing and production costs and operational expenses. 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 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 increases. During 2012, price changes did not have a material impact on our gross margin.|
|·||We continuously seek to reduce the cost of production, through engineering and purchasing optimization, without compromising the quality of our products. The success of such cost reduction activities in the past has resulted in lower production costs and improved gross margins. We expect these activities and related cost savings to continue. However, new and advanced versions of our products may increase our production costs and reduce our gross margin.|
|·||If our overall revenue grows, certain manufacturing costs, which are fixed in nature, such as the cost of production management and engineering employees, will constitute a smaller percentage of our overall cost of revenue and will positively affect our gross margin.|
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 principally consist of the cost of delivering our products to our customers’ premises (home, office, warehouse or other location as the case may be). The distribution of our products and the collection of the exchangeable CO2 cylinders for refill often involve freight costs and require 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, and the collection of the empty exchangeable CO2 cylinders. In many cases, we are able to pass some delivery costs on to customers.
Our advertising and promotional expenses consist primarily of media advertising costs, trade and consumer marketing expenses and public relation expenses. As we intend to invest in increasing our active customer installed base, particularly in the United States, we expect sales and marketing expenses in general, and advertising expenses in particular, to increase in absolute terms.
Our general and administrative expenses consist primarily of wages, salaries and other employee benefits for our managerial and administrative personnel, rental fees and building maintenance, communications and support costs as well as legal, professional advisors and audit and review costs. As we expand our installed base of active customers, primarily in our direct sales markets, and in particular, in the United States, we expect our administrative expenses to increase, mainly due to the additional information technology and finance resources required for supporting our business growth.
Other income, net consists primarily of rental income and capital gains and losses.
Financial expenses (income), net, consists primarily of (i) borrowing costs, (ii) unwinding of discounts on provisions, (iii) foreign currency exchange expenses, and (iv) losses on derivative instruments. These expenses are offset against (i) interest income on our interest bearing deposits, (ii) foreign currency exchange income and (iii) gains on derivative instruments.
The regular corporate tax rate in Israel in 2013 and subsequent years is 25%. The Israeli corporate tax rate for the 2012 and 2011 tax year was 25% and 24%, respectively. Non-Israeli subsidiaries are taxed according to the tax laws in their respective country of organization. Certain of our subsidiaries benefit from tax incentives, such as reduced tax rates ranging from 0% to 10%. One of our Israeli subsidiaries received “Approved Enterprise” status under the Israeli Law for the Encouragement of Capital Investments — 1959. The benefits period of an investment program that was approved in December 1999 ended at the end of the 2012 tax year. This investment program provided a tax exemption on undistributed earnings derived from program assets for a period of ten years from the first year in which taxable income is generated from the approved assets.
The operational phase of another program, which is in the investment grant course and was approved in December 2005, has not yet commenced. The subsidiary will be entitled to a grant for part of the approved investment.. The benefit period for this program will be ten years (with a tax exemption for two years and a reduced tax rate for eight more years) beginning in the first year the subsidiary has taxable income from the approved assets. The subsidiary’s income that is not derived from assets eligible for reduced taxation benefits, as described above, is taxed at the regular corporate income tax rate in Israel as detailed above.
Under this and other Israeli legislation, we are entitled to accelerated depreciation and amortization rates for tax purposes on certain of our assets. For more information about the tax benefits available to us as an approved enterprise, see “Item 10.E — Taxation.”
Over the course of our business operations, we have accumulated net operating loss carry forwards for tax purposes amounting to approximately $35.6 million as of December 31, 2012.
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. We have created reserves with respect to such 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. During 2012, we reached agreements with the tax authorities in some of the jurisdictions in which we operate. Following our entry into such agreements, we have adjusted the tax provision.
Because we operate in a number of countries, our income is subject to taxation in differing jurisdictions with a range of tax rates. Therefore, we need to apply significant judgment to determine our consolidated income tax position.
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 net operating 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.
During the year ended December 31, 2012, we granted options to purchase 604,400 ordinary shares under our equity incentive plan. The total amount of share-based compensation derived from the options granted in the year ended December 31, 2012 was $12.4 million. The expense will be recognized over the vesting period. The total amount recognized with respect to the 2012 grants was $1.6 million.
As we have rapidly entered new markets over the past few years, we have begun to 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 “CODM”).
We have identified four reportable operating segments, each of which represents a geographical area with similar characteristics. The products sold in all the segments are similar and generally produced at the same production sites. The identified segments are:
|·||The Americas consists of the United States and other markets in North America, Central America and South America, which are significantly influenced by the consumption culture of the United States and characterized by a very high consumption of carbonated soft drinks.|
|·||Western Europe consists of our markets in western and northern Europe, which are characterized by high standards of living and high price levels. Some of these markets also consume relatively high volumes of sparkling water as compared to carbonated soft drinks.|
|·||Asia-Pacific consists of our markets in Australia and New Zealand, together with our new markets in East Asia, including Japan 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. 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 revenue, by segment for the periods presented, as well as income (loss) before income tax from each segment:
|(in thousands)||The |
|Year ended December 31, 2010|
|Reportable income (loss) before income tax||(5,414||)||27,124||2,871||3,049||27,630||(12,715||)||14,915|
|Year ended December 31, 2011|
|Reportable income (loss) before income tax||409||44,862||4,894||6,586||56,571||(25,893||)||30,858|
|Year ended December 31, 2012|
|Reportable income (loss) before income tax||8,565||49,196||11,085||4,225||73,071||(28,474||)||44,597|
The following table presents the segments' revenue, as a percentage of total revenue:
|Year Ended December 31,|
One of our customers in the Americas accounted for 12.4% of our total revenue in 2011. One of our distributors in Western Europe accounted for 10.8% of our total revenue in 2012, and another distributor in Western Europe accounted for 13.1% of our total revenue in 2010.
Revenue from customers located in Israel amounted to $10.5 million in 2010, $9.1 million in 2011 and $10.4 million in 2012. Our Israeli sales and marketing subsidiary also serves as the exclusive distributor of Brita water filtration systems in Israel.
Revenue in the Americas increased by $73.8 million, or 88.0%, to $157.7 million in 2012 from $83.9 million in 2011. This increase is primarily attributable to continued growth in household penetration in the United States. Revenue in the Americas increased by $42.9 million, or 104.9%, to $83.9 million in 2011 from $41.0 million in 2010. This increase was primarily attributable to increased distribution, broader product selection at retailers and additional investments in consumer marketing.
Income before income tax in the Americas increased by $8.2 million to $8.6 million in 2012 from $0.4 million in 2011. Income before income tax in the Americas was $0.4 million in 2011 as compared to loss before income tax of $5.4 million in 2010. These increases were mainly due to increases in revenue.
Revenue in Western Europe increased by $51.1 million, or 33.4%, to $204.3 million in 2012 from $153.2 million in 2011. This increase is primarily attributable to increased sales in France and Germany as well as the change to direct distribution in the Nordics since the beginning of 2012, with such change contributing approximately $16 million to the revenue increase in the region. Revenue in Western Europe increased by $23.8 million, or 18.4%, to $153.2 million in 2011 from $129.4 million in 2010. This increase was primarily attributable to accelerated growth in France and the United Kingdom, as a result of our growth strategy, including increased retail distribution, new product introductions and marketing investments, as well as more modest, yet steady growth in Germany, Switzerland and the Nordics, driven primarily by demand for our high margin consumables.
Income before income tax in Western Europe increased by $4.3 million, or 9.7%, to $49.2 million in 2012 from $44.9 million in 2011. This relatively smaller increase in income before income tax as compared to the increase in the product mix, primarily a higher portion of soda makers with relatively lower gross margin than consumables. Income before income tax in Western Europe increased by $17.8 million, or 65.4%, to $44.9 million in 2011 from $27.1 million in 2010. This was mainly due to the leveraging of fixed costs with higher revenue, increases in the proportion generated from markets with higher margins and changes in the product mix.
One market in Western Europe that accounts for a little over 10% of our revenue contributed a higher proportion of our operating profit than our other markets.
Revenue in Asia-Pacific increased by $21.4 million, or 101.7%, to $42.4 million in 2012 from $21.0 million in 2011.This increase is primarily attributable to increased sales in Japan, Australia and South Korea. Revenue in Asia-Pacific increased by $8.2 million, or 63.6%, to $21.0 million in 2011 from $12.8 million in 2010. This increase was mainly due to an increase in our installed soda maker base in the Australian market and our entry into new markets in Asia.
Income before income tax in Asia-Pacific increased by $6.2 million, or 126.5%, to $11.1 million in 2012 from $4.9 million in 2011. Income before income tax in Asia-Pacific increased by $2.0 million, or 70.5%, to $4.9 million in 2011 from $2.9 million in 2010. These increases resulted from the increase in revenue.
Revenue in CEMEA increased by $1.0 million, or 3.4%, to $31.9 million in 2012 from $30.9 million in 2011. Revenue in CEMEA increased by $5.6 million, or 22.3%, to $30.9 million in 2011 from $25.3 million in 2010. These increases were primarily attributable to continued growth in certain of our markets in the region, primarily Israel in 2012 and the Czech Republic in 2011.
Income before income tax in CEMEA decreased by $2.4 million, or 35.8%, to $4.2 million in 2012 from $6.6 million in 2011. This was mainly due to higher marketing expenses and changes in the product mix, primarily a higher portion of soda makers with relatively lower gross margin. Income before income tax in CEMEA increased by $3.5 million, or 116.0%, to $6.6 million in 2011 from $3.1 million in 2010. This increase was mainly due to increases in revenue.
Results of operations
Year ended December 31, 2012 compared to year ended December 31, 2011
Revenue increased by $147.3 million, or 51.0%, to $436.3 million in 2012 from $289.0 million in 2011. This growth was attributable primarily to an increase of 29.1% in the volume of soda makers sold to 3.5 million in 2012, compared to 2.7 million in 2011. CO2 refills increased by 24.0% to 16.5 million units in 2012 from 13.3 million units in 2011 and flavors increased by 49.0% to 28.1 million units in 2012 from 18.9 million in 2011, primarily due to the expansion of our active installed soda maker base. By segment, the key regions of revenue growth were the Americas, with an increase of $73.8 million, and Western Europe, with an increase of $51.1 million. Revenue from Asia-Pacific and from CEMEA increased by $21.4 million and $1.0 million, respectively.
Gross profit increased by $78.3 million, or 61.1%, to $235.8 million in 2012 from $157.5 million in 2011. Gross profit as a percentage of revenue, or gross margin, decreased by 0.5% to 54.0% in 2012 compared to 54.5% in 2011. The decrease was primarily due to a higher dependency on subcontractors and expedited shipments, including the air freight for raw materials and finished goods mainly to support the Source soda maker launch and to fulfill better than expected overall demand. This negative impact on gross margin was partially offset by an increase in direct distribution that accounted for 75% of total revenue in 2012 compared to 63% in 2011. The increase in direct distribution is mainly due to growth in U.S. revenue and the shift to direct distribution in the Nordics.
Sales and marketing expenses increased by $53.8 million, or 54.3%, to $153.0 million in 2012 from $99.2 million in 2011. As a percentage of revenue, sales and marketing expenses increased to 35.1% in 2012 from 34.3% in 2011. This increase was primarily attributable to increased advertising and promotional expenses, mainly to support our continued retail expansion in the United States.
General and administrative expenses increased by $8.0 million, or 26.6%, to $37.8 million in 2012 from $29.8 million in 2011. As a percentage of revenue, general and administrative expenses decreased to 8.7% in 2012 from 10.3% in 2011. This improvement was driven by leveraging fixed expenses on higher revenue, partially offset by additional expenses associated with the Nordics and Canada distributor acquisitions. General and administrative expenses in 2012 also included additional share-based compensation expense associated with the adoption of a new long-term incentive plan for our chief executive officer.
Other income increased by $0.3 million to $0.5 million in 2012 from $0.2 million in 2011, due primarily to capital gains from the sale of property, plant and equipment in 2012.
Total financial expenses, net was $0.9 million in 2012 compared to income of $2.2 million in 2011. This was mainly due to net interest expense of $0.2 million in 2012 compared to net income of $1.5 million in 2011, mainly reflecting the decrease in the interest earned on our U.S. Dollar deposits and the impact of foreign exchange rates on assets and liabilities denominated in currencies other than the U.S. Dollar.
Income tax expense decreased by $2.6 million to $0.7 million in 2012 from $3.4 million in 2011. Our effective tax rate for 2012 was 1.7% compared to 10.9% for 2011. The decrease in our effective tax rate was primarily attributable to an adjustment of a tax provision that resulted from agreements with the tax authorities in some of our jurisdictions and the utilization of expenses for taxable purposes.
Year ended December 31, 2011 compared to year ended December 31, 2010
Revenue increased by $80.6 million, or 38.6%, to $289.0 million in 2011 from $208.4 million in 2010. This growth was attributable primarily to an increase of 41.0% in the volume of soda makers sold to 2.7 million in 2011 compared to 1.9 million in 2010. CO2 refills increased by 29.1% to 13.3 million units in 2011 from 10.3 million units in 2010 and flavors increased by 36.5% to 18.9 million units in 2011 from 13.8 million in 2010, primarily due to the expansion of our active installed customer base. By segment, the key regions of revenue growth were the Americas, with an increase of $42.9 million, and Western Europe, with an increase of $23.8 million. Revenue from Asia-Pacific and from CEMEA increased by $8.2 million and $5.6 million, respectively.
Gross profit increased by $45.2 million, or 40.2%, to $157.5 million in 2011 from $112.3 million in 2010. Gross profit as a percentage of revenue, or gross margin, increased by 0.6% to 54.5% in 2011 compared to 53.9% in 2010. This increase was mainly due to an increase in the proportion of U.S. revenue and the leveraging of fixed costs on higher revenue, which was partially offset by product mix, the foreign exchange impact and commodity prices.
Sales and marketing expenses increased by $25.2 million, or 34.0%, to $99.2 million in 2011 from $74.0 million in 2010. As a percentage of revenue, sales and marketing expenses decreased to 34.3% in 2011 from 35.5% in 2010. These changes were attributable primarily to increased advertising and promotional expenses, mainly to support our continued retail expansion in the United States and holiday sales in other markets, including the United Kingdom, France and the Czech Republic.
General and administrative expenses increased by $5.8 million, or 24.0%, to $29.8 million in 2011 from $24.0 million in 2010. As a percentage of revenue, general and administrative expenses decreased to 10.3% in 2011 from 11.5% in 2010. The general and administrative expenses included non-recurring management fees paid to Fortissimo Capital of $3.0 million (including a one-time termination payment of $2.3 million) in 2010. These management fees were terminated at the time of our IPO. Recurring administrative expenses increased to $29.8 million in 2011 from $21.0 million in 2010, primarily due to share-based compensation charges that increased to $5.4 million in 2011 from $1.3 million in 2010 and an increase in our information technology department’s and headquarter’s expenses required to support our expansion, particularly in the United States, as well as the additional expenses for supporting our public company status.
Other income decreased by $0.1 million to $0.2 million in 2011 from $0.3 million in 2010, primarily due to capital gains from the sale of property, plant and equipment in 2010 not recurring in 2011.
Total financial income, net increased by $1.8 million to $2.2 million in 2011 from $0.4 million in 2010, primarily due to interest expense (income), net, which was income of $1.5 million in 2011 as compared to a net expense of $1.9 million in 2010, mainly due to interest on our interest bearing deposits and lower debt balances, and to the impact of foreign exchange rates on assets and liabilities denominated in currencies other than the Euro.
Income tax expense increased by $1.1 million to $3.4 million in 2011 from $2.3 million in 2010. Our effective tax rate for 2011 was 10.9% compared to 15.4% for 2010. The decrease in our effective tax rate was primarily the result of geographical income distribution, transfer prices structure and the utilization of taxable losses.
Historically, we have recognized a somewhat larger share of our revenue in the second quarter of the year, driven by increased sales volume in preparation for the warm summer months. The fourth quarter is also generally stronger than the first and third quarters as a result of increased sales associated with holiday shopping, and in any given year, the fourth quarter may be the quarter with the highest revenue. In 2011 and 2012, this seasonality was not reflected in our quarterly sales as sales in the third quarter were higher than in the second quarter, which was as a result of continued growth of our installed customer base in our new and fast growing markets.
Our revenue may also be impacted by the effect of the weather. Specifically, in periods when the weather is warmer than usual our revenue would likely increase, and in periods when the weather is colder than usual our revenue would likely decline.
In the short term, due to our expansion in certain markets, our revenue may increase in each quarter of a given year, and we may find the fourth quarter to be our highest revenue-generating quarter in a given year, thereby changing the seasonality fluctuations described above.
Our operating expenses and, therefore, our overall margins are also seasonally impacted. Specifically, 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.
Quarterly financial information
The following table sets forth certain unaudited consolidated quarterly statements of operations data for each of the eight quarters ended December 31, 2012. This unaudited information has been prepared on a basis consistent with our annual financial statements. This information should be read in conjunction with our audited consolidated financial statements and related notes appearing elsewhere in this annual report. The results of operations for any quarter are not necessarily indicative of results that we may achieve for any subsequent periods.
|(in thousands)||March 31,|
|Consolidated statements of operations data:|
|Cost of revenue||27,215||32,491||35,152||36,549||39,505||47,016||51,531||62,439|
|Sales and marketing||17,139||22,469||23,129||36,432||27,268||37,083||35,825||52,833|
|General and administrative||7,513||7,290||7,605||7,422||9,641||9,225||8,741||10,160|
|Other income, net||(42||)||(39||)||(40||)||(38||)||(39||)||(41||)||(54||)||(350||)|
|Total operating expenses||24,610||29,720||30,694||43,816||36,870||46,267||44,512||62,643|
|Total financial expense (income), net||182||(914||)||(1,115||)||(304||)||7||152||523||254|
|Income before income taxes||6,499||7,807||10,924||5,627||11,486||9,584||15,916||7,611|
|Income tax expense (tax benefit)||1,012||1,239||816||306||1,375||134||(850||)||78|
|Net income for the period||$||5,487||$||6,568||$||10,108||$||5,321||$||10,111||$||9,450||$||16,766||$||7,533|
|As a percentage of revenue:|
|Sales and marketing||29.3||32.5||30.6||42.5||31.0||36.0||31.8||39.7|
|General and administrative||12.8||10.5||10.1||8.7||11.0||9.0||7.8||7.6|
|Other income, net||(0.1||)||(0.1||)||(0.1||)||(0.0||)||(0.0||)||(0.0||)||(0.0||)||(0.3||)|
|Total operating expenses||42.1||43.0||40.6||51.1||42.0||44.9||39.6||47.1|
|Net income for the period||9.4||%||9.5||%||13.4||%||6.2||%||11.5||%||9.2||%||14.9||%||5.7||%|
|As a percentage of full year results:|
|Sales and marketing||17.3||22.7||23.3||36.7||17.8||24.2||23.5||34.5|
|General and administrative||25.2||24.4||25.5||24.9||25.5||24.5||23.1||26.9|
|Other income, net||(26.2||)||(24.6||)||(25.4||)||(23.8||)||(8.0||)||(8.5||)||(11.2||)||(72.3||)|
|Total operating expenses||19.1||23.1||23.8||34.0||19.4||24.3||23.4||32.9|
|Net income for the period||20.0||%||23.9||%||36.8||%||19.3||%||23.1||%||21.5||%||38.2||%||17.2||%|
Application of critical accounting policies and use of estimates
Our accounting policies affecting our financial condition and results of operations are more fully described in our consolidated financial statements for the years ended December 31, 2012, 2011 and 2010, and as of December 31, 2012 and 2011 included elsewhere in this annual report. The preparation of our financial statements requires management to make judgments, estimates and assumptions that affect the amounts reflected in the consolidated financial statements and accompanying notes, and related disclosure of contingent assets and liabilities. We base our estimates upon various factors, including past experience, where applicable, external sources and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and could have a material adverse effect on our reported results.
In many cases, the accounting treatment of a particular transaction, event or activity is specifically dictated by accounting principles and does not require management’s judgment in its application, while in other cases, management’s judgment is required in the selection of the most appropriate alternative among the available accounting principles, that allow different accounting treatment for similar transactions.
We believe that the accounting policies discussed below are critical to our financial results and to the understanding of our past and future performance, as these policies relate to the more significant areas involving management’s estimates and assumptions. We consider an accounting estimate to be critical if (1) it requires us to make assumptions because information was not available at the time or it included matters that were highly uncertain at the time we were making our estimate; and (2) changes in the estimate or different estimates that we could have selected may have had a material impact on our financial condition or results of operations.
As described in note 3K to our audited consolidated financial statements included elsewhere in this annual report, revenue is recognized 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 buyer, 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 revenue 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 exchanging and refilling of exchangeable CO2 cylinders is a critical component of our operations and, since inception, we have developed various methods to protect our rights over the manufacturing, trading and refilling of our exchangeable CO2 cylinders. In this regard, our primary objective has been to assert that we maintain legal ownership over the exchangeable CO2 cylinders, while establishing the appropriate business and legal framework in each of our markets for trading and refilling activities related to the exchangeable CO2 cylinders.
The provision of exchangeable CO2 cylinders to customers is treated as a final sale and the related income is recorded. In certain circumstances, where no full cylinder is being exchanged for a returned cylinder, we have an obligation to provide a refund upon request for the returned exchangeable CO2 cylinder. The amount of the refund varies from country to country, from customer to customer (retailer, distributor and end consumer) and may also change over time as market conditions vary in a particular country. As a result, a provision is recorded for estimated returns based on historical return patterns of customers, and the refundable amounts are recorded as a reduction of revenue.
Trade receivables — bad debt and allowance for impairment
We make ongoing estimates relating to the collectability of our accounts receivable and maintain a reserve for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the reserve, we consider the payment history of the customers and significant economic developments within the retail environment that could impact the ability of our customers to pay outstanding balances and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Because we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event we determine that a smaller or larger reserve was appropriate, we would record a benefit or charge to sales and marketing expenses in the period in which we made such a determination.
For financial reporting purposes, we evaluate our inventory to ensure it is carried at the lower of cost or net realizable value. Provisions are made against slow moving, obsolete and damaged inventories. Damaged inventories are identified and written down through the inventory counting procedures conducted at each location. Provisions for slow moving and obsolete inventories are assessed by each country as part of their ongoing financial reporting. Obsolescence is assessed based on a comparison of the level of inventory held to projected future sales. Future sales are assessed based on historical experience and adjusted where we will no longer continue to manufacture the particular item. To the extent that future events impact the salability of inventory, these provisions could vary significantly. For example, changes in specifications or regulations may render certain inventory, previously considered to have a realizable value in excess of cost, obsolete and require such inventory to be fully written off. Inventories include exchangeable CO2 cylinders that are provided to customers. Exchangeable CO2 cylinders that are loaned to distributors and exchangeable CO2 cylinders that are used by us to facilitate the exchange program are included in property, plant and equipment.
Property, plant and equipment
Property, plant and equipment represent a significant proportion of our assets, constituting 18.6% of total assets as of December 31, 2012 as compared to 15.3% in 2011. Therefore, the estimates and assumptions made to determine their carrying value and related depreciation are critical to our financial position and performance.
Exchangeable CO2 cylinders that are loaned to distributors and certain retailers and exchangeable CO2 cylinders that are used to facilitate the cylinder exchange program are considered property, plant and equipment. These cylinders represent approximately 29% of our total property, plant and equipment.
The charge in respect of periodic depreciation of an asset is derived after determining its estimated expected useful life. The useful lives of our assets are determined at the time they are acquired and reviewed annually for appropriateness. The asset’s life is based on historical experience with similar assets as well as anticipation of future events, which may impact its life, such as changes in technology. With respect to the exchangeable CO2 cylinders, although we have no plans to replace the existing aluminum CO2 cylinder model and to date new machines have been designed to use our existing stock of cylinders, we have a continuous process of introducing re-designed or newly-designed soda makers that might require a change to the cylinder design in the future. There is no assurance that future soda maker designs will be compatible with the current cylinders’ models or that changes in governmental regulations, technological developments or other factors would not shorten the useful life of these cylinders in comparison with the current estimates. Our policy is that, if and when new developments lead to the phase-out of the current model of cylinders, at that time, we will change the estimated useful life and adjust the depreciation rate of the exchangeable CO2 cylinders.
We continuously evaluate our estimates and assumptions for each reporting period, and, when warranted, adjust these assumptions. Generally, these adjustments are accounted for on a prospective basis, through depreciation expense and impairment.
Impairment of long-lived assets
We periodically evaluate the recoverable amount of long-lived assets, including goodwill, other intangible assets and property, plant and equipment, relying on a number of factors, including operating results, business plans and projected future cash flows. Assets that have an indefinite useful life, such as goodwill, are not subject to amortization and are tested annually for impairment and whenever events or changes in circumstance indicate that the carrying amount may not be recoverable. In addition, we examine at least once a year the useful life of an intangible asset that is not periodically amortized in order to determine whether events and circumstances continue to support the decision that the intangible asset has an indefinite useful life.
Assets that are subject to amortization are tested for impairment whenever events or changes in circumstance indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. The fair value is in most cases based on the discounted present value of the future cash flows expected to arise from the cash generating unit to which the goodwill relates, or from the individual asset or asset group. Estimates are used in deriving these cash flows and the discount rate.
The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent with the application of the intangible assets and property, plant and equipment accounting policies affect the amounts reported in the financial statements. In particular, if different estimates of the projected future cash flows or a different selection of an appropriate discount rate or long-term growth rate were made, these changes could materially alter the projected value of the cash flows of the asset, and as a consequence, materially different amounts would be reported in the financial statements.
Income tax comprises the taxes levied on taxable income in the individual countries and the changes in deferred tax assets and liabilities. The income taxes recognized are reflected at the amounts likely to be payable under the statutory regulations in force, or already enacted in relation to future periods, as of the reporting date.
In compliance with IAS 12 (Income Taxes), deferred taxes are recognized for temporary differences between the carrying amounts of assets and liabilities in the balance sheet prepared according to IFRS and those in the balance sheet drawn up for tax purposes. Deferred taxes are also recognized for consolidation measures and for tax loss carry forwards likely to be realizable. Deferred tax assets relating to deductible temporary differences, tax credits and tax loss carry forwards are recognized where it is sufficiently probable that taxable income will be available in the future to enable the tax loss carry forwards to be utilized. Deferred tax liabilities are recognized on temporary differences taxable in the future. Deferred taxes are calculated at the rates which, on the basis of the statutory regulations in force, or already enacted in relation to future periods, as of the reporting date, are expected to apply in the individual countries at the time of realization. Deferred tax assets and deferred tax liabilities are offset if they relate to income taxes levied by the same taxation authority. The effects of changes in tax rates or tax law on deferred tax assets and liabilities are generally accounted for in the period in which the changes are substantively enacted. Such effects are normally recognized in the statement of operations. Effects on deferred taxes previously recognized in other comprehensive income are reflected in other comprehensive income. The probability that deferred tax assets resulting from temporary differences or loss carry forwards can be utilized in the future is the subject of forecasts by the individual consolidated companies regarding their future earnings situation and other parameters. The deferred tax liabilities recognized on planned dividend payments by subsidiaries depend on assumptions regarding the future earnings situation of the subsidiaries concerned, their future financing structure and other factors. Changes in the assumptions or in circumstances may necessitate adjustments that result in allocations to deferred taxes or reversals thereof.
The determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment and there are many transactions and calculations where the ultimate tax determination is uncertain.
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.
We measure and recognize share-based compensation expense based on estimated fair values for all share-based payment awards made to our employees and directors. Share-based compensation expense in 2012 was $6.2 million. The fair value of employee stock options is measured using the Black-Scholes formula. Measurement inputs include share price on the measurement date, the exercise price of the instrument, expected volatility (based on weighted average historic volatility of comparable companies over the expected term of the options), expected life of the instruments (based on averaging the vesting schedule of the options and the contractual term), expected dividends, and the risk-free interest rate (based on government bonds, denominated in the applicable currency and with a remaining life equal to the expected life of the options). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value. If such factors change and we employ different assumptions for future grants, our compensation expense, in connection with future grants, may differ significantly from the amounts that we have recorded in the past. In addition, our compensation expense is affected by our estimate of the number of awards that will ultimately vest. In the future, if the number of equity awards that are forfeited by employees is lower than expected, the expense recognized in future periods will be higher.
Change in reporting currency
Beginning with the period commencing on January 1, 2012, we changed our reporting currency to the U.S. Dollar. Previously, we had presented our annual and quarterly consolidated balance sheets and related consolidated statements of operations and cash flows in Euros. Our change in reporting currency is to better reflect the importance of the U.S. market to our current and future business plans.
The comparative periods were translated (restated) into the new reporting currency using the exchange rate as of January 1, 2012 of €1.00 = $1.2973.
Recently issued accounting standards
A number of new standards, amendments to standards and interpretations are not yet in effect for the year ended December 31, 2012 and have not been applied in preparing our consolidated financial statements as of that date:
|·||IFRS 9 (2010) Financial Instruments (referred to below as “IFRS 9”). IFRS 9 replaces the requirements included in IAS 39 regarding the classification and measurement of financial assets and financial liabilities. In accordance with IFRS 9, there are two principal categories for measuring financial assets: amortized cost and fair value, with the basis of classification for debt instruments being the entity’s business model for managing financial assets and the contractual cash flow characteristics of the financial asset. In addition, investments in equity instruments are measured at fair value with changes in fair value being recognized in profit or loss. Nevertheless, IFRS 9 allows an entity on the initial recognition of an equity instrument not held for trading to elect irrevocably to present fair value changes in the equity instrument in other comprehensive income where no amount so recognized is ever classified to profit or loss at a later date. IFRS 9 generally preserves the instructions regarding classification and measurement of financial liabilities that are provided in IAS 39. Nevertheless, unlike IAS 39, IFRS 9 requires as a rule that the amount of change in the fair value of financial liabilities designated at fair value through profit or loss, other than loan grant commitments and financial guarantee contracts, attributable to changes in the credit risk of the liability, be presented in other comprehensive income, with the remaining amount being included in profit or loss.|
|·||IFRS 9 is effective for annual periods beginning on or after January 1, 2015 but may be applied earlier, subject to providing disclosure and at the same time adopting other IFRS amendments as specified in the standard. IFRS 9 is to be applied retrospectively other than in a number of exceptions as indicated in the transitional provisions included in IFRS 9. We are assessing the effects of adopting IFRS 9 on our financial statements.|
|·||IFRS 10 Consolidated Financial Statements, a new suite of accounting standards on consolidation of financial statements, joint arrangements and disclosure of involvement with other entities (referred to below as “IFRS 10”). IFRS 10 introduces a new single control model for determining whether an investee should be consolidated, which is to be implemented with respect to all investees. According to IFRS 10, de facto power is to be considered when assessing control, which means that the existence of effective control of an investee will require consolidation. In addition, when assessing the existence of control, all substantive potential voting rights will be taken into account, and not only potential voting rights that are currently exercisable. The requirements of IAS 27 will continue to be valid only for separate financial statements.|
|·||IFRS 11 Joint Arrangements (referred to below as “IFRS 11”). IFRS 11 classifies joint arrangements as joint operations or as joint ventures on the basis of the rights and obligations of the parties to the arrangement. Joint ventures, which are all the joint arrangements structured in a separate vehicle in which the parties with joint control have rights to the net assets of the joint arrangement, shall only be accounted for using the equity method (the option to apply the proportionate consolidation method has been eliminated). In addition, IFRS 11 amends IAS 28 Investments in Associates. The amendment eliminates the existing requirement to re-measure the existing or retained interest in the investment to fair value at a transition from significant influence to joint control and vice versa, and provides that IFRS 5 applies to an investment, or a portion of an investment, that meets the criteria to be classified as held for sale.|
|·||IFRS 12 Disclosure of Involvement with Other Entities (referred to below as “IFRS 12”). IFRS 12 contains extensive disclosure requirements for entities that have interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. The suite of standards is applicable retrospectively for annual periods beginning on or after January 1, 2013 (other than certain relief in the transitional provisions). We believe that it will not have a material effect on our financial statements.|
|·||IFRS 13 Fair Value Measurement (referred to below as “IFRS 13”). IFRS 13 replaces the fair value measurement guidance that currently appears in various IFRSs. For this purpose, it defines fair value and provides measurement and disclosure guidance. Nevertheless, IFRS 13 does not introduce new fair value measurement requirements, but explains how to measure fair value when such measurement is required by other IFRSs. IFRS 13 is applied when fair value measurements or disclosures are required or permitted by other IFRSs.|
IFRS 13 is applicable prospectively for annual periods beginning on or after January 1, 2013. The disclosure requirements of IFRS 13 need not be applied for comparative information for periods before its initial application. We are assessing the effects of adopting IFRS 13 on our financial statements.
|·||Amendment to IAS 1 Presentation of Financial Statements (referred to below as “IAS 1”). The amendment to IAS 1 changes the presentation of items of other comprehensive income (“OCI”) in the financial statements so that items of OCI that may be reclassified to profit or loss in the future, would be presented separately from those that would never be reclassified to profit or loss. The amendment to IAS 1 is applicable retrospectively for annual periods beginning on or after July 1, 2012.|
|·||Amendment to IFRS 7 Financial Instruments: Disclosures (referred to below as “IFRS 7”). The amendment to IFRS 7 contains new disclosure requirements for financial assets and liabilities that are offset in the statement of financial position or are subject to master netting agreements or similar agreements. The amendment to IFRS 7 is applicable retrospectively for annual periods beginning on or after January 1, 2013.|
|·||Amendment to IAS 32 Financial Instruments: Presentation (referred to below as “IAS 32”). The amendment to IAS 32 clarifies that an entity currently has a legally enforceable right to set-off amounts that were recognized if that right is not contingent on a future event and it is enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all its counterparties.|
|The amendment to IAS 32 is applicable retrospectively for annual periods beginning on or after January 1, 2014. Early application of the amendment to IAS 32 is permitted subject to the concurrent application of the amendment to IFRS 7. The amendment to IAS 32 is not expected to have a material effect on our financial statements.|
|B.||Liquidity and Capital Resources|
Our cash requirements have principally been for working capital and capital expenditures. Working capital increased by $16.8 million to $95.1 million as of December 31, 2012 from $78.3 million as of December 31, 2011. The increase in working capital was funded primarily from cash and cash equivalents on hand. Our working capital requirements generally reflect the growth in our business and its seasonality. Historically, we have funded a portion of our working capital (primarily inventory) and capital investments from cash flows provided by our operating activities, cash and cash equivalents on hand and borrowings available under our revolving credit and long-term debt facilities. Following our IPO and follow-on offering, our working capital and capital investment needs are funded mainly by our cash and cash equivalents. Our capital investments have included the following: the expansion of our production capacity and capabilities; improvements and the expansion of our distribution and corporate facilities to support our growth; and investments and improvements in our information technology systems.
Since 2007, our inventory strategy has included increasing inventory levels to meet anticipated consumer demand for our products. This includes maintaining an inventory of soda makers, exchangeable CO2 cylinders and other consumables at each of our sites, at levels that we expect to sell during the next three months. In addition, our inventory strategy included, for some products for which we have limited production capacity, high production volumes during the low selling seasons in order to maximize productivity during our busier seasons and to be prepared with inventory in advance of the high selling seasons. In 2011 and 2012, we continued to focus on meeting market demand for our products while improving our inventory efficiency over the long term by implementing procedures to improve our production planning process. Based on these initiatives and new systems, and processes that we intend to implement, inventory may continue to increase, but at a rate lower than the rate of growth of revenue.
As of December 31, 2012, available borrowings under our credit facilities totaled $9.7 million, of which none was being utilized. These facilities are currently provided by banks in Israel.
We may require new borrowings or additional capital to meet our capital expenditure requirements and liquidity needs and future growth requirements.
The following table presents the major components of net cash flows used in and provided by operating, investing and financing activities for the periods presented:
|Year Ended December 31,|
|Net cash from (used in) operating activities||$||(10,634||)||$||(8,187||)||$||37,177|
|Net cash used in investing activities||(7,103||)||(58,558||)||(9,228||)|
|Net cash from (used in) financing activities||80,576||32,874||(983||)|
Cash from (used in) operating activities
Operating activities consist primarily of net income adjusted for certain non-cash items. Adjustments to net income for non-cash items include mainly depreciation and amortization, unrealized financial gains and losses, share-based compensation and non-cash movements in our income tax provision and deferred taxes. In addition, operating cash flows include the effect of changes in operating assets and liabilities, principally inventories, trade and other receivables, trade payables and accrued expenses.
Cash from operating activities was $37.2 million in 2012 as compared to cash used in operating activities of $8.2 million in 2011. This was primarily due to an increase in net income by $16.4 million to $43.9 million in 2012 from $27.5 million in 2011, an increase in an adjustment to net income for a non-cash item by $5.7 million to $14.7 million in 2012 from $9.0 million in 2011 and a decrease in net cash outflows to working capital by $23.3 million to $21.4 million in 2012 from $44.7 million in 2011. Adjustments to net income for non-cash items increased in 2012 as compared to 2011 primarily due an increase in depreciation and amortization, an increase in interest expense (income), net and an increase in non-cash share-based compensation expense, which was partially offset by a decrease in income tax expense. The decrease in cash outflows related to working capital was primarily driven by an increase in trade payables of $40.0 million in 2012 compared to $4.3 million in 2011, an increase in provisions and other current liabilities of $14.9 million compared to a $0.8 million decrease in 2011, partially offset by an increase in trade and other receivables of $49.4 million in 2012 compared to $22.7 million in 2011 and an increase in inventories of $26.8 million in 2012 compared to $25.5 million in 2011.
Cash used in operating activities decreased by $2.4 million to $8.2 million in 2011 from $10.6 million in 2010. This was primarily due to an increase in net income by $14.9 million to $27.5 million in 2011 from $12.6 million in 2010 and an increase in an adjustment to net income for a non-cash item by $6.8 million to $9.0 million in 2011 from $2.2 million in 2010, which was partially offset by an increase in net cash outflows to working capital by $19.3 million to $44.7 million in 2011 from $25.4 million in 2010. Adjustments to net income for non-cash items increased in 2011 as compared to 2010 primarily due an increase in non-cash share-based compensation expense, an increase in depreciation and amortization and an increase in income tax expense, which was partially offset by a decrease in interest expense (income), net. The increase in cash outflows related to working capital was primarily driven by an increase in inventories of $25.5 million in 2011 compared to $23.8 million in 2010, an increase in trade payables of $4.3 million in 2011 compared to $16.1 million in 2010 and a decrease in provisions and other current liabilities of $0.8 million compared to a $6.0 million increase in 2010, partially offset by an increase in trade and other receivables of $22.7 million in 2011 compared to $24.6 million in 2010.
Cash used in investing activities
Cash used in investing activities decreased by $49.4 million to $9.2 million in 2012 from $58.6 million in 2011, primarily as a result of proceeds from bank deposits, compared to investing in bank deposits in 2011, partially offset by an increase in our acquisition of property, plant and equipment and an increase in our acquisition of subsidiaries.
Cash used in investing activities increased by $51.5 million to $58.6 million in 2011 from $7.1 million in 2010, primarily as a result of investing in bank deposits and an increase in acquisition of property, plant and equipment.
The majority of our capital expenditures have historically been related to the purchase of machinery and equipment and information technology hardware. In order to support our overall business expansion, we will continue to invest in production machinery and equipment, additional gas filling lines, corporate facilities and information technology infrastructure in 2013 and thereafter.
We continue to expand our manufacturing capacity while we implement our plans for an additional manufacturing facility. Specifically, we currently anticipate needing additional manufacturing capacity in the future as the demand for our products continues to increase. We are currently constructing an additional facility in the southern part of Israel (construction commenced in the third quarter of 2012) that will be approximately 915,000 square feet. See “—Capital Expenditures.” During the interim period, we are investing in expanding our manufacturing capabilities through other means, primarily by expanding our manufacturing capacity at existing facilities and by increasing the use of subcontractors for certain products and components.
Furthermore, we may spend additional amounts of cash on acquisitions from time to time, if and when such opportunities arise.
Cash from (used in) financing activities
Cash used in financing activities was $1.0 million in 2012 as compared to cash from financing activities of $32.9 million in 2011. This change was mainly due to net proceeds from our follow-on offering of $42.9 million in 2011 and a decrease in repayments of short-term debt to $3.9 million in 2012 as compared to net repayments of $11.2 million in 2011.
Cash provided by financing activities decreased by $47.7 million to $32.9 million in 2011 from $80.6 million in 2010. This change was mainly due to net proceeds from our follow-on offering of $42.9 million in 2011 as compared to net proceeds from our IPO of $90.6 million in 2010, and an increase in repayments of loans and borrowings to $11.2 million in 2011 as compared to net repayments of $10.2 million in 2010.
As of December 31, 2011 and 2012, we had no long-term debt.
As of December 31, 2012, we had credit facilities with a total borrowing capacity of $9.7 million, consisting of secured lines of credit. As of December 31, 2012, the credit facilities were not utilized. Our credit facilities are denominated as follows: $5.3 million in Euros, $3.3 million in U.S. Dollars and $1.1 million in NIS.
We are currently constructing an additional facility in the southern part of Israel (construction commenced in the third quarter of 2012) that will be approximately 915,000 square feet. We expect to complete the first phase within approximately 18 to 30 months from the commencement of construction. Upon completion of the first phase, the new site will have all production capabilities necessary to produce all of our products. The second phase will increase the capacity of the site. The total anticipated capital expenditures required for the construction is approximately $90.0 million of which the first phase is approximately $49.0 million. The new facility is being built in an industrial park that has provided governmental grants and is considered a priority manufacturing area, which provides tax benefits under Israeli law.
|C.||Research and Development, Patents and Licenses, etc.|
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2012 to December 31, 2012 that are reasonably likely to have a material adverse effect on our net revenue, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial condition.
|E.||Off-Balance Sheet Arrangements|
We do not currently engage in off-balance sheet financing arrangements. In addition, we do not have any interest in entities referred to as variable interest entities, which includes special purposes entities and other structured finance entities.
Our significant contractual obligations and commitments as of December 31, 2012 are summarized in the following table:
|Payments Due by Period|
|(in thousands)||Less Than|
|1 – 3|
|3 – 5|
|Operating lease obligations||$||5,473||$||6,075||$||3,382||$||733||$||15,663|
|Item 6.||DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES|
|A.||Directors and Senior Management|
Executive officers and directors
The following table sets forth the name, age and position of each of our executive officers and directors as of March 31, 2013:
|Daniel Birnbaum||50||Chief Executive Officer and Director|
|Daniel Erdreich||49||Chief Financial Officer|
|Yonah Lloyd||47||Chief Director of Corporate Development and Communication Officer|
|Tali Haim||39||Chief Business Development Officer|
|Yossi Azarzar||50||Chief Operations Officer|
|Eyal Shohat||39||Chief Legal Officer|
|Leon Paull||47||GM Nordics and Global Distributors|
|Mika Mazor||35||Chief People Officer|
|Ilan Nacasch||39||Chief Marketing Officer|
|Yaron Kopel||42||Chief Innovation and Design Officer|
|Eytan Glazer (1) (2) (3)||50||Director|
|Lauri A. Hanover (1) (2) (3)||53||Director|
|David Morris (1) (2) (3)||43||Director|
|(1)||Member of our Compensation Committee.|
|(2)||Member of our Nominating and Governance Committee.|
|(3)||Member of our Audit Committee.|
Daniel Birnbaum has served as our Chief Executive Officer since January 2007 and as a member of our board of directors since November 2010. From 2003 to 2006, Mr. Birnbaum was the General Manager of Nike Israel. Mr. Birnbaum was a founding member of Nuvisio Corporation, a technology start-up, and served as its Chief Executive Officer from 1999 to 2002. In 1995, Mr. Birnbaum established Pillsbury Israel and served as its Chief Executive Officer until 1999. Mr. Birnbaum holds an M.B.A. from Harvard Business School and a B.A. from The Hebrew University of Jerusalem.
Daniel Erdreich has served as our Chief Financial Officer since March 2007. Mr. Erdreich joined us in 1996, served as our Controller until 2000 and served as the Finance Manager for some of our affiliated entities from 2003 until 2007. Between 1993 and 1996 and between 2000 and 2003, Mr. Erdreich was the Chief Financial Officer of public companies traded on Nasdaq and the Tel Aviv Stock Exchange. Mr. Erdreich is a certified public accountant in Israel and holds a B.A. in Accounting and Economics and an M.A. in Business Administration, both from The Hebrew University of Jerusalem.
Yonah Lloyd has served as our Chief Director of Corporate Development and Communication Officer since April 2010.From 2008 to 2010, Mr. Lloyd consulted for Cupron, Inc., and later served as their Executive Vice President of Sales and Business Development. From 1996 to 2007, Mr. Lloyd served as Senior Vice President of Sales and Marketing at Net2Phone, Inc. From 1990 to 1996, Mr. Lloyd was an Assistant District Attorney in Bronx County, New York. Mr. Lloyd holds a J.D. from Fordham University School of Law and a B.A. in Sociology from Queens College.
Tali Haim has served as our Chief Business Development Officer since November 2007. From 2001 to 2007, Ms. Haim was a Senior Director of Sales and Marketing at Shonfeld’s USA, Inc. Prior to 2001, Ms. Haim was an organizational psychologist at the Adam Milo Institute in Israel. Ms. Haim holds a B.A. in Psychology and Philosophy from Bar Ilan University and an M.A. in Clinical Psychology from Tel Aviv University.
Yossi Azarzar has served as our Chief Operations Officer since May 2007. From 2000 to 2007, Mr. Azarzar held various positions at Intel Corporation, including Manufacturing Functional Area Manager and Manufacturing Manager. From 1994 to 2000, Mr. Azarzar served as an Area Manager with the McDonald’s Corporation in Israel. Mr. Azarzar holds a B.A and an M.A. in Islamic, Middle Eastern & Arabic studies, both from The Hebrew University in Jerusalem.
Eyal Shohat has served as our Chief Legal Officer since May 2010. From 2007 to April 2010, Mr. Shohat was the Vice President, Legal Affairs of Frutarom Industries Ltd., a public company listed on the Tel Aviv and London Stock Exchanges. From 2002 to 2006, Mr. Shohat served as Legal Counsel for Frutarom. Mr. Shohat holds a B.A. in Accounting, an L.L.B. and an M.B.A., each from Tel Aviv University.
Leon Paull has served as our GM Nordics and Global Distributors, and has managed our global network of distribution partners since 2008. Prior to that, Mr. Paull fulfilled various key positions in the company after joining in 2004. From 2005 to 2006, Mr. Paull was Head of Market Research and Information, and from 2007 to 2008, served as Global Brand Manager for the Company’s soda makers and cylinder product range. Mr. Paull holds a Bachelor’s Degree in History and Political Science from The Hebrew University of Jerusalem.
Mika Mazor has served as our Chief People Officer since February 2012. From 2002 to 2012, Mika worked at Amdocs (NYSE: DOX) in various human resources roles. Most recently, Mr. Mazor was Vice President of Human Resources for Israel and Corporate Units, having previously served as Managing Senior Talent Unit and Human Resources Director of the European Division. From 2000 to 2002, Mr. Mazor worked in human resources for Manpower Israel. Mr. Mazor holds an M.B.A. in Organizational Behavior and a B.A. in Management specializing in human resources, both from Ben Gurion University, Israel.
Ilan Nacasch has served as our Chief Marketing Officer since March 2012. From 1997 to 2012, Mr. Nacasch worked in different marketing positions at Procter & Gamble. From 2009 to 2012, Mr. Nacasch served as Global Associate Marketing Director for Pampers. Before that, Mr. Nacasch worked as Associate Marketing Director on Beauty Care and Feminine Protection in the Balkans, and on leading P&G marketing capabilities for CEEMEA. Prior to 1997, Mr. Nacasch worked at Danone Group in France.
Yaron Kopel has served as our Chief Innovation and Design Officer since September 2011. From 2009 to 2011, Mr. Kopel was the Vice President of Marketing and Innovation for Excellence Israel, the second largest investment house in Israel with approximately $20 billion under management. Prior to that, Mr. Kopel was the founder of ZER4U, Israel’s leading flower chain, and founder of TeCasan, an upscale, women’s shoe brand in New York City. Mr. Kopel holds a B.A. in Business and Economics from Tel Aviv Academy.
Yuval Cohen has served as the Chairman of our board of directors since December 2006. Mr. Cohen is the founding and managing partner of Fortissimo Capital, a private equity fund established in January 2003, managing in excess of $400 million that invests in Israeli-related technology and industrial companies. From 1997 through 2002, Mr. Cohen was a General Partner at Jerusalem Venture Partners, an Israeli-based venture capital fund. Mr. Cohen currently serves as a director of several privately held portfolio companies of Fortissimo Capital and as a director of Emblaze Ltd. (LSE: BLZ). Mr. Cohen received a B.Sc. in Industrial Engineering from Tel Aviv University and an M.B.A. from Harvard Business School.
Eytan Glazer has served as a member of our board of directors since November 2010. Mr. Glazer is one of our external directors. Since 2008, Mr. Glazer has been investing in and actively involved with several emerging companies, providing strategic guidance, business development and assistance with financings. From 1998 through 2008, Mr. Glazer was the founder and served as the Chief Executive Officer of TippCom Ltd., which was sold to Unicell Advanced Cellular Solutions Ltd. in 2008. Prior to 1998, Mr. Glazer served as Vice President, Marketing of SPL World Group, Inc. Mr. Glazer holds a B.Sc. in Computer Science and Economics from Bar Ilan University and an M.B.A. from Harvard Business School.
Lauri Hanover has served as a member of our board of directors since November 2010. Ms. Hanover is one of our external directors. Ms. Hanover is the Executive Vice President and Chief Financial Officer of Tnuva Group. From January 2008 through April 2009, she served as Chief Executive Officer of Gross, Kleinhendler, Hodak, Halevy and Greenberg & Co., an Israeli law firm. From August 2004 through December 2007, she served as the Senior Vice President and Chief Financial Officer of Lumenis Ltd., a medical device company, and from 2000 to 2004, she served as the Corporate Vice President and Chief Financial Officer of NICE Systems Ltd., an interaction and transaction analytics company. From 1997 to 2000, she served as Executive Vice President and Chief Financial Officer of Sapiens International Corporation N.V. From 1984 to 1997, Ms. Hanover served in a variety of financial management positions, including Corporate Controller at Scitex Corporation Ltd., and from 1981 to 1984 as Financial Analyst at Philip Morris Inc. (Altria). Ms. Hanover holds a B.S. in Finance from the Wharton School of Business and a B.A. from the College of Arts and Sciences, both of the University of Pennsylvania. Ms. Hanover also holds an M.B.A. from New York University.
David Morris has served as a member of our board of directors since October 2010. Mr. Morris served as an observer on our board of directors from 2002 to 2006 and, since 2007, served as an alternate director to his father, Conrad Morris, one of the early and active investors in Soda Club NV, our predecessor company. Mr. Morris is an advisor to a group of companies with extensive business and property investments. He additionally manages an extensive property portfolio in the United Kingdom and the Ukraine. Mr. Morris is a director of PC Clothing Ltd. and is a partner at K.D.M. Partners LLP, both in the United Kingdom. He is also involved in numerous charitable and community endeavors in Europe and Israel. Mr. Morris holds a B.A. in Business Studies from the University of Westminster.
Compensation of officers and directors
The aggregate compensation paid by us and our subsidiaries to our current executive officers, including share-based compensation, for the year ended December 31, 2012, was approximately $8.2 million. This amount does not include any business travel, relocation, professional and business association dues and expenses reimbursed to office holders, and other benefits commonly reimbursed or paid by companies in Israel.
We pay each of our non-employee directors an annual cash retainer of $30,000, a per meeting fee of $500 for any board or committee meeting attended and a fee of $250 per written consent of the board or a committee thereof. The Chairman of the Board receives an annual cash retainer of $60,000. We also reimburse our directors for expenses arising from their board membership. Our current non-employee directors were each granted options to purchase 30,000 of our ordinary shares upon the consummation of our IPO, at an exercise price of $20.00 per share, which vest on the first, second and third anniversaries of the date of grant. Mr. Cohen has instructed us to pay his director fees and option grants directly to an affiliate of Fortissimo Capital.
Pursuant to a recently enacted amendment to the Companies Law (the “Compensation Amendment”), which became effective on December 12, 2012, the compensation (including insurance, indemnification, exculpation and compensation) of our directors requires the approval of our compensation committee, the subsequent approval of the board of directors and, unless exempted under the regulations promulgated under the Companies Law, the approval of the shareholders at a general meeting. If the compensation of our directors is inconsistent with our stated compensation policy, then the approval of the company’s shareholders requires that either:
|·||a majority of the shares held by shareholders who are not controlling shareholders and do not have a personal interest in such matter and who are present and voting at the meeting, are voted in favor of approving the compensation package, excluding abstentions; or|
|·||the total number of shares voted by non-controlling shareholders and shareholders who do not have a personal interest in such matter that are voted against the compensation package does not exceed 2% of the aggregate voting rights in the company.|
Pursuant to the Compensation Amendment, the compensation (including insurance, indemnification and exculpation) of a public company’s office holders (other than directors as described above, and the chief executive officer as described below) is to be approved first by the compensation committee; second by the company’s board of directors; and third, if such compensation arrangement is inconsistent with the company’s stated compensation policy, the company’s shareholders provided that either:
|·||a majority of the shares held by shareholders who are not controlling shareholders and do not have a personal interest in such matter and who are present and voting at the meeting are voted in favor of approving the compensation package, excluding abstentions; or|
|·||the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in such matter voting against the compensation package does not exceed 2% of the aggregate voting rights in the company.|
Under the Compensation Amendment, if the shareholders of the company do not approve the compensation arrangement with an office holder who is not a director, including the chief executive officer, the compensation committee and board of directors may override the shareholders’ decision, subject to certain conditions. Under certain circumstances, the compensation committee and board of directors may waive the shareholder approval requirement in respect of the compensation arrangements with a candidate for chief executive officer if they determine that the compensation arrangements are consistent with the company’s stated compensation policy.
In the event that an existing compensation arrangement with an office holder who is not a director, including the chief executive officer, is amended, only the approval of the compensation committee is required so long as the compensation committee determines that the amendment is not material in relation to the existing compensation arrangement. Prior to the adoption of the compensation policy (which, as noted, must occur no later than September 12, 2013), the extension of the term of compensation arrangements existing as of the effective date of the Compensation Amendment does not require approvals under the Compensation Amendment. Where the office holder is also a controlling shareholder, the requirements for approval of transactions with controlling shareholders apply as described below under “— Disclosure of personal interests of a controlling shareholders and approval of certain transactions.”
Employment and consulting agreements with executive officers
We have entered into written employment agreements with each of our executive officers. See “Item 7.B — Related Party Transactions — Agreements with directors and officers” for additional information.
Directors’ service contracts
There are no arrangements or understandings between us and any of our subsidiaries, on the one hand, and any of our non-employee directors, on the other hand, providing for benefits upon termination of their employment or service as directors of our company or any of our subsidiaries.
In 2007, we adopted the 2007 Employee Share Option Plan and, in October 2010, we adopted the 2010 Employee Share Option Plan, (collectively, the “ESOP”). The ESOP allows us to grant options to purchase ordinary shares to our employees, directors, service providers, and consultants, and those of our subsidiaries, and to others that our compensation committee considers valuable to us. The ESOP is intended to benefit us by enhancing our ability to attract desirable individuals and increasing their ownership interests in us. The following is a summary of the material terms of the ESOP.
We currently have outstanding options to purchase our ordinary shares that were granted under our ESOP. As of December 31, 2012, 2,084,988 ordinary shares remained available for issuance under our stock option plan of which options to purchase 1,643,025 ordinary shares had been granted and were outstanding, at a weighted average exercise price of $25.64 per share, which includes 20,807 restricted share units granted to a former shareholder of a subsidiary as part of the consideration for shares of the subsidiary. Of these outstanding options, as of December 31, 2012, options to purchase 502,435 were vested and exercisable.
The normal vesting schedule for options granted under the ESOP provides that 25% of the options will vest one year after the date of grant; and 6.25% will vest at the end of each quarter thereafter for 12 quarters. The options, other than the options granted as of February 23, 2012, will expire ten years after the date of grant if not exercised earlier. Options granted on or after February 23, 2012 but prior to February 26, 2013, will expire prior to six years after the date of grant if not exercised earlier. Options granted as of February 26, 2013 will expire five years after the date of grant if not exercised earlier. In general, when an option holder’s employment or service with us terminates, his or her option will no longer continue to vest following termination, and the holder may exercise any vested options for a period of 180 days following termination without cause. If an option holder’s employment with us terminates due to disability or if the termination of employment results from his or her death, then the option holder or his or her estate (as applicable) has 12 months to exercise the option; however, the option may not be exercised after its scheduled expiration date. If termination of employment results from the dismissal of the option holder for cause, his or her outstanding options will expire upon termination.
The option exercise price is determined by the compensation committee and specified in each option award agreement. In general, the option exercise price is the fair market value of the shares on the date of grant as determined in good faith by our board of directors.
We have elected to issue our options and shares granted or issued to most of our Israeli participants in this plan under Section 102(b)(3) of the Israeli Income Tax Ordinance, which is the capital gains track. To comply with the capital gains track, all options and shares under the ESOP are granted or issued to a trustee and are held by the trustee for two years from the date of grant of the option. Under the capital gains track we are not allowed an Israeli tax deduction for the grant or issuance of the options or shares.
Our compensation committee administers the ESOP. However, our board of directors has residual authority to exercise any powers or duties of the compensation committee concerning the ESOP if the committee ceases to operate for any reason. The compensation committee determines the eligible individuals who receive options under the ESOP, the number of ordinary shares covered by those options, the terms under which such options may be exercised and the other terms and conditions of the options, all in accordance with the provisions of the ESOP.
Option holders may not transfer their options, except in the event of death or if the compensation committee determines otherwise.
In the case of certain changes in our share capital structure, such as a consolidation or share split or dividend, appropriate adjustments will be made to the numbers of shares and exercise prices under outstanding options.
In the event that we undergo a transaction, as described below, subject to any contrary law or rule, or the terms of any option award agreement in effect before the transaction, any unexercised options will be replaced by equally ranking options of the successor company. If the successor company refuses to issue these replacement options, the vesting and exercisability of outstanding options may (in the discretion of the compensation committee or the board of directors) be accelerated prior to a transaction. The ESOP defines a transaction as (a) a merger, acquisition or reorganization of the company with one or more entities in which we are not the surviving entity, or (b) a sale of all or substantially all of our assets. In the event that a proposal for liquidation is submitted to shareholders, option holders will also be entitled to exercise their options during a 10 day period to participate in a liquidation distribution. In 2012, as part of approving our CEO's long term incentive plan, the compensation committee, the audit committee, the board of directors and our shareholders, approved that in the event of a change of control in the company, all options granted previously to the CEO will be accelerated and become exercisable as at the date on which the change of control will become effective. In 2013 our compensation committee approved the same option acceleration for all of the executive officers of the company.
Our compensation committee and/or board of directors may at any time amend or terminate the ESOP; however, any amendment or termination may not adversely affect any options or shares granted under the ESOP prior to such action. The ESOP provides that if the board of directors desires, it can, with the consent of the option holder, cancel an outstanding option or amend an outstanding option, including the exercise price. For amendments affecting our officers, audit committee and/or shareholder approval may also be necessary. See “Item 6.C — Board Practices — Fiduciary duties and approval of specified related party transactions under Israeli law” and “Item 6.C — Board Practices — Audit committee — Approval of transactions with related parties.”
The following table provides information regarding the options to purchase our ordinary shares held by each of our directors and officers who beneficially own greater than one percent of our ordinary shares or options to purchase more than one percent of our ordinary shares as of December 31, 2012:
|Name (Title)||Number of Option(s)||Exercise Price||Expiration Date||Total Shares Underlying|
|Daniel Birnbaum,||29,934||€||1.60579||Dec. 25, 2017|
|Chief Executive Officer and Director|
|38,647||€||1.60579||Feb. 25, 2018|
|210,000||$||20.00||Nov. 2, 2020|
|55,000||$||35.35||Nov. 7, 2021|
|450,000||$||35.80||Dec. 20, 2018|
On December 20, 2012, our shareholders approved a Long-Term Incentive Plan for our chief executive officer (the “LTIP”), pursuant to which he was granted option to purchase 450,000 shares of which 135,000 of the options vest on January 1, 2014, and 315,000 of the options vest on December 31, 2015, subject to achieving a performance condition of weighted revenue-EBITDA measurement (as may be discounted) of at least 100%. The weighted revenue-EBITDA measurement is calculated based on our aggregate annual EBITDA at the end of each of the years from 2012 through 2015, subject to extension to 2016 and our aggregate revenue and EBITDA included in our annual approved budget
C. Board Practices
Board of directors and officers
Our current board of directors consists of five directors. Mr. Glazer and Ms. Hanover serve as our external directors.
Our articles of association provide that we may have between five and nine directors. Removal of any director shall be upon the vote of the holders of two-thirds of our voting shares, except as provided by applicable law.
Under our articles of association, our directors (other than the external directors, whose appointment is required under the Companies Law; see “— External directors”) are divided into three classes. Each class of directors consists, as nearly as possible, of one-third of the total number of directors constituting the entire board of directors (other than the external directors). At each annual general meeting of our shareholders, the election or re-election of directors following the expiration of the term of office of the directors of that class of directors, will be for a term of office that expires on the third annual general meeting following such election or re-election, such that from 2012 and after, each year the term of office of only one class of directors will expire. Class I directors, consisting of Mr. Birnbaum, will hold office until our annual meeting of shareholders to be held in 2014. Class II directors, is currently vacant since our 2012 annual meeting held in December 2012 and any director that is placed into this class will hold office until our annual meeting of shareholders to be held in 2015. Class III directors, consisting of Messrs. Cohen and Morris, will hold office until our annual meeting of shareholders to be held in 2013. The directors shall be elected by a vote of the holders of a majority of the voting power present and voting at that meeting (excluding abstentions). Each director will hold office until the annual general meeting of our shareholders for the year in which his or her term expires, unless the tenure of such director expires earlier pursuant to the Companies Law or unless he or she is removed from office as described below.
The articles relating to the number of directors, staggered board and election and removal of a director from office may be changed only by a resolution adopted by two-thirds of our voting shares. Vacancies on our board of directors, including vacancies resulting from there being fewer than the maximum number of directors permitted by our articles, may be filled by a vote of a simple majority of the directors then in office, even if they do not constitute a quorum. Directors so chosen or appointed shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible. See “— External directors” for a description of the procedure for the election of external directors.
In addition, under the Companies Law, our board of directors must determine the minimum number of directors who are required to have financial and accounting expertise. Under applicable regulations, a director with financial and accounting expertise is a director who, by reason of his or her education, professional experience and skill, has a high level of proficiency in and understanding of business accounting matters and financial statements. See “— Qualifications of external directors.” He or she must be able to thoroughly comprehend the financial statements of the listed company and initiate debate regarding the manner in which financial information is presented. In determining the number of directors required to have such expertise, the board of directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors has determined that we require at least one director with the requisite financial and accounting expertise. Ms. Hanover has such financial and accounting expertise.
Each of our executive officers serves at the discretion of the board of directors and holds office until his or her resignation or removal. There are no family relationships among any of our directors or executive officers.
Qualifications of external directors
Under the Companies Law, companies incorporated under the laws of the State of Israel that are “public companies,” including companies with shares listed on the Nasdaq Global Select Market, are required to appoint at least two external directors. Mr. Glazer and Ms. Hanover are qualified to serve as external directors under the Companies Law.
Pursuant to a recent amendment to the Companies Law, a person may not serve as an external director if, (a) the person is a relative of our controlling shareholder, or (b) at the date of the person’s appointment or within the prior two years, the person, the person’s relatives, entities under the person’s control, the person’s partner, the person’s employer, or anyone to whom that person is subordinate, whether directly or indirectly, have or have had any affiliation with (1) us; (2) our controlling shareholder at the time of such person’s appointment; or (3) any entity that is either controlled by us or under common control with us at the time of such appointment or during the prior two years. In a company that has no controlling shareholder or entity or any entity holding 25% or more of the voting rights in the company, a person may also not serve as an external director if the person has any affiliation with any person who, as of the date of the person’s appointment, was the chairman of the board of directors, the general manager (chief executive officer), any shareholder holding 5% or more of the company’s shares or voting rights or the most senior financial officer.
The term affiliation includes:
|·||an employment relationship;|
|·||a business or professional relationship even if not maintained on a regular basis (excluding insignificant relationships);|
|·||service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such director was appointed as a director of the private company in order to serve as an external director following the initial public offering.|
The term relative is defined as a spouse, sibling, parent, grandparent or descendant; a spouse’s sibling, parent or descendant; and the spouse of each of the foregoing persons.
The term office holder is defined as a director, general manager, chief business manager, deputy general manager, vice general manager, other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of the foregoing positions, without regard to such person’s title.
No person can serve as an external director if the person’s position or other business create, or may create, a conflict of interest with the person’s responsibilities as a director or may otherwise interfere with the person’s ability to serve as a director or if the person is an employee of the Israel Securities Authority or of an Israeli stock exchange. Furthermore, a person may not continue to serve as an external director if he or she received direct or indirect compensation from us for his or her role as a director unless such compensation is paid or given in accordance with regulations promulgated under the Companies Law or unless such compensation constitutes amounts paid pursuant to indemnification and/or exculpation contracts or commitments and insurance coverage. If at the time an external director is appointed all current members of the board of directors not otherwise affiliated with the company are of the same gender, then that external director must be of the other gender. In addition, a director of a company may not be elected as an external director of another company if, at that time, a director of the other company is acting as an external director of the first company.
The Companies Law provides that an external director must meet certain professional qualifications or have financial and accounting expertise, and that at least one external director must have financial and accounting expertise. However, if at least one of our other directors (1) meets the independence requirements of the Exchange Act, (2) meets the standards of the Nasdaq Marketplace Rules for membership on the audit committee and (3) has financial and accounting expertise as defined in the Companies Law and applicable regulations, then neither of our external directors is required to possess financial and accounting expertise as long as both possess other requisite professional qualifications. The board of directors is required to determine whether a director possesses financial and accounting expertise by examining whether, due to the director’s education, experience and qualifications, the director is highly proficient and knowledgeable with regard to business-accounting issues and financial statements, to the extent that the director is able to engage in a discussion concerning the presentation of financial information in the company’s financial statements, among others. The regulations define a director with the requisite professional qualifications as a director who satisfies one of the following requirements: (1) the director holds an academic degree in either economics, business administration, accounting, law or public administration, (2) the director either holds an academic degree in any other field or has completed another form of higher education in the company’s primary field of business or in an area which is relevant to the office of an external director, or (3) the director has at least five years of experience serving in any one of the following, or at least five years of cumulative experience serving in two or more of the following capacities: (a) a senior business management position in a corporation with a substantial scope of business, (b) a senior position in the company’s primary field of business or (c) a senior position in public administration. Our board of directors has determined that Ms. Hanover possesses the requisite financial and accounting expertise.
Following the termination of an external director’s service on a board of directors, such former external director and his or her spouse and children may not be provided a direct or indirect benefit by the company, its controlling shareholder or any entity under its controlling shareholders’ control. This includes engagement to serve as an executive officer or director of the company or a company controlled by a controlling shareholder or employment by, or providing services to, any such company for consideration, either directly or indirectly, including through a corporation controlled by the former external director, for a period of two years (and for a period of one year with respect to relatives of the former external director).
Election and dismissal of external directors
Under Israeli law, external directors are elected by a majority vote at a shareholders’ meeting, provided that either:
|·||the majority of the shares that are voted at the meeting, including at least a majority of the shares held by non-controlling shareholders who do not have a personal interest in the election of the external director (other than a personal interest not deriving from a relationship with a controlling shareholder) who voted at the meeting, excluding abstentions, vote in favor of the election of the external director; or|
|·||the total number of shares held by non-controlling, disinterested shareholders (as described in the preceding clause) that are voted against the election of the external director does not exceed two percent of the aggregate voting rights in the company.|
Under Israeli law, the initial term of an external director of an Israeli company traded on the Nasdaq Global Select Market is three years and he or she may be reelected to two additional terms of three years provided that either (a) the board of directors has recommended such reelection and such reelection is approved by a majority vote at a shareholders’ meeting, subject to the conditions described above for election of external directors, or (b) the reelection has been recommended by one or more shareholders holding at least one percent of the company’s voting rights and is approved by a majority of non-controlling, disinterested shareholders who hold among them at least two percent of the company’s voting rights. Reelection to each additional term beyond the first extension must comply with the following conditions: (1) the audit committee and, subsequently, the board of directors must confirm that the reelection for an additional term is beneficial to the company, taking into account the external director’s expertise and special contribution to the function of the board of directors and its committees, and (2) the company’s shareholders were informed at the general meeting, prior to the approval of the reelection of the external director, of the term previously served by him or her and of the reasons why the board of directors and audit committee recommended the extension of the external director’s term.
If the board of directors is made aware of a concern that an external director has ceased to meet the statutory requirements for his or her appointment, or has violated his or her duty of loyalty to the company, then the board of directors is required to discuss the concern and determine whether it is justified. If the board of directors determines that the concern is justified, it must call a special general meeting of the company’s shareholders, the agenda of which includes the dismissal of the external director. The external directors may be removed by the same majority of shareholders as is required for their election.
An Israeli court may remove external directors (1) at the request of a director or a shareholder of the company if it determines that the external director has ceased to meet the statutory requirements for his or her appointment, or has violated his or her duty of loyalty to the company, or (2) at the request of the company, a director, a shareholder or a creditor of the company if it determines that the external director is unable to perform his or her duties on a regular basis, or is convicted of certain offenses set forth in the Companies Law.
If the vacancy of an external directorship causes the company to have fewer than two external directors, such company’s board of directors is required under the Companies Law to call a special general meeting of the company’s shareholders as soon as possible to appoint a new external director. It is anticipated that external directors will be elected at our annual meeting which will take place in 2013 with their term to be effective in February 2014.
Under the Companies Law, each committee to which a board of directors delegates power is required to include at least one external director and its audit committee is required to include all of the external directors.
An external director is entitled to compensation and reimbursement of expenses only in accordance with regulations promulgated under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with serving as a director.
Our audit committee consists of Ms. Hanover and Messrs. Glazer and Morris. The chairperson of the audit committee is Ms. Hanover.
Companies law requirements
Under the Companies Law, the board of directors of any public company must also appoint an audit committee comprised of at least three directors, including all of the external directors, and one of our external directors must serve as chairperson of the committee. The audit committee may not include:
|·||the chairman of the board of directors;|
|·||a controlling shareholder or a relative of a controlling shareholder (as each such term is defined in the Companies Law); or|
|·||any director employed by the company, by the company’s controlling shareholder or by any other entity controlled by the company’s controlling shareholder, or any director who provides services to the company, to the company’s controlling shareholder or to any other entity controlled by the company’s controlling shareholder on a regular basis (other than as a member of the board of directors), or any other director whose main source of income derives from the controlling shareholder.|
The term controlling shareholder is defined in the Companies Law as a shareholder with the ability to direct the activities of the company, other than by virtue of being an office holder. A shareholder is presumed to be a controlling shareholder if the shareholder holds 50% or more of the voting rights in a company or has the right to appoint the majority of the directors of the company or its general manager.
A majority of the total number of then-serving members of the audit committee shall constitute a quorum for the transaction of business at the audit committee meetings, provided, that the majority of the members present at such meeting are unaffiliated directors and at least one of such members is an external director. In addition, the audit committee of a publicly traded company must consist of a majority of unaffiliated directors. An “unaffiliated director” is defined as either an external director or as a director who meets the following criteria:
|·||he or she meets the qualifications for being appointed as an external director, except for (i) the requirement that the director be an Israeli resident (which does not apply to companies such as ours whose securities have been offered outside of Israel or are listed outside of Israel) and (ii) the requirement for accounting and financial expertise or professional qualifications; and|
|·||he or she has not served as a director of the company for a period exceeding nine consecutive years. For this purpose, a break of less than two years in the service shall not be deemed to interrupt the continuation of the service.|
All of the directors on our audit committee are unaffiliated directors.
Under the Nasdaq Marketplace Rules, we are required to maintain an audit committee consisting of at least three independent directors, all of whom are financially literate and one of whom has accounting or related financial management expertise.
Our audit committee consists of Ms. Hanover and Messrs. Glazer and Morris. Ms. Hanover is an audit committee financial expert as defined by the SEC rules and has the requisite financial sophistication as defined by the Nasdaq Marketplace Rules. All of the members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and the Nasdaq Marketplace Rules.
Ms. Hanover and Messrs. Glazer and Morris are independent as such term is defined in Rule 10A-3(b)(1) under the Exchange Act and under the listing standards of the Nasdaq Global Select Market.
Approval of transactions with related parties
The approval of the audit committee is required to effect specified actions and transactions with office holders and controlling shareholders, or in which they have an interest. See “— Fiduciary duties and approval of specified related party transactions under Israeli law.” The term “controlling shareholder” means a shareholder with the ability to direct the activities of the company, other than by virtue of being an office holder. A shareholder is presumed to be a controlling shareholder if the shareholder holds 50% or more of the voting rights in a company or has the right to appoint the majority of the directors of the company or its general manager. For the purpose of approving transactions with controlling shareholders, the term also includes any shareholder that holds 25% or more of the voting rights of the company if the company has no shareholder that owns more than 50% of its voting rights. For purposes of determining the holding percentage stated above, two or more shareholders who have a personal interest in a transaction that is brought for the company’s approval are deemed as joint holders. The audit committee may not approve an action or a transaction with a controlling shareholder or with an office holder unless at the time of approval two external directors are serving as members of the audit committee and at least one of them was present at the meeting at which the approval was granted.
Audit committee role
Our board of directors has adopted an audit committee charter setting forth the responsibilities of the audit committee consistent with the rules of the SEC and the Nasdaq Marketplace Rules, which include:
|·||retaining and terminating our independent auditors, subject to shareholder ratification;|
|·||pre-approval of audit and non-audit services provided by the independent auditors;|
|·||examining our quarterly and annual financial reports prior to their submission to the board of directors;|
|·||to determine whether to classify certain arrangements or transactions as requiring special approval under the Companies Law;|
|·||determining whether there are delinquencies in the business management practices of our company, including in consultation with our internal auditor or our independent auditor, and making recommendations to the board of directors to improve such practices;|
|·||determining whether to approve certain related party transactions (including compensation of office holders or transactions in which an office holder has a personal interest and whether such transaction is material);|
|·||where the board of directors approves the working plan of the internal audit, examining such working plan before its submission to the board of directors and proposing amendments thereto;|
|·||examining our internal controls and internal auditor’s performance, including whether the internal auditor has sufficient resources and tools to dispose of his responsibilities (taking into consideration our special needs and size);|
|·||examining the scope of our auditor’s work and compensation and submitting its recommendation with respect thereto to the corporate body considering the appointment thereof (either the board of directors or the general meeting of shareholders); and|
|·||establishing procedures for the handling of employees’ complaints as to the management of our business and the protection to be provided to such employees.|
Additionally, under the Companies Law, the role of the audit committee is to identify irregularities in our business management in consultation with the internal auditor or our independent auditors and suggest an appropriate course of action to the board of directors, and to approve the yearly or periodic work plan proposed by the internal auditor to the extent required.
The audit committee charter states that in fulfilling its obligations, the committee is entitled to demand from us any document, file, report or any other information that is required for the fulfillment of its roles and duties and to interview any of our employees or any employees of our subsidiaries in order to receive more details about his or her line of work or other issues that are connected to the roles and duties of the audit committee.
Our compensation committee consists of Ms. Hanover and Messrs. Glazer and Morris. The chairperson of the compensation committee is Ms. Hanover.
Our board of directors has adopted a compensation committee charter setting forth the responsibilities of the committee consistent with the Nasdaq Global Select Market rules which include:
|·||reviewing and recommending overall compensation policies with respect to our chief executive officer and other executive officers;|
|·||reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer and other executive officers including evaluating their performance in light of such goals and objectives;|
|·||reviewing and approving the granting of options and other incentive awards; and|
|·||reviewing, evaluating and making recommendations regarding the compensation and benefits for our non-employee directors.|
Ms. Hanover and Messrs. Glazer and Morris are independent under the listing standards of the Nasdaq Global Select Market.
Nominating and governance committee
Our nominating and governance committee consists of Ms. Hanover and Messrs. Glazer and Morris. The chairperson of the nominating and governance committee is Mr. Glazer.
Our board of directors has adopted a nominating and governance committee charter setting forth the responsibilities of the committee consistent with the Nasdaq Global Select Market rules which include:
|·||reviewing and recommending nominees for election as directors;|
|·||developing and recommending to our board corporate governance guidelines and a code of conduct and ethics for our directors, officers and employees in compliance with applicable law;|
|·||reviewing developments relating to corporate governance issues;|
|·||reviewing and making recommendations regarding board member skills and qualifications, the nature of duties of board committees and other corporate governance matters; and|
|·||establishing procedures for and administering annual performance evaluations of our board.|
Ms. Hanover and Messrs. Glazer and Morris are independent under the listing standards of the Nasdaq Global Select Market. Pursuant to the Compensation Amendment, we are required to adopt a compensation policy by September 12, 2013, which must comply with the requirements of the Compensation Amendment. Our compensation policies are to be approved at least once every three years, first, by our board of directors, upon recommendation of our compensation committee, and second, by a majority of the ordinary shares present, in person or by proxy, and voting at a shareholders meeting. The other responsibilities of the compensation committee set forth in the Compensation Amendment are consistent with the Nasdaq rules and are also applicable to the compensation of our directors.
Under the Companies Law, the board of directors of a public company must appoint an internal auditor based on the recommendation of the audit committee. The role of the internal auditor is, among other things, to examine whether a company’s actions comply with applicable law and orderly business procedure. Under the Companies Law, the internal auditor may be an employee of the company but not an interested party or an office holder or a relative of an interested party or an office holder, nor may the internal auditor be the company’s independent auditor or the representative of the same. An “interested party” is defined in the Companies Law as (i) a holder of 5% or more of the issued share capital or voting power in a company, (ii) any person or entity who has the right to designate one or more directors or to designate the chief executive officer of the company, or (iii) any person who serves as a director or as a chief executive officer of the company.
Dror Haimovitch has been appointed as our internal auditor. Mr. Haimovitch is a certified internal auditor and a partner of the Israeli accounting firm of Barzily& Co.
Fiduciary duties and approval of specified related party transactions under Israeli law
Fiduciary duties of office holders
The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company.
The duty of care of an office holder is based on the duty of care set forth in connection with the tort of negligence under the Israeli Torts Ordinance (New Version) 5728-1968. This duty of care requires an office holder to act with the degree of proficiency with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of care includes a duty to use reasonable means, in light of the circumstances, to obtain:
|·||information on the advisability of a given action brought for his or her approval or performed by virtue of his or her position; and|
|·||all other important information pertaining to these actions.|
The duty of loyalty requires an office holder to act in good faith and for the benefit of the company, and includes the duty to:
|·||refrain from any act involving a conflict of interest between the performance of his or her duties in the company and his or her other duties or personal affairs;|
|·||refrain from any activity that is competitive with the business of the company;|
|·||refrain from exploiting any business opportunity of the company for the purpose of gaining a personal advantage for himself or herself or others; and|
|·||disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of his or her position as an office holder.|
We may approve an act performed in breach of the duty of loyalty of an office holder provided that the office holder acted in good faith, the act or its approval does not harm the company, and the office holder discloses his or her personal interest, as described below.
Disclosure of personal interests of an office holder and approval of acts and transactions
The Companies Law requires that an office holder promptly disclose to the company any personal interest that he or she may have and all related material information or documents relating to any existing or proposed transaction by the company. An interested office holder’s disclosure must be made promptly and in any event no later than the first meeting of the board of directors at which the transaction is considered. An office holder is not obliged to disclose such information if the personal interest of the office holder derives solely from the personal interest of his or her relative in a transaction that is not considered as an extraordinary transaction.
“Personal interest” is defined under the Companies Law to include the personal interest of a person in an action or in the business of a company, including the personal interest of such person’s relative or the interest of any corporation in which the person is an interested party, but excluding a personal interest stemming solely from the fact of holding shares in the company. Pursuant to a recent amendment to the Companies Law, a personal interest will include the personal interest of a person for whom the office holder holds a voting proxy or the interest of the office holder with respect to his or her vote on behalf of the shareholder for whom he or she holds a proxy even if such shareholder itself has no personal interest in the approval of the matter. An office holder is not, however, obliged to disclose a personal interest if it derives solely from the personal interest of his or her relative in a transaction that is not considered an extraordinary transaction.
Under the Companies Law, an extraordinary transaction which requires approval is defined as any of the following:
|·||a transaction other than in the ordinary course of business;|
|·||a transaction that is not on market terms; or|
|·||a transaction that may have a material impact on the company’s profitability, assets or liabilities.|
Under the Companies Law, once an office holder has complied with the above disclosure requirement, a company may approve a transaction between the company and the office holder or a third-party in which the office holder has a personal interest, or approve an action by the office holder that would otherwise be deemed a breach of duty of loyalty. However, a company may not approve a transaction or action that is adverse to the company’s interest or that is not performed by the office holder in good faith.
Under the Companies Law, unless the articles of association of a company provide otherwise, a transaction with an office holder, a transaction with a third-party in which the office holder has a personal interest, and an action of an office holder that would otherwise be deemed a breach of duty of loyalty requires approval by the board of directors. Our articles of association do not provide otherwise. If the transaction or action considered is (i) an extraordinary transaction, (ii) an action of an office holder that would otherwise be deemed a breach of duty of loyalty and may have a material impact on a company’s profitability, assets or liabilities, (iii) an undertaking to indemnify or insure an office holder who is not a director, or (iv) an undertaking concerning the terms of compensation of an office holder who is not a director, including, an undertaking to indemnify or insure such office holder, then audit committee approval is required prior to approval by the board of directors. Arrangements regarding the compensation, indemnification or insurance of a director require the approval of the audit committee, board of directors and shareholders, in that order.
A director who has a personal interest in a matter that is considered at a meeting of the board of directors or the audit committee may generally not be present at the meeting or vote on the matter unless a majority of the directors or members of the audit committee have a personal interest in the matter, or unless the chairman of the audit committee or board of directors (as applicable) determines that he or she should be present to present the transaction that is subject to approval. If a majority of the directors have a personal interest in the matter, such matter also requires approval of the shareholders of the company.
Disclosure of personal interests of a controlling shareholder and approval of transactions
Under the Companies Law, the disclosure requirements that apply to an office holder also apply to a controlling shareholder of a public company. See “Audit committee — Approval of transactions with related parties” for a definition of controlling shareholder. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, including a private placement in which a controlling shareholder has a personal interest, transactions for the provision of services whether directly or indirectly by a controlling shareholder or his or her relative, or a company such controlling shareholder controls, and transactions concerning the terms of engagement of a controlling shareholder or a controlling shareholder’s relative, whether as an office holder or an employee, require the approval of the audit committee, the board of directors and a majority of the shares voted by the shareholders of the company participating and voting on the matter in a shareholders’ meeting. In addition, the shareholder approval must fulfill one of the following requirements:
|·||at least a majority of the shares held by shareholders who have no personal interest in the transaction and are voting at the meeting must be voted in favor of approving the transaction, excluding abstentions; or|
|·||the shares voted by shareholders who have no personal interest in the transaction who vote against the transaction represent no more than 2.0% of the voting rights in the company.|
To the extent that any such transaction with a controlling shareholder is for a period extending beyond three years, approval is required once every three years, unless the audit committee determines that the duration of the transaction is reasonable given the circumstances related thereto.
Duties of shareholders
Under the Companies Law, a shareholder has a duty to refrain from abusing its power in the company and to act in good faith and in an acceptable manner in exercising its rights and performing its obligations to the company and other shareholders, including, among other things, voting at general meetings of shareholders on the following matters:
|·||an amendment to the articles of association;|
|·||an increase in the company’s authorized share capital;|
|·||a merger; and|
|·||the approval of related party transactions and acts of office holders that require shareholder approval.|
A shareholder also has a general duty to refrain from discriminating against other shareholders.
The remedies generally available upon a breach of contract will also apply to a breach of the above mentioned duties, and in the event of discrimination against other shareholders, additional remedies are available to the injured shareholder.
In addition, any controlling shareholder, any shareholder that knows that its vote can determine the outcome of a shareholder vote and any shareholder that, under a company’s articles of association, has the power to appoint or prevent the appointment of an office holder, or has another power with respect to a company, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness, taking the shareholder’s position in the company into account.
Exculpation, insurance and indemnification of office holders
Under the Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. An Israeli company may exculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of care but only if a provision authorizing such exculpation is inserted in its articles of association. Our articles of association include such a provision. An Israeli company may not exculpate a director from liability arising out of a prohibited dividend or distribution to shareholders.
An Israeli company may indemnify an office holder in respect of the following liabilities and expenses incurred for acts performed as an office holder, either in advance of an event or following an event, provided a provision authorizing such indemnification is contained in its articles of association:
|•||financial liability imposed on him or her in favor of another person pursuant to a judgment, settlement or arbitrator’s award approved by a court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such an undertaking must be limited to events which, in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking shall detail the abovementioned events and amount or criteria;|
|•||reasonable litigation expenses, including attorneys’ fees, incurred by the office holder as a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (i) no indictment was filed against such office holder as a result of such investigation or proceeding; and (ii) no financial liability, such as a criminal penalty, was imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent; and|
|•||reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings instituted against him or her by the company, on its behalf or by a third-party or in connection with criminal proceedings in which the office holder was acquitted or as a result of a conviction for an offense that does not require proof of criminal intent.|
An Israeli company may insure an office holder against the following liabilities incurred for acts performed as an office holder if and to the extent provided in the company’s articles of association:
|•||a breach of duty of loyalty to the company, to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;|
|•||a breach of duty of care to the company or to a third-party, including a breach arising out of the negligent conduct of the office holder; and|
|•||a financial liability imposed on the office holder in favor of a third-party.|
An Israeli company may not indemnify or insure an office holder against any of the following:
|•||a breach of duty of loyalty, except to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;|
|•||a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder;|
|•||an act or omission committed with intent to derive illegal personal benefit; or|
|•||a fine or forfeit levied against the office holder.|
Under the Companies Law, exculpation, indemnification and insurance of office holders must be approved by the audit committee and the board of directors and, with respect to directors, by shareholders.
Our articles of association allow us to indemnify and insure our office holders for any liability imposed on them as a consequence of an act (including any omission) which was performed by virtue of being an office holder. Our office holders are currently covered by a directors and officers’ liability insurance policy. As of the date of this annual report, no claims for directors and officers’ liability insurance have been filed under this policy and we are not aware of any pending or threatened litigation or proceeding involving any of our directors or officers in which indemnification is sought.
We have entered into agreements with each of our directors and executive officers exculpating them, to the fullest extent permitted by law, from liability to us for damages caused to us as a result of a breach of duty of care, and undertaking to indemnify them to the fullest extent permitted by law. This indemnification is limited to events determined as foreseeable by the board of directors based on our activities, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances. The insurance is subject to our discretion depending on its availability, effectiveness and cost. Effective as of the date of our IPO, the maximum amount set forth in such agreements is (1) with respect to indemnification in connection with a public offering of our securities, the gross proceeds raised by us and/or any selling shareholder in such public offering, and (2) with respect to all permitted indemnification, including a public offering of our securities, the greater of (a) an amount equal to 50% of our shareholders’ equity on a consolidated basis, based on our most recent financial statements made publicly available before the date on which the indemnity payment is made and (b) $50 million. In the opinion of the SEC, indemnification of directors and office holders for liabilities arising under the Securities Act however, is against public policy and therefore unenforceable.
There is no pending litigation or proceeding against any of our directors or officers as to which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.
As of December 31, 2012, we had 2,232 employees of whom 1,672 were based in Israel, 145 were in Germany, 113 were in the United States and 302 were in other countries. Of the total number of employees, approximately 598 were temporary employees (most of whom work at our manufacturing facilities).
The breakdown of our employees by department is as follows:
|As of December 31,|
|Operations and product development||710||978||1,645|
|Sales and marketing||262||337||360|
|General and administration||85||148||206|
Under applicable Israeli law, we and our employees are subject to protective labor provisions such as restrictions on working hours, minimum wages, minimum vacation, sick pay, severance pay and advance notice of termination of employment, as well as equal opportunity and anti-discrimination laws. Orders issued by the Israeli Ministry of Industry, Trade and Labor may make certain industry-wide collective bargaining agreements applicable to us. These agreements affect matters such as cost of living adjustments to salaries, length of working hours and week, recuperation pay, travel expenses and pension rights. Our employees in Israel are not represented by a labor union. We provide our employees with benefits and working conditions which we believe are competitive with benefits and working conditions provided by similar companies in Israel.
Agreements with our employees also forbid disclosure of our proprietary information and contain customary provisions restricting employment with our competitors for a certain period after they stop working for us. Certain of these restrictions may be of no or little enforceability under Israeli law and may be of questionable enforceability in other jurisdictions. In addition, many of the employees in our manufacturing facilities are employed through third-party manpower agencies. Under Israeli Law, after nine consecutive months of employment with the same company, employees employed through third-party manpower agencies become employees of the company into which they were placed by the manpower agency, and are entitled to all related protective labor provisions as of the first day of such individual’s employment with the company into which they were placed.
Employees that work for our international subsidiaries are subject to local law and in most cases have entered into personal employment agreements with the particular subsidiary that they work for. These agreements also include non-competition and non-disclosure provisions. Our employees located in Germany are subject to local collective bargaining agreements.
For information regarding the share ownership of our directors and executive officers, please refer to “Item 6.B — Compensation — Option plans” and “Item 7.A — Major Shareholders.”
|Item 7.||MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS|
The following table sets forth information with respect to the beneficial ownership of our shares as of March 31, 2013 by:
• each person or entity known by us to own beneficially more than 5% of our outstanding shares;
• each of our executive officers;
• each of our directors; and
• all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting or investment power with respect to those securities, and include shares subject to options that are exercisable within 60 days after the date of this annual report. Such shares are also deemed outstanding for purposes of computing the percentage ownership of the person holding the option, but not the percentage ownership of any other person.
For the purpose of calculating the percentage of shares beneficially owned by any shareholder, this table lists applicable percentage ownership based on 20,715,768 ordinary shares outstanding as of March 31, 2013.
Unless otherwise indicated below, to our knowledge, all persons named in the table have sole voting and investment power with respect to their shares, except to the extent that authority is shared by spouses under community property laws.
As of March 31, 2013, we had two shareholders of record, both located in the United States, of our outstanding ordinary shares, representing 100% of our outstanding ordinary shares. None of our shareholders has informed us that he, she or it is affiliated with a registered broker-dealer or is in the business of underwriting securities.
Unless otherwise indicated, the address of each beneficial owner is c/o SodaStream International Ltd., Gilboa Street, Airport City, Ben Gurion Airport 70100, Israel.
|Name of Beneficial Owner||Shares Beneficially Owned|
|FMR LLC and Affiliates (1)||2,618,498||12.6||%|
|Real Property Investment Limited (2)||2,101,333||10.1||%|
|Tremblant Capital Group (3)||1,948,871||9.4||%|
|Cadian Capital Management, LLC and Eric Bannasch(4)||1,456,146||7.0||%|
|Executive officers and directors|
|Yuval Cohen (6)||*||*|
|Lauri A. Hanover||*||*|
|David Morris (6)||*||*|
|Daniel Birnbaum (7)||220,457||1.1||%|
|All executive officers and directors as a group (14 persons) (8)||380,726||1.8||%|
* less than 1%.
|(1)||Based on a Schedule 13G/A filed with the SEC on February 14, 2013 by FMR LLC (“FMR”). Consists of 2,618,498 shares beneficially owned by Fidelity Management & Research Company (“Fidelity”) in its capacity as an investment adviser to various investment companies and 61,200 shares beneficially owned by Pyramis Global Advisors Trust Company (“PGATC”) in its capacity as an investment manager of institutional accounts owning such shares. Fidelity is a wholly owned subsidiary of FMR and PGATC is an indirect wholly owned subsidiary of FMR. Members of the family of Edward C. Johnson 3d, Chairman of FMR, directly or through trusts, own approximately 49% of the voting power of FMR and may be deemed, under the Investment Company Act of 1940, to form a controlling group with respect to FMR. The principal address of FMR and Fidelity is 82 Devonshire Street, Boston, Massachusetts 02109. The principal address of PGATC is 900 Salem Street, Smithfield, Rhode Island 02917.|
|(2)||Based on a Schedule 13G/A filed with the SEC on January 17, 2013. Includes 2,101,333 ordinary shares, which are held of record by Real Property Investment Limited, a Liberian company, whose shares are held 50% by Cosign Nominees Limited and 50% by Spread Nominees Limited as bare nominees for Line Trust Corporation Limited, a professional trustee company, in its capacity as trustee of a discretionary settlement constituted under the laws of Gibraltar, with the potential beneficiaries being certain of the remoter issue of Conrad Morris, who is the father of our director David Morris. Real Property Investment Limited is a private company and is ultimately controlled by its board of directors, currently consisting of Michael Thomas Cahill, Peter Francis Griffin and Roy Frank Le Hegarat. The directors of Real Property Investment Limited have the power to vote and dispose of the ordinary shares held by Real Property Investment Limited. The principal address of Real Property Investment Limited is c/o Justin Jager, Intertrust International Management Ltd., P.O. Box 119, Martello Court, Admiral Park, St Peter Port, Guernsey GY1 3HB, Channel Islands.|
|(3)||Based on a Schedule 13G filed with the SEC on February 14, 2013 by Tremblant Capital Group (“Tremblant”). Tremblant has sole voting and dispositive power with respect to 1,455,053 ordinary shares in its capacity as an investment adviser for its various advisory clients, none of which owns more than 5% of the class. The principal address for Tremblant is 767 Fifth Avenue, New York, New York 10153.|
|(4)||Based on a Schedule 13G filed with the SEC on February 14, 2013 by Cadian Capital Management, LLC (“Cadian”) and Eric Bannasch (“Bannasch”) who share beneficial ownership over 1,456,146 ordinary shares. The principal address for both Cadian and Bannasch is 535 Madison Avenue, 36th Floor, New York, New York 10022.|
|(5)||Based on a Schedule 13G filed with the SEC on February 20, 2013 by Morgan Stanley who share beneficial ownership over 1,236,301 ordinary shares. The principal address for Morgan Stanley is 1585 Broadway, New York, New York 10036.|
|(6)||The address for Mr. Morris is c/o PC Clothing Ltd., 55-57 Holmes Road, London NW5 3AN, United Kingdom.|
|(7)||Consists of options to purchase 220,457 shares which are currently exercisable or exercisable within 60 days of March 31, 2013.|
|(8)||Includes options to purchase 379,660 shares and 1,066 restricted share units which are currently exercisable or exercisable within 60 days of March 31, 2013.|
Prior to our IPO, our major shareholders were Fortissimo Capital Fund GP, L.P., which beneficially held approximately 43.3% of our then-existing share capital, Real Property Investment Limited, which beneficially held approximately 25.6% of our then-existing share capital, Kendray Properties Ltd., which beneficially held approximately 15.7% of our then-existing share capital, Clemente Corsini, who beneficially held approximately 7.2% of our then-existing share capital and Keswick Properties Ltd., which beneficially held approximately 3.9% of our then-existing share capital. As part of our IPO, consummated on November 8, 2010, each of the aforementioned major shareholders, except for Clemente Corsini, sold a portion of its shares to the public. As part of a follow-on public offering consummated on April 19, 2011, all of the aforementioned major shareholders, including Clemente Corsini, sold a portion of their shares to the public. Based on Schedules 13G/A filed with the Securities and Exchange Commission on February 9, 2012, Fortissimo Capital Fund GP, L.P., Kendray Properties Ltd. and Clemente Corsini have ceased to be beneficial owners of any of our shares. For additional information regarding changes in the percentage of our shares held by our major shareholders during the past three years, please refer to “Item 7.B — Related Party Transactions.” Our major shareholders do not have voting rights that are different from our other shareholders. For additional information regarding the voting of our ordinary shares, please refer to “Item 10.B — Memorandum and Articles of Association.”
|B.||Related Party Transactions|
Since January 1, 2012, we have engaged in the following transactions with our directors and executive officers, holders of more than 5% of our voting securities and affiliates of our directors, executive officers and 5% shareholders. We believe that all of the transactions described below were made on terms no less favorable to us than could have been obtained from unaffiliated third parties.
Agreements with directors and officers
We have entered into written employment agreements with all of our executive officers. These agreements each contain provisions regarding non-competition, confidentiality of information and assignment of inventions. The non-competition provision applies for a period that is generally between six and 24 months following termination of employment. The enforceability of covenants not to compete in Israel and the United States is subject to limitations. In addition, we are required to provide notice of between two and six months prior to terminating the employment of certain of our senior executive officers other than in the case of a termination for cause.
Since our inception, we have granted options to purchase our ordinary shares to certain of our officers. We describe our option plans under “Item 6.B. — Compensation — Option plans.”
Our articles of association permit us to exculpate, indemnify and insure our office holders to the fullest extent permitted by the Companies Law. We have entered into agreements with each of our directors and executive officers, exculpating them from a breach of their duty of care to us to the fullest extent permitted by law and undertaking to indemnify them to the fullest extent permitted by law, to the extent that these liabilities are not covered by insurance. See “Item 6.C — Board Practices — Exculpation, insurance and indemnification of office holders.”
Certain arrangements with Daniel Birnbaum
On December 29, 2011, our shareholders approved a payment of a bonus to Mr. Daniel Birnbaum, our chief executive officer and a director on our board, in the amount of NIS 525,000, and options to purchase 55,000 of our ordinary shares at an exercise price equal to the closing price on the Nasdaq Global Select Market of our ordinary shares on November 7, 2011, all related to the successful completion of our follow-on offering.
On December 20, 2012, our shareholders approved the following changes to the compensation package given to Mr. Birnbaum including an increase in (1) gross monthly salary to NIS 0.1 million (approximately $27,000) per month, (2) annual paid vacation to 30 days per year and (3) our contribution to the chief executive officer’s education fund to 7.5% of the chief executive officer’s monthly gross salary without limitation to the amount that provides a tax benefit under the Israeli Tax Ordinance. The above changes were deemed effective as of January 1, 2012 (the “Effective Date”). In addition, the shareholders approved an annual bonus for the year 2011 in the amount of $0.1 million, for his contribution to our results and achievements in 2011 and a bonus to our chief executive officer, in an amount equal to 12 months of the chief executive officer’s monthly gross salary at the time of payment, if we achieved, at least, the target revenues and target EBITDA that were set in the 2012 Annual Budget as previously approved by the board of directors. For the year 2013 and thereafter, an annual cash bonus plan for the chief executive officer of an amount equal to a maximum of up to an amount that equals 14 months of the chief executive officer’s gross monthly salary that is in effect at the time of payment, of which an amount equal to up to 12 months of the chief executive officer’s gross monthly salary will be paid if quantitative targets have been reached and an additional amount equal to up to two months of the chief executive officer’s gross monthly salary will be paid if qualitative targets have been reached. The quantitative targets for each fiscal year shall be set by the board of directors at the time of approving the annual budget for such year, provided, that such approval shall not take place later than March 31 of any given year.
On December 20, 2012, our shareholders approved a long term incentive plan ("LTIP") for our chief executive officer, pursuant to which 135,000 of the options vest on January 1, 2014, and 315,000 of the options vest on December 31, 2015, subject to achieving a performance condition of weighted revenue-EBITDA measurement (as may be discounted) of at least 100%. The weighted revenue-EBITDA measurement is calculated based on our aggregate annual EBITDA at the end of each of the years from 2012 through 2015, subject to extension to 2016 and our aggregate revenue and EBITDA included in our annual approved budget.
|C.||Interests of Experts and Counsel|
|Item 8.||FINANCIAL INFORMATION|
|A.||Consolidated Statements and Other Financial Information|
Consolidated financial statements
We have appended our consolidated financial statements at the end of this annual report, starting at page F-1, as part of this annual report.
We are currently party to a number of lawsuits in various jurisdictions in which we do business, including product liability actions and employee lawsuits. Product liability suits are generally covered by our product liability insurance and, in many cases, involve the use of third-party products with our home carbonating system, such as carbonation bottles or CO2 cylinders. We believe that our product and employer’s liability insurance provide sufficient protection for such actions.
In November 2009, we filed a lawsuit in the District Court of Stockholm, Sweden, against a competitor, Vikingsoda AB, which had been refilling our exchangeable CO2 cylinders without our authorization. In the suit, we alleged that Vikingsoda had infringed our intellectual property rights by altering our exchangeable CO2 cylinders by removing our trademarks from and affixing their trademarks to those cylinders. On June 2012 the District Court issued its judgment in our favor. The District Court prohibited Vikingsoda, under penalty of a fine of SEK 500,000 from de-branding and co-branding our CO2 cylinders in a certain manner as described in the judgment. In addition, the District Court declared that we are entitled to reasonable compensation for Vikingsoda’s use of our trademarks, compensation for damages that Vikingsoda caused us and compensation for litigation fees in the amount of SEK 1,090,000. We and Vikingsoda have filed an appeal to the court and leave for appeal was granted. In February 2013, Vikingsoda went into bankruptcy and we have been informed by the court of appeal that Vikingsoda has withdrawn its appeal.
On November 16, 2009, Vikingsoda AB filed a complaint with the Swedish Competition Authority, or the SCA, alleging that two of our subsidiaries, together with our then Swedish distributor, Empire AB are guilty of abuse of dominant position. On March 5, 2012, the SCA provided us with notice that it has decided to terminate, with no further action, its investigation with respect to potential abuse of our dominant position in the Swedish market.
We are engaged in other legal actions arising out of the ordinary course of business and believe that the ultimate outcome of these actions will not have a material adverse effect on our results of operations, financial condition or cash flows.
Historically, we have generally not distributed our net income as dividends to our shareholders but rather re-invested such income in our business. We currently intend to retain all future earnings to finance operations and to expand our business. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, the provisions of applicable Israeli law, financial condition and future prospects and other factors our board of directors may deem relevant.
Under Israeli law, we may only declare and pay an annual dividend if, upon the reasonable determination of our board of directors, the distribution will not prevent us from being able to meet the terms of our existing and contingent obligations as they become due. Under Israeli law, the amount distributed is further limited to the greater of retained earnings or earnings generated over the two most recent fiscal years. In the event that we do not meet the retained earnings criteria, as defined in the Companies Law, we may seek the approval of the applicable Israeli court in order to distribute a dividend. The court may approve our request if it is convinced that there is no reasonable concern that the payment of a dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. See “Item 10.B — Memorandum and Articles of Association — Dividend and liquidation rights.”
The payment of dividends may be subject to Israeli withholding taxes. See “Item 10.E — Taxation — Israeli tax considerations and government programs — Taxation of our shareholders — Taxation of non-Israeli shareholders on receipt of dividend.”
No significant changes have occurred since December 31, 2012, except as otherwise disclosed in this annual report.
|Item 9.||THE OFFER AND LISTING|
Our ordinary shares have been listed on the Nasdaq Global Select Market under the symbol “SODA” since November 3, 2010. Prior to that date, there was no public trading market for our ordinary shares. Our IPO was priced at $20.00 per share on November 2, 2010. The following table sets forth for the periods indicated the high and low sales prices per ordinary share as reported on the Nasdaq Global Select Market:
|Year Ended December 31, 2010|
|Fourth Quarter (beginning November 3, 2010)||$||23.15||$||43.88|
|Year Ended December 31, 2011|
|Year Ended December 31, 2012|
|Year Ended December 31, 2013|
|Second Quarter (up to April 12, 2013)||$||47.25||$||55.62|
|Last Six Months|
|April 2013 (up to April 12, 2013)||$||47.25||$||55.62|
On March 31, 2013, the last reported sale price of our ordinary shares on the Nasdaq Global Select Market was $49.64 per share.
As of March 31, 2013, we had two holders of record of our ordinary shares. The actual number of shareholders is greater than this number of record holders, and includes shareholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include shareholders whose shares may be held in trust by other entities.
|B.||Plan of Distribution|
Our ordinary shares have been listed on the Nasdaq Global Select Market under the symbol “SODA” since November 3, 2010.
|F.||Expenses of the Issue|
|Item 10.||ADDITIONAL INFORMATION|
|B.||Memorandum and Articles of Association|
Objects and Purposes
We are registered with the Israeli Registrar of Companies in Jerusalem. Our registration number is 51-395125-1. Our purpose as set forth in our articles of association is to engage in any legal business.
Holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders at a shareholder meeting. Shareholders may vote at shareholder meetings either in person, by proxy or by written ballot. Israeli law does not allow public companies to adopt shareholder resolutions by means of written consent in lieu of a shareholder meeting. Shareholder voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future. The Companies Law provides that a shareholder, in exercising his or her rights and performing his or her obligations toward the company and its other shareholders, must act in good faith and avoid abusing his or her powers including when voting at general meetings on matters such as amending the articles of association, increasing the company’s authorized capital and approving mergers and related party transactions that require shareholder approval. A shareholder also has a general duty to refrain from discriminating against other shareholders. The remedies generally available upon a breach of contract apply in the event of breach of the above mentioned duties, and in the event of harm, other remedies shall also be available to the injured shareholder. In addition, any controlling shareholder, any shareholder who knows that its vote can determine the outcome of a shareholder vote and any shareholder who, under a company’s articles of association, can appoint or prevent the appointment of an office holder or has other power with respect to the company, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty, except to state that the remedies generally available upon a breach of contract will apply also in the event of a breach of the duty to act with fairness. Except as otherwise disclosed in this annual report, an amendment to our articles of association to change the rights of our shareholders requires the prior approval of a simple majority of our shares represented and voting at a general meeting.
Share ownership restrictions
The ownership or voting of ordinary shares by non-residents of Israel is not restricted in any way by our articles of association or the laws of the State of Israel, except that citizens of countries which are in a state of war with Israel may not be recognized as owners of ordinary shares.
Transfer of shares
Fully paid ordinary shares are issued in registered form and may be freely transferred under our articles of association unless the transfer is restricted or prohibited by another instrument, Israeli law or the rules of a stock exchange on which the shares are traded.
Election of directors
Our ordinary shares do not have cumulative voting rights for the election of directors. Rather, under our articles of association our dire