Company Quick10K Filing
SodaStream
20-F 2017-12-31 Filed 2018-03-22
20-F 2016-12-31 Filed 2017-03-09
20-F 2015-12-31 Filed 2016-04-18
20-F 2014-12-31 Filed 2015-04-20
20-F 2013-12-31 Filed 2014-04-30
20-F 2012-12-31 Filed 2013-04-16
20-F 2011-12-31 Filed 2012-04-30
20-F 2010-12-31 Filed 2011-06-30

SODA 20F Annual Report

Part I
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
Part II
Item 13.Defaults, Dividend Arrearages and Delinquencies
Item 14.Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15.Controls and Procedures
Item 16.[Reserved]
Item 16A.Audit Committee Financial Expert
Item 16B.Code of Ethics
Item 16C.Principal Accountant Fees and Services
Item 16D.Exemptions From The Listing Standards for Audit Committees
Item 16E.Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F.Change in Registrant's Certifying Accountant
Item 16G.Corporate Governance
Item 16H.Mine Safety Disclosure
Part III
Item 17.Financial Statements
Item 18.Financial Statements
Item 19.Exhibits
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 Distribution Business and Operations
Note 8 - Property, Plant and Equipment
Note 9 - Intangible Assets
Note 10 - Inventories
Note 11 - Other Receivables
Note 12 - Cash and Cash Equivalents
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 Expense (Income), Net
Note 19 - General and Administrative
Note 20 - Sales and Marketing
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
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SodaStream Earnings 2014-12-31

Balance SheetIncome StatementCash Flow

20-F 1 v407458_20f.htm FORM 20-F

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

 

 

FORM 20-F

 

 

 

¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2014

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

OR

 

¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report _______________

 

Commission file number 001-34929

 

SODASTREAM INTERNATIONAL LTD.

(Exact name of Registrant as specified in its charter)

 

Not Applicable

(Translation of Registrant’s name into English)

 

Israel

(Jurisdiction of incorporation or organization)

 

Gilboa Street,

Airport City 7010000, Israel

(Address of principal executive offices)

 

Daniel Birnbaum
Chief Executive Officer
SodaStream International Ltd.
Gilboa Street
Airport City 7010000, 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 Stock Market LLC

 

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, 2014, the registrant had outstanding 21,002,547 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 o No x

 

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 ¨   Non-accelerated filer ¨

 

Indicate by check mark which basis for accounting the registrant has used to prepare the financing statements included in this filing:

 

U.S. GAAP ¨   International Financial Reporting Standards as issued by the
International Accounting Standards Board x
  Other ¨

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. 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

 

Introduction 1
Special Note Regarding Forward-Looking Statements 1
   
PART I
Item 1. Identity of Directors, Senior Management and Advisers 2
Item 2. Offer Statistics and Expected Timetable 2
Item 3. Key Information 2
Item 4. Information on the Company 17
Item 4A. Unresolved Staff Comments 25
Item 5. Operating and Financial Review and Prospects 25
Item 6. Directors, Senior Management and Employees 38
Item 7. Major Shareholders and Related Party Transactions 53
Item 8. Financial Information 55
Item 9. The Offer and Listing 56
Item 10. Additional Information 57
Item 11. Quantitative and Qualitative Disclosures About Market Risk 68
Item 12. Description of Securities Other than Equity Securities 68
   
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies 69
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 69
Item 15. Controls and Procedures 69
Item 16. [Reserved] 70
Item 16A. Audit Committee Financial Expert 70
Item 16B. Code of Ethics 70
Item 16C. Principal Accountant Fees and Services 70
Item 16D. Exemptions from the Listing Standards for Audit Committees 70
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 70
Item 16F. Change in Registrant’s Certifying Accountant 70
Item 16G. Corporate Governance 71
Item 16H. Mine Safety Disclosure 71
   
PART III
Item 17. Financial Statements 71
Item 18. Financial Statements 71
Item 19. Exhibits 71
Signatures 72
Index to Consolidated Financial Statements F-1

 

 
 

 

INTRODUCTION

 

In this annual report, the terms “SodaStream,” “we,” “us,” “our,” “our company” and “the company” refer to SodaStream International Ltd. and its consolidated subsidiaries. References to “Euros” or “€” are to the Euro, the official currency of the Eurozone; references to “U.S. Dollars,” “$” or “dollars” are to U.S. dollars, the official currency of the United States; and references to “NIS” are to New Israeli Shekels, the official currency of the State of Israel.

 

Throughout this annual report, we refer to various trademarks, service marks and trade names that we use in our business. SodaStream® and Soda-Club® are some of our registered trademarks. We also have a number of other registered trademarks, service marks and pending applications relating to our products. Other trademarks and service marks appearing in this annual report are the property of their respective holders.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, 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,” “will,” “would” or similar expressions that convey uncertainty of future events or outcomes and the negatives of those terms. These statements include, but are not limited to, statements regarding:

 

·growing our business by repositioning our brand around health and wellness;

 

·our ability to successfully implement our growth plan;

 

·our plans to develop and introduce new products and to rebrand certain of our current products;

 

·our plans to increase our installed base in our markets and generate ongoing demand for our consumables;

 

·our intention to use certain marketing techniques for expansion into new markets and broaden our penetration in existing markets;

 

·completing the ramp-up of our new manufacturing facility located in the southern part of Israel, including the timing thereof;

 

·increasing the number of stores in each region where we sell our products;

 

·our belief that the sale of sparkling water makers will increase the sale of consumables;

 

·entering new markets, including in collaboration with distributors;

 

·our plans to enter into collaboration arrangements with third parties, including strategic co-branding arrangements;

 

·our belief regarding our ability to meet demand for our products; 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 included in this annual report are based on information available to us as of the date of this annual report. Unless we are required to do so under U.S. federal securities laws or other applicable laws, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

 

1
 

 

PART I

 

Item 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

Item 2.OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

Item 3.KEY INFORMATION

 

A.Selected Financial Data

 

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, 2014 and the consolidated balance sheet data as of December 31, 2013 and December 31, 2014 are derived from our audited consolidated financial statements appearing elsewhere in this annual report. The consolidated statements of operations data for the year ended December 31, 2010 and 2011 and the consolidated balance sheet data as of December 31, 2010, 2011 and 2012 are derived from our audited consolidated financial statements that are not included in this annual report. The information presented below under the caption “Other financial and operating data” contains unaudited information that is not derived from our financial statements.

 

 

(in thousands, except share  Year Ended December 31, 
and per share amounts)  2010   2011   2012   2013   2014 
Consolidated statements of operations data:                         
Revenues  $208,414   $288,953   $436,316   $562,723   $511,774 
Cost of revenues   96,077    131,405    200,491    277,153    258,686 
Gross profit   112,337    157,548    235,825    285,570    253,088 
Operating expenses:                         
Sales and marketing   74,020    99,170    153,009    186,289    177,668 
General and administrative   24,047    29,829    37,767    50,353    49,795 
Other expenses (income), net   (257)   (158)   (484)   -    10,654 
Total operating expenses   97,810    128,841    190,292    236,642    238,117 
Operating income   14,527    28,707    45,533    48,928    14,971 
Interest expense (income), net   1,903    (1,526)   169    551    401 
Other financial expenses (income), net   (2,291)   (625)   767    1,695    (1,593)
Total financial expenses (income), net   (388)   (2,151)   936    2,246    (1,192)
Income before income tax   14,915    30,858    44,597    46,682    16,163 
Income tax expense   2,295    3,373    737    4,655    3,868 
Net income  $12,620   $27,485   $43,860   $42,027   $12,295 
Net income per ordinary share:                         
Basic  $1.57   $1.40   $2.16   $2.02   $0.59 
Diluted  $0.90   $1.34   $2.09   $1.96   $0.58 
Shares used in computing net income per ordinary share:                         
Basic   8,026,701    19,553,296    20,343,829    20,790,930    20,968,498 
Diluted   14,680,217    20,572,300    20,968,168    21,427,958    21,251,118 

 

2
 

  

   Year Ended December 31, 
(in thousands)  2010   2011   2012   2013   2014 
Other financial and operating data (unaudited):                         
Total number of sparkling water makers sold   1,922    2,710    3,499    4,449    3,225 
Total number of CO2 refills sold (1)   10,299    13,292    16,543    21,479    25,012 
EBITDA(2)  $20,111   $35,282   $54,890   $62,226   $33,611 
Adjusted EBITDA(3)  $20,111   $35,282   $54,890   $62,226   $52,572 
Adjusted net income (3)  $12,620   $27,485   $43,860   $42,027   $27,944 
                          
   As of December 31, 
(in thousands)  2010   2011   2012   2013   2014 
Consolidated balance sheet data:                         
Cash and cash equivalents  $68,627   $34,769   $62,068   $40,885   $46,880 
Bank deposits   -    39,485    -    -    - 
Working capital (4)   35,241    78,278    95,137    155,382    158,840 
Total assets   218,031    303,738    412,377    484,999    487,298 
Loans and borrowings    8,761    4,006    -    15,452    43,884 
Total liabilities   77,764    84,756    137,887    153,393    156,523 
Total shareholders’ equity   140,267    218,982    274,490    331,606    330,775 

 

(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 restructuring costs and goodwill impairment. Adjusted net income is a non-IFRS measure which eliminates the effect of restructuring costs. We believe that Adjusted net income and Adjusted EBITDA, as described above, should be considered in evaluating the company’s operations. Adjusted net income excludes restructuring costs because it is a non-cash expense that does not reflect the performance of the company’s underlying business and operations. Adjusted EBITDA facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structures (affecting interest expense, net), tax positions (such as the impact on periods or companies of changes in effective tax rates) and the age and depreciation charges and amortization of fixed and intangible assets, respectively (affecting relative depreciation and amortization expense, 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. Adjusted net income and Adjusted EBITDA presented in this annual report are defined differently than in the company’s previous annual reports on Form 20-F. The Adjusted net income and Adjusted EBITDA data for all periods presented reflect such terms as defined above.

 

(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.

 

3
 

 

 

   Year Ended December 31, 
(in thousands)  2010   2011   2012   2013   2014 
Reconciliation of net income to EBITDA and to adjusted EBITDA:                         
Net income  $12,620   $27,485   $43,860   $42,027   $12,295 
Interest expense (income), net   1,903    (1,526)   169    551    401 
Income tax expense   2,295    3,373    737    4,655    3,868 
Depreciation and amortization   3,293    5,950    10,124    14,993    17,047 
EBITDA  $20,111   $35,282   $54,890   $62,226   $33,611 
Restructuring costs   -    -    -    -    15,649 
Goodwill impairment   -    -    -    -    3,312 
Adjusted EBITDA  $20,111   $35,282   $54,890   $62,226   $52,572 
                          
   Year Ended December 31, 
(in thousands)  2010   2011   2012   2013   2014 
Reconciliation of net income to adjusted net income:                         
Net income  $12,620   $27,485   $43,860   $42,027   $12,295 
Restructuring costs   -    -    -    -    15,649 
Adjusted net income  $12,620   $27,485   $43,860   $42,027   $27,944 

 

B.Capitalization and Indebtedness

 

Not applicable.

 

C.Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D.Risk Factors

 

Our business faces significant risks. You should carefully consider all of the information set forth in this annual report and in our other filings with the United States Securities and Exchange Commission (the “SEC”), including the following risk factors. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. This report also contains forward-looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward-looking statements as a result of certain factors including the risks described below and elsewhere in this report and our other SEC filings. See also “Special Note Regarding Forward-Looking Statements.”

 

Risks Related to our Business and Industry

 

A key element of our strategy is to expand in target markets, primarily the United States, and our failure to do so would have a material adverse effect on our business, financial condition, results of operations and prospects.

 

A key element of our strategy is to grow our business by expanding sales of our sparkling water makers, CO2 refills and other consumables in certain existing markets that we believe have high growth potential and in select new markets. In particular, 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. We face several challenges in achieving consumer acceptance and adoption of our home beverage carbonation systems, including, among other things, identifying and addressing market trends and consumers’ tastes and preferences, which often differ between markets, adapting to changes in market trends and consumers’ tastes and preferences in our existing markets, encouraging consumers to make sparkling water beverages at home rather than purchasing sparkling water beverages and consumers’ willingness to exchange empty CO2 cylinders for filled CO2 cylinders. We have and expect to continue to invest amounts in repositioning our brand around health and wellness as per our growth plan. We may not be successful in establishing such positioning and such positioning might not appeal to consumers. We may not achieve the anticipated positive results or growth from repositioning our brand around health and wellness, even if we succeed in establishing such positioning. There can be no assurance that we will meet any of the challenges we face in our existing markets or new markets we are targeting, and the failure to do so would materially adversely affect our growth in a particular market and may materially adversely affect our business, financial condition, results of operations and prospects.

 

4
 

  

Our marketing campaigns and media spending might not result in increased sales or generate the levels of product and brand awareness we desire, which may adversely affect our business and prospects.

 

Our products are ultimately sold to consumers and, therefore, our future growth depends in large part on our ability to create and maintain awareness of our products and our brand in a manner that appeals to consumers. As part of our growth plan, we have and expect to continue to invest amounts to establish our new positioning around health and wellness and our future growth depends in part in our successfully positioning our brand and products in a manner that appeals to consumers. To create and maintain product and brand awareness, we engage in extensive advertising and promotional campaigns in certain key markets that we believe have significant growth potential. Our future growth and results of operations depend in part on the effectiveness and efficiency of these campaigns and our media spending, including our ability to:

 

·raise awareness of our home beverage carbonation systems and brand;

 

·determine the appropriate creative message and media mix to raise awareness of our products and our brand in a manner that appeals to consumers;

 

·create and tailor specific advertisements and promotion campaigns for the consumers we target in the markets in which we distribute our products; and

 

·effectively manage advertising costs, including creative and media costs.

 

We have significantly expanded our retail presence in the United States in recent years; however, we believe that our ability to drive sales of our products depends on raising awareness of our brand in a manner that appeals to consumers. We allocate a significant portion of our annual media spend on marketing campaigns targeted at the United States. These campaigns require significant financial resources and may require additional funds depending on the results they generate.

 

Our marketing campaigns and messages may not result in increased revenues or increased product or brand awareness in a manner that appeals to consumers, and we may not be able to increase our sales at the same rate as we increase our advertising expenditures, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

Our ability to grow our business successfully depends, among other things, on our ability to develop and implement our production and operating infrastructure in a way that would effectively support our growth in our target markets.

 

We are targeting certain markets for growth, including the United States. Achieving and successfully managing growth in our target markets will require us to continue developing and implementing our production and operating infrastructure including, among other things, infrastructure and logistics for our products’ distribution and supply chain, quality assurance controls, product development, manufacturing of our products, information technology and financial control systems. In addition, we will need to continue to develop the infrastructure for consumers to conveniently exchange empty CO2 cylinders for filled ones, whether through retailers or otherwise. The development and implementation of our infrastructure requires significant investment and can be complex in the markets in which we operate and seek to operate. We expect that these investments will increase and become increasingly complex as our business grows. Our future results will depend on our ability to successfully develop and implement these initiatives, particularly in our larger markets, such as 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 business, financial condition, results of operations and prospects.

 

Our future success also requires that we have adequate capacity in our manufacturing facilities to manufacture the quantities of products to support our current sales level and the anticipated increased levels that may result from our growth. There can be no assurance as to the timing or our ability to achieve planned, needed, or desired manufacturing capacity levels. We believe that the capacity of our current manufacturing facilities and subcontractors is sufficient to meet anticipated demand for our products through 2015 and upon completion of the ramp-up of our new manufacturing facility located in the southern part of Israel, which we refer to as the Lehavim facility, we expect to have sufficient capacity to meet demand for our products for the foreseeable future. The ramp-up of the Lehavim facility is a substantial and complex project. If we cannot fund or otherwise successfully complete the ramp-up of the Lehavim facility, we may be unable to satisfy demand for our products. We may seek additional long-term loans to finance the further construction and ramp-up of the Lehavim facility, which may not be available on reasonable terms, if at all.

 

In addition, we have experienced, and may in the future experience, difficulties that are common in the installation, functionality and operation of manufacturing equipment. Failures or delays in obtaining and installing the necessary equipment, technology and other resources may delay the completion of the ramp-up of the Lehavim facility, add to its cost and result in our not fully utilizing the substantial investment made in the construction of the Lehavim facility, which would have a material adverse effect on our business, financial condition, results of operations and prospects. There can be no assurance that demand for our products will increase commensurate with the increased production capability that will be available upon completion of the ramp-up of the Lehavim facility or that we will realize the anticipated production and operational benefits from the Lehavim facility.

 

5
 

 

Our products are manufactured at a limited number of locations in Israel and in China. Upon completion of the ramp-up of the Lehavim facility, a single facility will house the majority of our production operations in Israel. Business interruptions at any of our manufacturing facilities could result in our inability to produce products for extended periods of time, which would have a material adverse effect on our business, financial condition, results of operations and prospects.

 

We currently produce a majority of our products, including certain key components, at a limited number of manufacturing facilities in Israel, including one facility, which is scheduled to be shut down by the end of 2015, located in a disputed territory. After the completion of the ramp-up of the Lehavim facility, we expect that most of our manufacturing operations in Israel will take place at the Lehavim facility, including metals, bottle blowing, machining, assembly, cylinder manufacturing, CO2 refills, cylinder retesting, plastic injection and printing, and to continue manufacturing flavors in Ashkelon, Israel, located on the Mediterranean coast of Israel.

 

If operations at any of our manufacturing facilities, and at the Lehavim facility in particular, were to be disrupted as a result of equipment failures, earthquakes and other natural disasters, fires, accidents, work stoppages, power outages, water shortages, acts of terrorism or war, or other reasons, we may be unable to produce our products for extended periods of time. A facility and certain equipment located 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. Lost sales or increased costs that we may experience due to the disruption of operations may not be recoverable under our insurance policies, and longer-term business disruptions could result in a loss of customers. The occurrence of any of such events could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

We also 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 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 adversely affect our business, financial condition, results of operations and prospects.

 

We lease some of our facilities from third parties, including certain of our manufacturing facilities. As such, there is a risk that we will not be able to renew the lease agreements, which could lead to a disruption of our operations, or that the terms of the leases under any such renewals will be on less favorable terms.

 

We may not be successful in continuing to develop or in maintaining our presence in retail networks for the sale of our products and the exchange of our empty CO2 cylinders in the markets we are targeting for growth, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

Our growth in both existing and new markets depends significantly on our ability to develop and maintain our presence in retail networks, as retailers are the primary channel through which consumers initially purchase our home beverage carbonation systems and through which our consumables and other products are sold. Our ability to successfully expand in our target markets depends, among other things, on whether we are able to establish relationships with strong retailers in those markets for the sale of our home beverage carbonation systems, the exchange of our empty CO2 cylinders and the sale of our other consumables and products. There can be no assurance that we will be successful in establishing or maintaining relationships with strong retailers in the markets we are targeting for growth, or if successful, that we will do so in a time frame consistent with our plans or 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 business, financial condition, results of operations and prospects.

 

We rely on third-party distributors of our home beverage carbonation systems and consumables in a number of our markets.

 

We distribute our home beverage carbonation systems and consumables through relationships with third-party distributors in 21 countries. Our third-party distributors accounted for 18.2% of our revenues in 2014 and one of our distributors, serving one country in Western Europe, accounted for 12.2% of our revenues in 2014. Our distribution agreements are generally exclusive agreements for a given territory with a five-year term with an option to extend the term, and our distributors are generally required to meet defined purchase targets. If our distributors do not meet their defined purchase targets, they may lose their exclusivity right and we may also seek to terminate our distribution agreement with them. 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 may also experience a delay in retaining new distributors. Where 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 the 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 adversely affect our business, financial condition, results of operations and prospects.

 

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We may face competition from sales of consumables and, in particular, CO2 cylinders, which could adversely impact our business, financial condition and results of operations.

 

Our business of refilling our exchangeable CO2 cylinders is important to the long-term success of our business and our future growth. For safety, public health and other reasons, we retain ownership of the exchangeable CO2 cylinders included in our home beverage carbonation systems and provide them under license, whether sold with our system or as a separate component. Our agreements with retailers contain an acknowledgement that we retain title to the exchangeable CO2 cylinders. In addition, the packaging in which the cylinders are distributed, as well as the cylinders themselves, bear notices advising consumers that the cylinders are provided under license. Nevertheless, these contractual arrangements have not always been effective, and in a number of locations, suppliers of CO2 not authorized by us seek, or have sought in the past, to refill our exchangeable CO2 cylinders or refill other exchangeable CO2 cylinders marketed as compatible with our systems. In addition to creating potential safety and public health risks, such sales of consumables by third parties unauthorized by us may result in lost sales opportunities for us, negatively impact customer retention and could harm our reputation if these products cause damage when used with our products. 

 

In 2008, the German Federal Court of Justice, the highest German court, upheld a decision by the German Federal Cartel Office that preventing end consumers from having their CO2 cylinders refilled by third parties constituted an abuse of a dominant position in violation of EU and German competition law and requiring us to permit the end consumers to have their CO2 cylinders refilled by or exchanged with third parties. Although the decision of the German Federal Court of Justice is not binding on courts in other jurisdictions, it could be cited as a precedent in other antitrust or competition law proceedings. There can be no assurance that a court of law in any other jurisdiction will determine that we have not violated applicable competition or antitrust laws. Further, there can be no assurance that a court in any of the jurisdictions in which we operate will uphold our ownership rights over the exchangeable CO2 cylinders or find that the cylinder refilling restrictions we impose do not violate applicable competition or antitrust laws. Our failure to successfully enforce our ownership rights to our exchangeable CO2 cylinders could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

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 which offer products that compete with ours, including sparkling water makers, carbonation bottles and flavors. We anticipate that we will face additional competition from competitors that may enter the home carbonated beverage and sparkling water market, including from manufacturers of home beverage carbonation systems and consumables and manufacturers of carbonated beverages. Current or future competitors may, for example, introduce products with features which may cause consumers to stop using our systems or to use them less frequently, such as sparkling water makers that do not require the exchange of CO2 cylinders or that may use other methods of carbonation. The entry of new competitors into our market or the acquisition of our existing competitors by companies with substantial resources could result in further increased competition and harm our business. For example, in February 2014, The Coca-Cola Company announced its purchase of a 10% equity stake in Keurig Green Mountain, Inc. (“Keurig”) and their collaboration to develop a home cold beverage system. In May 2014, The Coca-Cola Company increased its stake to approximately 16% and in January 2015, Keurig announced it will collaborate with Dr Pepper Snapple Group to develop a selection of Dr Pepper Snapple Group’s products for its home cold beverage system and that its system’s launch is expected in the fall of 2015. Increased competition from existing or new competitors may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects. Additionally, our competitors’ arrangements with their collaborators may prevent us from entering into similar, or other, arrangements with such collaborators.

 

We also face competition from manufacturers that sell counterfeit reproductions of our sparkling water makers. Although we monitor and attempt to take action against such manufacturers when we deem it appropriate, there can be no assurance that we will be successful in deterring competitors from manufacturing and selling counterfeit reproductions of our products. The sale of counterfeit reproductions of our products may result in lost sales opportunities and cause harm to our reputation due to the lower quality of these counterfeit products compared to our products. The risk of counterfeiting may increase with the expansion of our business and increased recognition of our brand name. Finally, we face competition from beverage companies, including large global companies, for the dollars spent by consumers on non-alcoholic beverages. These include primarily manufacturers of carbonated soft drinks and sparkling water.

 

A number of our competitors are substantially larger than we are and have significantly greater financial, sales and marketing, manufacturing and other resources than are available to us, and have established brands and greater brand awareness. These competitors may use their resources and scale to respond more rapidly than us to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities.

 

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We may be unable to retain 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 sparkling water makers to new consumers and our consumables to consumers who already own our sparkling water makers. Since we derive our highest profit margins from our consumables, the continued use of our home beverage carbonation systems by, and the repeat sales of our consumables to, consumers who have already purchased our systems are important to our business. In markets where we have an established presence, we face the challenge of retaining customers due to changes in consumer preferences, 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 identify and respond quickly to such changes, including through creative initiatives, such as new product offerings and special promotions. For example, in response to what we believe is a shift in consumer preferences towards health and wellness in the carbonated beverage industry, under our growth plan, we are positioning our brand around health and wellness. However, we may not be successful in establishing such positioning and such positioning might not appeal to consumers. Our failure to predict, or respond effectively to changes in consumer behavior, including where they shop, could result in a reduction in the number of our customers, which could lead to lower revenues and increased inventories, and would have a material adverse effect on our business, financial condition, results of operations and prospects.

 

If we do not manage our inventory effectively, our business, financial condition and results of operations could be materially adversely affected.

 

We must manage our inventory effectively. If our forecasts for demand for our products exceed actual demand, we could experience excess inventory. As we innovate and introduce new sparkling water makers and new flavors to the marketplace, our existing sparkling water makers and flavors are at an increased risk of inventory obsolescence. If we ultimately determine that we have excess inventory, we may have to reduce our prices and write-down inventory which could have an adverse effect on our business, financial condition and results of operations. In addition, we may determine that having both older and newer products for sale in the marketplace is confusing to consumers or interferes with promoting our new products and therefore decide to cease selling our older products, which would result in our not receiving any revenues for such products. Conversely, if the introduction of new products is delayed, we may have insufficient existing inventory to meet our customer demand which could result in lost revenue opportunities and have an adverse impact on our financial condition and results of operations. Risks of inventory obsolescence also exist with our products that are subject to expiration, such as our carbonation bottles and flavors. If we are unable to accurately forecast demand for our products and inventory expires or becomes unusable, our business, financial condition and results of operations could be materially adversely affected.

 

Our home beverage carbonation systems and other products may fail, whether due to design faults, defects or misuse, and cause personal injury or property damage, which may subject us to product liability and other claims and harm our reputation.

 

Our home beverage carbonation systems and other products may fail and cause personal injury or property damages. Failures of our home carbonation beverage systems may be caused by, among other things, design defects, defects in workmanship or materials and misuse by consumers. Although we take quality assurance measures to ensure that our products are free from design faults and defects in workmanship and materials, there can be no assurance that our products will not fail. Additionally, although we include explicit instructions for the operation of our home beverage carbonation systems and place safety warnings on our products, consumers may misuse our products, including by:

 

·washing our non-dishwasher safe carbonation bottles in the dishwasher or otherwise exposing them to severe heat, which could cause the bottle to burst during the carbonation process;

 

·carbonating substances other than water with our sparkling water maker, which could cause the sparkling water 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 failure or misuse of any of the components of our home beverage carbonating systems may cause personal injury and damage to property. In addition, any unauthorized use of our home beverage carbonation 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. Product safety or quality issues, actual or perceived, including allegations of product contamination or other issues, even when false or unfounded, could subject us to product liability and other claims, tarnish the image of the affected brands and may cause consumers to choose other products. Such issues or allegations may also require us to conduct product recalls and result in higher than anticipated rates of warranty returns and other returns of goods.

 

In addition, consumer protection agencies that have broad authority to order product modifications or recalls may take such actions with respect to our products, even if we include explicit instructions with our products regarding their use. Under these circumstances, we could be required to offer to exchange our existing products for new ones or to recall products entirely from the market, which would materially adversely impact our business, financial condition, results of operations and reputation.

 

Our product liability insurance for personal injury and damage to property may not be sufficient or available to cover product liability claims, or similar claims, against us, which could materially adversely impact our financial condition and results of operations. Whether or not a claim against us would be successful, defense of a claim may be costly and the existence of any claim may adversely impact our business, financial condition, results of operations and reputation. 

 

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Our inability to protect our intellectual property rights could reduce the value of our products or permit competitors to more easily compete with us and have a material adverse effect on our business, brand, financial condition, results of operations and prospects.

 

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 or the successful independent development by third parties of the same or similar confidential or proprietary innovations. We have been in the past and may in the future be subject to opposition proceedings with respect to applications for registrations of our intellectual property, including but not limited to our marks. As we rely in part on brand names and trademark protection to enforce our intellectual property rights, barriers to the registration of our brand names and trademarks in various countries may restrict our ability to promote and maintain a cohesive brand throughout our key markets.

 

Our ability to compete effectively depends, in part, on our ability to maintain the proprietary nature of our technologies, which include the ability to obtain, protect and enforce patents and trade secrets and other know-how relating to our technologies. 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 pending patent and registration applications that may protect certain aspects of our products for an extended period, there can be no assurance that pending U.S. applications or applications in other jurisdictions will be approved in a timely manner or at all, or that such registrations will effectively protect our intellectual property. There can be no assurance that we will develop patentable intellectual property in the future, and we may choose not to pursue patents or other protection for innovations that subsequently turn out to be important.

 

To protect our intellectual property, including our know-how and trade secrets, we have implemented a system in most jurisdictions by which we require our relevant employees to enter into employment contracts, which include clauses requiring such employees to acknowledge our ownership of all inventions and intellectual property rights they develop in the course of their employment and to agree not to disclose confidential information. Agreements with certain of our employees also typically contain provisions restricting employment with our competitors for a certain period of time after they stop working for us. These restrictions may be of no or little enforceability under applicable law. We also typically include similar provisions in our distributor and supplier agreements. These provisions may not be adequate or enforceable, and despite our efforts, our know-how, confidential information and trade secrets could be disclosed to third parties, or third parties could independently develop the same or similar information or technologies, which could cause us to lose competitive advantages.

 

From time to time, we may discover that third parties are infringing or otherwise violating our intellectual property rights. For example, we are aware of unauthorized third-party uses of our trademarks and designs, and there may be other third parties using trademarks or names, or designs, similar to ours of 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 United States and other developed markets in which we currently operate. We are prepared to protect our intellectual property rights vigorously; however, our patent portfolio is limited in certain markets and, as such, we may be unable to institute effective legal action against third parties engaged in copying our sparkling water makers and components.

 

There can also be no assurance that we will prevail in any intellectual property infringement litigation we institute to protect our intellectual property rights given the complex technical issues and inherent uncertainties in litigation. Such litigation may be time consuming, expensive, and may distract our management from running the day-to-day operations of our business. If we are unable to successfully defend our intellectual property rights, we could experience a material adverse effect on our business, brand, financial condition, results of operations and prospects. There can be no assurance that our intellectual property rights can be successfully asserted or will not be invalidated, circumvented or challenged. In addition, there can be no assurance that these protections will be adequate to deter the unauthorized use of our intellectual property rights by third parties or to deter the development of products with features based upon, or otherwise similar to, our products.

 

We may be subject to claims by third parties asserting that our products and other intellectual property infringe, or may infringe, their proprietary rights.

 

We have in the past been, and may in the future be, subject to claims by third parties asserting misappropriation, or that our products and other intellectual property infringe, or may infringe, or otherwise violate, their proprietary rights. Any such claims, regardless of merit, could result in litigation, which could result in expenses, divert the attention of our management, cause significant delays in and materially disrupt the conduct of our business. As a consequence of such claims, we could lose our proprietary rights, become subject to liabilities, including payments of damages, be required to develop non-infringing products, seek licenses from others, which may not be available on reasonable terms, if at all, stop selling our products or re-brand our products and suffer other negative effects to our business. In the event of a successful claim of infringement against us or our failure or inability to develop non-infringing technology or license the infringed or similar technology or other intellectual property, our business, financial condition, results of operations and prospects could be materially adversely affected.

 

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If a large number of empty exchangeable CO2 cylinders are returned to us without having been exchanged for full ones, we would incur costs with no corresponding revenues.

 

We retain ownership of the exchangeable CO2 cylinders and provide them under license. In most cases, we collect a license fee for each exchangeable CO2 cylinder from the distributors and retailers who receive them. The amount of the license fee varies from country to country and also changes over time as market conditions vary in a particular country. In addition, in some countries, including certain major markets in Northern and Western Europe, consumers have paid in the past an advance rental fee when they received their first exchangeable CO2 cylinder. A portion of these fees may be refundable when an empty exchangeable CO2 cylinder is returned and not exchanged for a full one. To date, returns of exchangeable CO2 cylinders from our distributors, retailers and consumers have been negligible. However, if distributors, retailers or consumers in any one or more of the markets in which we operate return a large number of cylinders without exchanging them for full ones, we may be required to pay a large amount of cash to refund a portion of the rental or license fees, which could have a material adverse effect on our financial condition and results of operations.

 

We are subject to currency exchange rate fluctuations and may not adequately hedge against them.

 

The dollar is our functional and reporting currency. However, a significant portion of our operating expenses are incurred in NIS, and to a lesser extent, in other currencies, such as the Euro. As a result, we are exposed to the risks that the Israeli shekel or these other currencies may appreciate relative to the dollar. In any such event, the dollar cost of our non-dollar denominated operations would increase and our dollar-denominated results of operations would be adversely affected. Furthermore, because a material portion of our revenues are denominated in currencies other than the dollar, the strengthening of the dollar in relation to other currencies, in particular the Euro, will negatively affect our results of operations. We cannot predict any future trends and rates of devaluation (if any) of the Israeli shekel or any of these other currencies against the dollar. Although we currently engage in hedging transactions to minimize our currency exchange rate risk, future currency exchange rate fluctuations that we have not adequately hedged could adversely affect our profitability and may vary from quarter to quarter. We are also exposed to credit risk if counterparties to our derivative instruments are unable to meet their obligations.

 

Fluctuations in our business caused by seasonality or unusual weather conditions could cause fluctuations in our quarterly results of operations and volatility in the market price of our ordinary shares.

 

Historically, our revenues have generally been strongest in the third and fourth quarters and weakest in the first quarter. However, this was not the case in 2014, as revenues in the second quarter were stronger than in the third and fourth quarters. We generally attribute this historical seasonality to increased demand for our products during the warmer summer months and increased sales associated with holiday shopping. As such, our revenues may also be impacted by the effects of the weather as our revenues would likely decrease if periods when the weather is colder are longer than usual. Our operating expenses and, therefore, our overall margins are also seasonally impacted. For example, we typically increase our advertising and promotional expenditures in the second and fourth quarters. Consequently, our overall operating income may be lower in these quarters. The impact on sales volume and operating results due to these and other factors can significantly impact our business. Accordingly, our results for any quarter are not necessarily indicative of the results that may be achieved in subsequent quarters or for the full fiscal year. Our quarterly operating results should not be relied on as indications of our future performance. These fluctuations may also cause volatility in the market price of our ordinary shares.

 

We may have exposure to greater 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 our tax liabilities in one or more jurisdictions could be more than reported in respect of prior taxable periods and more than anticipated in respect of future taxable periods. In this regard, the amount of income taxes that we pay in future taxable periods could be higher if earnings are lower than anticipated in jurisdictions where lower statutory tax rates apply and higher than anticipated in jurisdictions where higher statutory tax rates apply.

 

In addition, we have entered into transfer pricing arrangements that establish transfer prices for our inter-company operations. However, our transfer pricing procedures are not binding on the applicable taxing authorities. No official authority in any country has made a binding determination as to whether or not we are operating in compliance with its transfer pricing laws. Accordingly, taxing authorities in any of the countries in which we operate could challenge our transfer prices and require us to adjust them to reallocate our income and potentially to pay additional taxes for prior tax periods. For example, the tax authorities in the United States, 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 pricing arrangements 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. We expect that the issue of the validity of our transfer pricing procedures will become of greater importance as we continue our expansion in markets in which we currently have a limited presence and attempt to penetrate new markets. Any change to the allocation of our income as a result of reviews by taxing authorities could have a negative effect on our financial condition and results of operations.

 

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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 condition and results of operations in the period or periods for which such determination is made. We have created reserves with respect to tax liabilities where we believe it to be appropriate. However, there can be no assurance that our ultimate tax liability will not exceed the reserves we have created.

 

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 that we must comply with are those governing the manufacturing and transportation of our exchangeable CO2 cylinders. In the United States, and in certain other markets in which we currently operate or may in the future operate, our exchangeable CO2 cylinders are considered hazardous materials due to the highly pressurized CO2 inside, and the applicable regulations consequently restrict our ability to ship our exchangeable CO2 cylinders by air and also place significant restrictions on their land transportation, which results in additional costs. There can be no assurance that we will be in compliance with all applicable laws and regulations to which we and our products are subject. If we fail to comply, we may be subject to civil remedies, including fines, injunctions, recalls or seizures, as well as criminal sanctions, which could have a material adverse effect on our business, financial condition, results of operations and reputation.

 

The flavors we manufacture and distribute are also subject to numerous health and safety laws regulating the manufacturing and distribution of food products. A failure to plan and develop effective procedures to address these laws and regulations, new or revised laws or regulations, or new interpretations or enforcement of existing laws and regulations, may affect our ability to manufacture, distribute and sell our products, which could have a material adverse effect on our business, financial condition and results of operations.

 

Furthermore, new government laws and regulations may be introduced in the future that could result in additional compliance costs, seizures, confiscations, recalls or monetary fines, any of which could prevent or inhibit the development, distribution and sale of our products. For example, Finland has recently imposed a tax on sugar-sweetened beverages which applies to our flavors, and various governmental authorities in the United States have considered levying similar taxes. If such taxes are introduced and were to apply to our flavors, the sales and consumption of our non-sugar free flavors might decrease and thereby have a material adverse impact on our financial condition and results of operations.

 

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, financial condition and results of operations.

 

We use certain raw materials to produce our sparkling water makers, exchangeable CO2 cylinders and consumables. The most important of these materials are aluminum, brass, CO2, certain plastics, flavor essences 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 due to movements in currency exchange rates, government policies and regulations, increased demand for, or decreased supply of, such materials, crop failures, weather conditions, shortages or other reasons or unforeseen circumstances. To the extent that any of the foregoing or other factors increase the prices or limit the supply of such materials, and we are unable to increase our prices or adequately hedge against such changes in a manner that offsets such changes, our business, financial condition and results of operations could be materially adversely affected.

 

Disruption of our supply chain could adversely affect our business.

 

Damage or disruption to our manufacturing or distribution capabilities due to the financial and/or operational instability of key suppliers, distributors, warehousing and transportation providers, or brokers, or other reasons, could impair our ability to manufacture or sell our products. To the extent we are unable to retain alternative sources of supply, to financially mitigate the impact of such events, such as by identifying an alternative supplier in a timely and cost-effective manner, or to effectively manage such events if they occur, there could be a material adverse effect on our sales and profitability, and additional resources could be required to restore our supply chain.

 

We are subject to certain safety risks in our manufacturing facilities.

 

Our business involves complex manufacturing processes and hazardous materials that can be dangerous to our employees. Although we employ safety procedures in the design and operation of our facilities, there have been two deaths at our facilities in the past, and there is a risk that an accident or death could occur in one of our facilities in the future. Any accident could result in manufacturing delays, which could harm our business and our results of operations. The potential liability resulting from any such accident or death, to the extent not covered by insurance, and any negative publicity associated therewith could harm our business, reputation, financial condition or results of operations. Whether or not a claim against us succeeds, its defense may be costly and the existence of any claim may adversely impact our business, reputation, financial condition and results of operations.

 

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Higher energy costs and other factors affecting the cost of producing, transporting and distributing our products could adversely affect our results of operations.

 

Rising fuel, freight and energy costs have in the past, and may in the future, have an adverse impact on the cost of our operations, including the manufacture, transportation and distribution of our products. All of these costs may fluctuate due to a number of factors outside of our control, including governmental 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 our operations. If we are unable to hedge against such increases or raise the prices of our products to offset the changes, our results of operations could be materially adversely affected.

 

Adverse conditions in the global economy could negatively impact customer 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, bankruptcies and other events. 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 changes in both the volume and mix of our product sales, which could materially adversely affect our business, financial condition and results of operations.

 

We depend on the expertise of key personnel. If these individuals leave without replacements, our operations could suffer.

 

Our success depends on the continued service of our senior management. The loss of the services of any of these individuals could delay or prevent the successful implementation of our growth plan, or could otherwise affect our ability to manage our company effectively.  Given their extensive knowledge of the home beverage carbonation industry, we believe that it would be difficult to find replacements should any of them leave. Our inability to find suitable replacements for any of the members of our senior management team, particularly our Chief Executive Officer, Daniel Birnbaum, would adversely impair our ability to implement our business strategies and plans 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, if at all.

 

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 meet our currently anticipated cash requirements for the next 12 months. However, in the future, we may require additional capital in order to finance our activities. We may be unable to obtain requisite financing or such financing may not be available on terms that are acceptable to us. The incurrence of additional debt would result in increased debt service obligations and the terms of which may include additional operating or other covenants that might, among other things, restrict our ability to pay dividends to our shareholders. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects. If we were to issue equity to raise capital, it would dilute the holdings of our existing shareholders.

 

Disruptions to our IT system may impact our operations and materially harm our business.

 

Our servers and equipment may be subject to computer viruses, break-ins, and similar disruptions from unauthorized tampering with computer systems. There can be no assurance that our current information technology (IT) system is fully protected against third-party intrusions, viruses, hacker attacks, information or data theft or other similar threats. A cyber-attack that bypasses our IT security systems causing an IT security breach may lead to a material disruption of our IT business systems and/or the loss of business information. Any such event could have a material adverse effect on our business. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders or the manufacture or shipment of our products, or in theft, destruction, loss, misappropriation or release of our confidential information or our intellectual property, our business, financial condition, results of operations and prospects could be materially adversely affected.

 

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, namely -tantalum, tin, gold and tungsten (referred to as “conflict minerals” regardless of their actual country of origin) in their products. These rules require us to investigate whether our products contain such “conflict minerals” and include appropriate disclosures in our filings with the SEC. There are 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 that may arise as a consequence of such activities. Compliance with 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 or lose 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, customer demand for our products may decline, and we may have to write off inventory in the event that it cannot be sold. The occurrence of any of these events could also have a material adverse impact on our ability to manufacture and market our products.

 

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Risks Related to our Operations in Israel

 

We conduct operations in Israel and therefore, political, economic and military instability in Israel and its region may adversely affect our business.

 

We are incorporated under the laws of the State of Israel, and our principal offices and a significant portion of our manufacturing facilities are located in Israel. Accordingly, political, economic and military conditions in Israel and the surrounding region directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. States of hostility, varying in degree and intensity, have caused security and economic problems in Israel. Although Israel has entered into peace treaties with Egypt and Jordan, and various agreements with the Palestinian National 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. In recent years, including in July and August 2014, Israel engaged in an armed conflict with Hamas, which involved missile strikes against civilian targets in various parts of Israel and negatively affected business conditions in Israel.

 

Recent political uprisings and social unrest in various countries in the Middle East and North Africa are affecting the political stability of those countries. This instability may lead to deterioration of the political relationships that exist between Israel and these countries, and have raised concerns regarding security in the region and the potential for armed conflict. Among other things, this instability may affect the global economy and marketplace through changes in oil and gas prices. In addition, Iran has publicly threatened to attack Israel and is suspected of developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in the region, such as Hamas in the Gaza Strip and Hezbollah in Lebanon. Continued hostilities between Israel and its neighbors and any future armed conflict, terrorist activity, political instability or violence in the region could adversely affect our operations in Israel and adversely affect the market price of our ordinary shares. Further escalation of tensions or violence might result in a significant downturn in the economic or financial condition of Israel, which could have a material adverse effect on our operations in Israel and our business.

 

Our commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East. Although the Israeli government is currently committed to covering the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, there can be no assurance that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by us could have a material adverse effect on our business, financial condition and results of operations.

 

In addition, several countries, principally in the Middle East, restrict doing business with Israel, and additional countries may impose restrictions on doing business with Israel and Israeli companies whether as a result of hostilities in the region or otherwise. The interruption or curtailment of trade between Israel and its present trading partners could adversely affect our business, financial condition and results of operations.

 

The State of Israel and Israeli companies have been and are today subjected to threats of economic boycotts. In recent years, there have been increased efforts by activists to cause companies and consumers to boycott Israeli goods based on Israeli government policies. Currently, one of our manufacturing facilities is in Mishor Adumim, which is located in a disputed territory sometimes referred to as the “West Bank.” A number of political groups have called for consumer boycotts of products originating in this disputed territory, including our products. While, as part of the ramp-up plan for the Lehavim facility, we are gradually phasing out our facilities in Mishor Adumim, both of which we expect to complete by the end of 2015, we may continue to be subject to such activities.

 

Our operations could be disrupted as a result of the obligation of certain of our personnel in Israel to perform military service.

 

Our operations could be disrupted by the obligations of our employees to perform military service. Generally, adult citizens and permanent residents of Israel under the age of 40 (or older, for individuals 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 employees, including members of our management, are currently obligated to perform annual reserve duty. In response to increased tension and hostilities in the region, there have been, at times, call-ups of military reservists, and it is possible that there will be additional call-ups in the future. Our operations could be disrupted by the absence of one or more of our key employees for a significant period due to military service. Such disruption could have a material adverse effect on our business and results of operations.

 

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The tax benefits and grants that may be available to us may be terminated or reduced in the future, which could increase our costs and taxes. If we fail to satisfy various conditions, we may be required to refund the tax benefits and government grants we received.

 

One of our subsidiaries 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. 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. If this subsidiary does not meet these requirements, the tax benefits could be canceled and it could be required to refund any tax benefits and investment grants that it received in the past. Furthermore, these tax benefits may be reduced or discontinued in the future. The termination or reduction of these tax benefits would increase our tax liability, which would harm our financial condition and results of operations. See “Item 10.E — Taxation — Israeli tax considerations and government programs — Law for the encouragement of capital investments, 5719-1959.”

 

We have been approved to receive grants under certain Israeli Government programs and apply from time to time to receive additional grants, including under the Investment Law. The receipt of approved grants and future grants, if approved, is subject to our satisfying certain conditions stipulated in applicable Israeli legislation and letters of approval. If we fail to meet these conditions, the grants could be canceled and we may be required to refund the amounts received, as adjusted by the Israeli consumer price index, and interest, and may become subject to other monetary penalties, which would harm our financial condition and results of operations.

 

It may be difficult to enforce the judgment of a U.S. court against us, our officers and directors in Israel or the United States, or to assert U.S. securities laws claims in Israel or serve process on our officers and directors.

 

We are incorporated in Israel. All of our executive officers or most of our directors are not residents of the United States, and the majority of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a judgment of a U.S. court based upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons in a U.S. or Israeli court, or to effect service of process upon these persons in the United States. Additionally, it may be difficult for an investor, or any other person or entity, to initiate an action with respect to U.S. securities laws in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proven as a fact by expert witnesses, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel that addresses the matters described above. As a result of the difficulty associated with enforcing a judgment against us in Israel, you may not be able to collect any damages awarded by either a U.S. or foreign court.

 

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 in 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 a company has a duty of fairness towards the company with regard to such vote or appointment. There is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations. See “Item 6.C — Board Practices — Fiduciary duties and approval of specified related party transactions under Israeli law — Duties of shareholders.”

 

As a foreign private issuer whose shares are listed on the Nasdaq Global Select Market, we follow and we may in the future elect to follow additional home country corporate governance practices instead of certain Nasdaq requirements.

 

As a foreign private issuer whose shares are listed on the Nasdaq Global Select Market, we have elected to follow certain home country corporate governance practices instead of certain requirements of the Nasdaq Stock Market Rules (the “Nasdaq Rules”). We may in the future elect to follow Israeli corporate governance practices with regard to, among other things, the composition of our board of directors, compensation of officers and director nomination procedures. In addition, we may elect to follow Israeli corporate governance practices instead of the requirements under the Nasdaq Rules to obtain shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity-based compensation plans, issuances that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company). Accordingly, our shareholders may not be afforded the same protection as provided under Nasdaq’s corporate governance rules. Following our home country governance practices as opposed to the requirements that would otherwise apply to a U.S. company listed on the Nasdaq Global Select Market may provide less protection than is accorded to investors of U.S. domestic issuers. We currently rely on this “foreign private issuer exemption” with respect to the quorum requirement for meetings of our shareholders. See “Item 16G — Corporate Governance.”

 

In addition, as a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements and we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act. In addition, we are not required to comply with Regulation FD, which restricts the selective disclosure of material information. Moreover, as a foreign private issuer, our officers, directors and 10% shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. We may from time to time disclose certain purchases or sales of our shares by certain of our officers and directors, but may not do so consistently and may not disclose sales of shares which we reported were purchased. Investors should therefore assume that there may be additional purchase and sale information that we may not have disclosed.

 

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For so long as we qualify as a foreign private issuer, we are not required to comply with the proxy rules applicable to U.S. domestic companies, including the requirement to disclose the compensation of our Chief Executive Officer, Chief Financial Officer and other three most highly compensated executive officers on an individual basis. Nevertheless, a recent amendment to regulations promulgated under the Israeli Companies Law, 5759-1999 (the “Companies Law”) requires us to disclose the annual compensation of SodaStream International Ltd.’s five most highly compensated office holders on an individual basis. Prior to such amendment, Israeli public companies listed outside of Israel, such as us, were required to disclose the annual compensation of their directors and officers on an aggregate basis. Under the Companies Law regulations, this disclosure is required to be included in the proxy statement for our annual meeting of shareholders each year, which we furnish to the SEC under cover of a Report of Foreign Private Issuer on Form 6-K. Because of that disclosure requirement under Israeli law, we are also including such information in this annual report. See “Item 6.B. Directors, Senior Management and Employees—Compensation.”

 

We would lose our foreign private issuer status if a majority of our directors or executive officers are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We would also be required to follow U.S. proxy disclosure requirements, including the requirement to disclose more detailed information about the compensation of our senior executive officers on an individual basis. We may also be required to modify certain of our policies to comply with accepted governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.

 

Provisions of our articles of association, Israeli law and certain of our agreements may delay, prevent or make undesirable an acquisition of all or a significant portion of our shares or assets.

 

Our articles of association contain certain provisions that may delay or prevent a change of control. These provisions include that our directors (other than external directors) are elected on a staggered basis, and therefore a potential acquiror cannot readily replace our entire board of directors at a single annual general shareholder meeting. Our articles of association also include the requirement of a supermajority vote of our shareholders to amend certain provisions of our articles of association. In addition, Israeli corporate law regulates acquisitions of shares through tender offers and mergers, requires special approvals for transactions involving significant shareholders and regulates other matters that may be relevant to these types of transactions. See “Item 10.B — Memorandum and Articles of Association — Acquisitions under Israeli Law.” Further, Israeli tax considerations may make potential transactions undesirable to us or to some of our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including a holding period of two years from the date of the transaction during which certain sales and dispositions of shares of the participating companies are restricted. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no actual disposition of the shares has occurred. Certain of our agreements require the receipt of consents, including from governmental authorities, for change of control transactions. These provisions of Israeli law, our agreements and our articles of association could have the effect of delaying or preventing a change in control in us and may make it more difficult for a third-party to acquire us, even if doing so would be beneficial to our shareholders, and may limit the price that investors may be willing to pay in the future for our ordinary shares.

 

Risks Related to our Ordinary Shares and the Trading of our Ordinary Shares

 

The price of our ordinary shares may fluctuate significantly.

 

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 $16.80 and was trading at $20.26 per share as of March 31, 2015.

 

In the recent past, stock prices 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 revenues;

  

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·quarterly variations in our results of operations or in our competitors’ results of operations;

 

·announcements or introductions of new products by us or competitors;

 

·rumors about material events involving third parties;

 

·the recruitment or departure of key personnel;

 

·regulatory developments;

 

·changes in earnings’ estimates, if provided, investors’ perceptions or recommendations by securities analysts or our failure to achieve analysts’ earnings estimates;

 

·developments in our industry;

 

·sales or proposed sales of our ordinary shares by us or our shareholders; and

 

·general market conditions and political and other factors unrelated to our operating performance or the operating performance of our competitors.

 

These factors may materially 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, the price of our ordinary shares could decline.

 

The trading price for our ordinary shares may be affected by any research or reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us or our business publish inaccurate or unfavorable research about us or our business, and in particular, if they downgrade their evaluations of our ordinary shares, the price of our ordinary shares would likely decline. If one or more of these analysts cease coverage of our company, we could lose visibility in the market for our ordinary shares, which in turn could cause the price of our ordinary shares to decline.

 

We do not expect to pay any dividends for the foreseeable future.

 

We do not anticipate that we will pay any dividends to holders of our ordinary shares in the foreseeable future. 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 of any future credit facility we may take containing terms prohibiting or limiting the amount of dividends that may be declared or paid on our ordinary shares. Accordingly, investors must rely on sales of their ordinary shares after price appreciation, which may never occur, as the only way to realize any return on their investment. As a result, investors seeking cash dividends should not purchase our ordinary shares. In addition, Israeli law limits our ability to declare and pay dividends, and may subject our dividends to Israeli withholding taxes.

 

Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a Passive Foreign Investment Company.

 

Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of our assets are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company for U.S. federal income tax purposes. To determine if at least 50% of our assets are held for the production of, or produce, passive income, we are required to use the market capitalization method. Under the market capitalization method, the total asset value of a company would be considered to equal the fair market value of its outstanding shares plus outstanding indebtedness on a relevant testing date. Because the market price of our ordinary shares is likely to fluctuate and may be volatile, the market price may affect the determination of whether we will be considered a passive foreign investment company. Accordingly, there can be no assurance that we will not be considered a passive foreign investment company for any taxable year. If we are characterized as a passive foreign investment company, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather than capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals who are United States holders, and having interest charges apply to distributions by us and the proceeds of share sales. See “Item 10.E — Taxation — United States federal income taxation.” 

 

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Item 4.INFORMATION ON THE COMPANY

 

A.History and Development of the Company

 

Our History

 

The SodaStream brand has a history that dates back to the beginning of the 20th century with the forerunner of our sparkling water makers being invented in London in 1903. During the 1970s and 1980s, the SodaStream home beverage carbonation system gained substantial popularity in certain markets. In 1998, Soda Stream Ltd. was acquired by Soda Club Enterprises N.V., which, at the time, was its Israeli distributor.

 

In March 2007, Fortissimo Capital Fund GP, L.P. (“Fortissimo Capital”) invested in us, and in connection with that investment, SodaStream International Ltd. was incorporated under the laws of the State of Israel on March 8, 2007, and all of the shares of Soda Club Enterprises N.V. were exchanged for our ordinary shares. Following our acquisition by Fortissimo Capital, we restructured our operations significantly, including introducing a new management team headed by our Chief Executive Officer, Daniel Birnbaum. Our new management team implemented a new corporate strategy focused on the penetration of new markets, consumer-driven product innovation and capitalizing on the consumer benefits of our products.

 

We are registered with the Israeli Registrar of Companies. Our registration number is 51-395125-1. Our purpose as set forth in our articles of association is to engage in any lawful act or activity.

 

In March 2010, we changed our corporate name from Soda-Club Holdings Ltd. to SodaStream International Ltd. On November 3, 2010, our ordinary shares commenced trading on the Nasdaq Global Select Market following our initial public offering (“IPO”).

 

Our principal executive offices are located at Gilboa Street, Airport City, Ben Gurion Airport 7010000 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 200 East Park Drive, Suite 600, Mount Laurel, NJ 08054. Our website address is www.sodastream.com. The information contained on, or that can be accessed through, our website does not constitute a part of this annual report and is not incorporated by reference herein.

 

Principal Capital Expenditures

 

Our capital expenditures for fiscal years 2014, 2013 and 2012 amounted to $60.9 million, $44.6 million and $37.8 million, respectively. Capital expenditures are defined as investment in property, plant and equipment and in intangible assets. The increase in capital expenditures in 2014 as compared to 2013 was mainly due to the construction of our new manufacturing facility in the southern part of Israel, which was primarily financed by long-term loans and cash flow from operations, and to a lesser extent to investments in developing new products and improvements in our information technology systems. We anticipate our capital expenditures in 2015 to primarily be related to the further construction of the Lehavim facility, expansion of our production capacity and capabilities, including the ramp-up of the Lehavim facility, investments in developing new products and investments and improvements in our information technology systems. We anticipate our capital expenditures in 2015 to be financed from cash flow generated from operations and utilization of existing credit lines. However, we may require additional new borrowings or additional capital to meet our capital expenditure requirements.

 

B.Business Overview

 

Overview

 

SodaStream manufactures, distributes and sells home beverage carbonation systems, which enable consumers to easily transform ordinary tap water into sparkling water and flavored sparkling water in seconds. We believe our sparkling water makers offer a highly differentiated and innovative solution to consumers of bottled and canned carbonated beverages. SodaStream’s home beverage carbonation systems, flavors and other products promote health and wellness and empower people with simple, creative and fun ways to make water exciting. Our products are also environmentally friendly, cost-effective and are customizable and fun to use. In addition, our products offer convenience by eliminating the need to carry bottles and cans home from the supermarket, to store them at home or to regularly dispose of empty bottles and cans. Educating consumers of these benefits is a key element of our strategy to build awareness and strengthen our brand.

 

We believe that we are the world’s largest sparkling water company (in terms of volume consumption) and the world’s leading manufacturer of home beverage carbonation systems. Such belief is based on consumer surveys we commissioned that show that SodaStream has the largest market share in each of a dozen of the largest markets in which we operate. We continue to grow our installed base and estimate, based on consumer surveys and sales of CO2 refills, that, as of December 31, 2014, there were approximately 9.5 million households that make a sparkling water or flavored sparkling water beverage using our system at least once every two weeks, whom we refer to as active consumers, with many of the largest carbonated beverage and sparkling water markets still remaining virtually untapped.

 

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We develop, manufacture and sell sparkling water makers and exchangeable carbon-dioxide (CO2) cylinders, as well as consumables, consisting of CO2 refills, reusable carbonation bottles and flavors to add to the sparkling water. As of December 31, 2014, we sell our products through more than 70,000 individual retail stores in 45 countries, including approximately 15,000 retail stores in the United States. In 2014, we distributed our products directly in 24 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.

 

Our revenues grew by 29.0% from $436.3 million in 2012 to $562.7 million in 2013 and decreased by 9.0% to $511.8 million in 2014. Over the past five years, our revenues grew 145.6% from $208.4 million in 2010 to $511.8 million in 2014, representing a compound annual growth rate of 19.7% for that period. We had net income of $43.9 million, $42.0 million and $12.3 million in 2012, 2013 and 2014, respectively. From 2012 through 2014, our revenues from sparkling water makers and exchangeable CO2 cylinders decreased from $185.9 million to $172.6 million, while our revenues from sales of consumables increased from $241.9 million to $327.4 million.

 

After seven consecutive years of double-digit growth between 2007 and 2013, our revenues decreased in 2014 by 9.0% as compared to 2013. In October 2014, we adopted a growth plan based on the following five “growth pillars”:

 

·Organization – This pillar includes investing in human capital, including recruiting new talent to our leadership team and consolidating our operational structure.

 

·Marketing – This pillar includes repositioning our brand around health and wellness and reinvigorating our brand heat.

 

·Product and Innovation – This pillar includes offering products that will provide a superior user experience and introducing innovative technology platforms.

 

·Distribution – This pillar includes strengthening our presence in our existing markets, by, among other things, educating consumers of the benefits of our product offerings.

 

·Operations – This pillar includes improving operational efficiencies by, among other things, ramping up our new manufacturing facility and focusing on Stock Keeping Unit, or SKU, rationalization, including discontinuing or rebranding flavors that do not fit with our new positioning and discontinuing certain models of our sparkling water makers.

 

Industry background

 

According to Canadean, the global carbonated beverage industry generated approximately $350 billion in sales turnover in 2013 and approximately $357 billion in 2014. In recent years, we have witnessed a significant shift toward “health & wellness” in the carbonated beverage industry, as consumers are abandoning traditional soft drinks in favor of what is popularly referred to as “Water+ beverages” and sparkling waters. For example, in the United States, consumers have shifted towards natural ingredients, natural sweeteners, reduced calories and products that are considered to promote “health & wellness”.

 

In addition to the health and wellness trend, we believe that consumers are also exhibiting an increased focus on value and personalization. Our products address these long-term trends in global consumer behavior, including the rapidly growing popularity of health and wellness products. Our products are also environmentally friendly (“green”) and offer a simple, fun and sustainable way to enjoy sparkling water and flavored sparkling water by making water exciting.

 

Consumers initially purchase a “starter kit,” consisting of a sparkling water maker and one or two carbonation bottles together with hermetically-sealing bottle caps. The starter kit also includes an exchangeable CO2 cylinder which is provided under license and can produce varying amounts of sparkling water, depending on the CO2 content. 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 model that has stainless steel components and utilizes glass carbonation bottles.

 

Sparkling water makers. We currently offer a variety of sparkling water makers. Our sparkling water makers are free-standing, lightweight and compact, and have a stylish design. They are made of stainless steel and/or plastic. Other than our “Revolution” model, and its successor, the “Power” model, none of our sparkling water makers requires electricity. The CO2 cylinder fits easily in a rear compartment and with a simple push, carbonates water. Our sparkling water makers are sold in a variety of designs and colors and accommodate different CO2 cylinder sizes. 

 

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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 sparkling water maker. Certain models of sparkling water makers can accommodate more than one size of cylinders, while others fit only one size. The actual amount of sparkling water produced per cylinder varies based on the CO2 content, the type of sparkling water maker used, user preference (the amount of carbonation released during each carbonation) and other factors. We only use beverage-grade CO2 in our cylinders, the same as that used by the world’s major soft drink companies. We also sell natural sourced CO2 (derived from natural underground sources) in certain markets, in addition to CO2 extracted from other sources.

 

CO2 refills. We provide beverage-grade CO2 refills through authorized retailers that participate in our cylinder exchange program. These retailers generally maintain a stock of filled cylinders in their inventory. Consumers typically exchange their empty cylinders at retail stores or through online orders for full cylinders and since the cylinders are provided under license, they only pay for the CO2. In some markets, direct home delivery and exchange is also available, and we use third-party carriers to exchange the empty cylinders for full ones. Empty cylinders are then delivered to a filling plant where they are inspected, cleaned and refilled for distribution. We conduct CO2 refilling (including at third-party facilities) in the United States, Australia, Germany, Israel, the Netherlands, New Zealand, South Africa and Sweden. 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 $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, is dishwasher-safe. For the high-end market, we offer sparkling water makers specifically intended to be used with glass bottles, which are appropriate for a more formal table setting. Carbonation bottles can easily be personalized and are offered in a variety of colors, designs and sizes. The plastic bottles are BPA-free and are designed to have a lifespan of three years. Consumers often purchase additional carbonation bottles to allow for several bottles of sparkling water and flavored sparkling water to be available at the same time. 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 leading international flavor and essence manufacturers which provide research and product development services, including sensory testing in order to enhance our flavor offerings and cater to consumers’ tastes and address market trends. Our flavors come in a highly concentrated form, customized for our home beverage carbonation systems. Currently, our flavors are usually sold in 375 ml, 500 ml or 750 ml bottles, which typically produce between nine and 18 liters of flavored sparkling water, depending on the flavor. Our current product range consists of more than 100 flavors, including a large variety of fruit flavors. Consumers in the United States typically pay between $5.99 and $9.99 for a 500 ml bottle of one of our flavors, which would usually produce 12 liters of flavored sparkling water.

 

As part of our growth plan, during 2015, we intend to commence the launch of our new portfolio of flavors which support the repositioning of our brand around health and wellness. The new flavor portfolio will comprise the following flavor categories:

 

·“WATERS Essence” – A variety of naturally lightly flavored sparkling water mixes.

 

·“WATERS Fruits” – A variety of naturally fruit flavored water sparkling water mixes.

 

·“WATERS Plus+” – A variety of naturally flavored sparkling water mixes with added nutrients.

 

·“WATERS Zeros” – A variety of naturally fruit flavored water sparkling water mixes with no calories.

 

·“Sparkling Gourmet Waters” – A variety of naturally flavored innovative flavor combinations created in conjunction with the celebrated, two Michelin star chef, Paul Liebrandt.

 

In line with our growth plan, we expect flavors that do not fit with our new positioning, including some of our currently popular flavors, to be sold under new brands called “Fountain Style” and “T-Rex Energy”. We also expect to continue to enter into strategic co-branding arrangements and intend to discontinue certain other flavors.

 

The new flavors, including the “Fountain Style” and “T-Rex Energy” flavors, will be sold in newly designed 440 ml bottles which will typically produce between seven and nine liters of flavored sparkling water. In addition to offering a variety of our new portfolio flavors in our SodaStream Caps, which we launched in 2012 and our single-serving disposable capsules that add a pre-measured amount of flavor to SodaStream carbonating bottles, resulting in a consistently flavored sparkling water each time, we also intend to introduce a new 48 ml squeeze packet for the “on-the-go” consumer.

 

We have entered into strategic co-branding arrangements with third parties relating to flavors. These collaborations allow us to offer our consumers a variety of well-known brands and flavors. 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.

 

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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.

 

Distribution

 

We mostly market our products through retail channels. We distribute our products in 45 countries, 24 directly and the remainder indirectly through our 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 70,000 stores worldwide, including stores of many of the largest retailers in our markets.

 

Direct 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. We distribute our products directly in 24 countries.

 

Indirect markets

 

Pursuant to our distribution strategy and in order to expedite penetration into certain new markets, we contract with third-party distributors who facilitate distribution of our products. In 2014, our distributors accounted for 18.2% 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 brands (including our trademarks) and all promotional and 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. 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.

 

We continue to penetrate certain new markets in collaboration with distributors. Factors that we consider in prioritizing which markets to enter include: the size of the carbonated beverage and sparkling water market, per capita consumption of carbonated beverages, the perceived quality of the tap water, household demographics, health and wellness and environmental consciousness.

 

Our distribution agreements are generally exclusive agreements for a given territory with a five-year term with an option to renew. Distributors are generally required to meet annual purchase targets, defined as monetary amounts, for the first year or two of the agreement, as well as to meet certain defined growth targets for each of the subsequent years until the end of the term of the agreement. In addition, annual and semi-annual discussions with distributors often include more specific volume targets per product type. If our distributors do not meet their defined purchase targets, they may lose their exclusivity rights and we also generally have the right to terminate the agreement after a notice period.

 

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. 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.

 

 Retailers

 

In both our direct and indirect markets, we sell our products primarily at retail stores as well as online. We target major retailers with either a national footprint or a significant regional concentration. Set forth below is a representative list of our current retailer relationships:

 

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Western Europe   Central and Eastern
Europe, Middle East
and Africa
  The Americas   Asia-Pacific
Ahlens   ACE   Amazon.ca   Asplund
Amazon   Ahold   Amazon   Assorted Homeware
Auchan   Argos   Bed Bath & Beyond   Automatic Centre
Boulanger   Asda Walmart   Best Buy   Betta Electrical
Carrefour   Auchan   BJ’s   Bing Lee
Class Ohlson   Blue Square   Canadian Tire   Big W
Coop   Clicks   Costco   Clive Peeters
Cora   Cora   Crate and Barrel   Coles
Costco   DartyDatart   ECS Cofee   David Jones
Dansk Supermarked   El Corte Ingles   El Palacio de Hierro   Dick Smith
Darty   FoodZone   Fred Meyer   Edion
Dunelm   Game   Home Depot   Globus
Edeka   General Trade   Home Hardware   Good Guys
Elipso   Globus   Home Outfitters   Harvey Norman
Electrolux Home   Home Center   JC Penney   IGA
elGiganten   InterSpar   Kitchen Collection   Ito Yokado
Elkedjan   Lakeland   Kitchen Stuff Plus   JB Hi Fi
Euronics   Makro   Kmart   John Danks
Expert   Media Markt   Kohl’s   Kmart
Groupe Delhaize   Media Saturn   Kroger   K’s Electronics
Harvey Nichols   Metro/Stax   Le Gourmet Chef   Mitre 10
ICA   OK Foods   Liverpool   Mitsukoshi
Inex   Pick’n Pay National   Linen Chest   Myers
Intermarche   Planeo Partners   London Drugs   RetraVision
InterSpar   Sainsburys   Lowes Canada   SM
Jarnia   Shield   Loyalty One   Spotlight
Karstadt   Shoprite Checkers   Office Depot   Target
Kasanova   Shufersal   PC Richards   Woolworth
Kaufhof   Spar   Personal Edge   Takashimaya
Kaufland   Tesco   Planet Organic   Yodobashi
Leclerc   Wholefoods   Sears    
Media Markt       Shopko    
Media Saturn       Sobeys West    
Metro       Staples    
Migros       Sur La Table    
Monoprix       Target    
OBI       The Bay    
OnOff       Walmart    
Real       Wegman’s    
REWE       Water Depot    
Rossmann       Williams Sonoma    
Ruokakesko            
Selfridges            
SIBA            
Tokmanni            

 

Our retail distribution is an important element in bringing our products to potential consumers and thereby generating the acquisition of our home beverage carbonation system by new customers. Additionally, we believe that the widespread availability and easy access to consumables (primarily CO2 refills and flavors) are key to securing ongoing customer retention and loyalty. We believe that one of our most important competitive advantages is our strong network of retail distribution and in particular, that of our CO2 refill exchange program. We intend to further penetrate our existing markets by increasing the number of stores in which our products are currently being sold.

 

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Marketing

 

Under our growth plan, our marketing objective is to establish and position Sodastream as a sparkling water and flavored sparkling water brand around health and wellness. Accordingly, during 2015, we intend to commence the launch of a new portfolio of flavors which support such positioning and to sell flavors that do not fit with our new positioning under new brands and to discontinue certain of our current flavors. A key element of our strategy to achieve this marketing objective is to build consumer awareness and to educate consumers of the benefits of our products. Consumer demand activities are designed primarily to increase the installed base of sparkling water makers as measured in terms of percentage of household penetration in each market. Secondarily, we promote “users for life” so as to generate ongoing demand for our consumables (CO2 refills, flavors and carbonation bottles). We believe that widespread availability and easy access to consumables are key to customer retention and loyalty.

 

Our marketing activities include brand and product marketing and management as well as sales support programs. We use a variety of vehicles, including advertising, direct marketing and public relations campaigns, using both traditional and digital media, in-store demonstrations, infomercials and our websites to build brand awareness, educate consumers about the benefits of our home beverage carbonation systems, communicate the advantages of our products and establish brand positioning, all of which are designed to increase our installed base of sparkling water makers and active consumers base in our markets. We also use our marketing programs to support the sale of our products through new channels and to enter new markets. We conduct surveys and use third-party tracking programs in order to track our household penetration, usage behaviors and consumer opinions across markets, and to measure the success of our marketing activities over time. Our internal marketing team supports sales at the point-of-sale through trade marketing, developing and executing product and brand initiatives, and consumer education.

 

Acquiring a new customer is only the beginning of a relationship with the customer. To this end, we continuously test and apply various marketing tools to improve customer retention. In addition to enhancing our flavor offerings and improving the user experience, we employ subscription programs, newsletters, warranties, trade-in promotions and various other programs to keep the customer engaged. We offer easy access to CO2 refills through mass distribution of our cylinder exchange program and direct-to-home delivery from online 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.

 

Our marketing activities are managed from our headquarters in Israel. Each market has a representative (either through one of our subsidiaries or through our distribution partner) who works closely with our marketing team to localize our marketing activities in accordance with the individual tastes and preferences in a particular country.

 

Manufacturing and production

 

We manufacture 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 manufacture our products in over 20 locations around the world.

 

We are in the process of transitioning most of our manufacturing operations in Israel to our new manufacturing facility located in the southern part of Israel, the Lehavim facility. The Lehavim facility will house various manufacturing functions, including metals, bottle blowing, machining, assembly, cylinder manufacturing, CO2 refills, cylinder retesting, plastic injection and printing. As part of the ramp-up plan for the Lehavim facility, which is currently scheduled to be completed by the end of 2015, we are gradually phasing out our facilities in Mishor Adumim, which is located in a disputed territory sometimes referred to as the “West Bank,” and in Alon Tavor, located in the northern part of Israel, a process which we intend to complete by the end of 2015. We intend to maintain our facility in Ashkelon, located on the Mediterranean coast of Israel, where we manufacture flavors that are distributed worldwide.

 

We also outsource the production of certain components of our products to subcontractors in Israel and in China and with the closure of our Alon Tavor facility, we intend to engage a subcontractor for the painting of our sparkling water makers. In addition, we conduct CO2 refilling in the United States, Australia, Germany, Israel, the Netherlands, New Zealand, South Africa and Sweden. 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.

 

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 demand in 2013 and 2014 and believe that the capacity of our current manufacturing facilities and subcontractors is sufficient to meet anticipated demand for our products through 2015.

  

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 sparkling water makers, carbonation bottles, CO2 cylinders and flavors. The most important of these materials are aluminum, brass, certain plastics, flavor essences 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. From time to time, we engage in long-term purchase agreements and in hedging transactions to lower the impact of such fluctuations.

 

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Product development

 

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 sparkling water makers, some of which use dishwasher-safe glass or plastic carbonation bottles. In August 2012, we introduced the “Source,” an elegantly-designed sparkling water maker by Yves Behar that combines beauty, functionality and efficiency and the “Revolution,” an electrically powered innovative sparkling water maker that offers many new features, such as “touch-button” activation, providing a choice of carbonation levels (low, medium, high and turbo), a “snap-n-lock” mechanism for easy bottle insertion and removal and an LED display indicating carbonation progress and CO2 usage status. We expect to replace the “Revolution” with its successor, the “Power,” in the first half of 2015. In September 2013, we introduced the “Play,” also designed by Yves Behar. The Play incorporates the advanced “snap-n-lock” bottle mechanism and an auto lift slider for easy carbonation. The Play design also celebrates color and customization and enables creation of a custom color personally designed machine. 

 

We are continuously seeking to enhance our flavor offerings and cater to consumers’ tastes and address market trends. As part of our growth plan, during 2015, we intend to commence the launch of our new portfolio of flavors which support the repositioning of our brand around health and wellness. The new flavor portfolio will comprise the following flavor categories: “WATERS Essence,” “WATERS Fruits,” “WATERS Plus+,” “WATERS Zeros” and “Sparkling Gourmet Waters.” In line with our growth plan, we expect flavors that do not fit with our new positioning, including some of our currently popular flavors, to be sold under new brands called “Fountain Style” and “T-Rex Energy”. We also expect to continue to enter into strategic co-branding arrangements and intend to discontinue certain other flavors.

 

We constantly seek to continue to improve our product offerings and to provide consumers with a superior user experience. We are currently developing several innovative sparkling water 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 provide CO2 and other accessories for their carbonation devices. For example, we partnered with Samsung, a leading home appliance brand, which, in 2013, launched a refrigerator that offers sparkling water and in 2013, we collaborated with Whirlpool to produce a jointly developed home carbonation system for Whirlpool’s KitchenAid brand, which launched in the second quarter of 2014. 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 additional sales of consumables. In April 2015, we unveiled the “Mix”, a new high-end carbonation machine that connects to the internet and can carbonate almost any liquid.

 

In 2012, we introduced our SodaStream Caps that are innovative, patented, single-serve disposable capsules that add a pre-measured amount of flavor to SodaStream carbonating bottles, resulting in a consistently flavored sparkling water and an improved user experience.

 

Intellectual property

 

Our intellectual property portfolio is one of the means by which we attempt to protect our competitive position. We seek to protect our intellectual property, core technologies and other know-how, through a combination of patents, trademarks, trade secrets, non-disclosure and confidentiality agreements, licenses, assignments of invention and other contractual arrangements with our employees, consultants, partners, suppliers and customers, among others. We have a variety of trademarks registrations and pending applications, patents and pending patent applications and design registrations and pending applications which cover, among other things, the “snap-n-lock” mechanism, the SodaStream Caps and designs for most of the sparkling water makers we introduced in the last few years, including the “Play” and the “Source.” We place trademarks on all of our products, including carbonation bottles, CO2 cylinders and flavors. We have monitored and challenged the sale of products that we believe infringe our intellectual property rights in the past and we intend to continue to protect our intellectual property rights in the future.

 

Competition

 

We currently face limited competition from manufacturers of other home sparkling water makers in certain jurisdictions. However, new competitors may enter the home carbonated beverage and sparkling water market. Current or future competitors may, for example, introduce products with features which may cause our consumers to stop using our systems or to use them less frequently, such as sparkling water makers that do not require the exchange of CO2 cylinders or that may use other methods of carbonation. We also compete with the large global beverage companies for the dollars spent by consumers on non-alcoholic beverages. These include primarily manufacturers of carbonated soft drinks and sparkling water.

 

In February 2014, The Coca-Cola Company announced its purchase of a 10% equity stake in Keurig and their collaboration to develop a home cold beverage system. In May 2014, The Coca-Cola Company increased its stake to approximately 16%. In January 2015, Keurig announced it will collaborate with Dr Pepper Snapple Group to develop a selection of Dr Pepper Snapple Group’s products for its home cold beverage system and that its system’s launch is expected in the fall of 2015.

 

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 We also face competition with respect to some of our consumables, in particular in our CO2 refill business and our flavors. Third parties may manufacture and refill cylinders that can be used with our sparkling water makers. We have generally entered into agreements with distributors and retailers that prohibit them from providing our cylinders to third parties for refilling. Notwithstanding such arrangements, a court ruling in Germany allows consumers to have the CO2 cylinders refilled by third parties. With respect to our flavors, we face competition from various companies that produce syrups to add to sparkling or still water. 

 

Government regulation

 

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, the United States (Department of Transportation) and Canada (Transport Canada). The various regulatory bodies have different requirements for periodic re-testing of cylinders that vary from between five to 10 years, procedures for which we are largely self-certified. In addition, the transport of cylinders is regulated on an international level and all of our 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.

 

Facilities

 

Our headquarters in Airport City, Israel is comprised of approximately 28,308 square feet of office and warehouse space, which we lease under a lease agreement that terminates in April 2018. Our Lehavim facility, located on a plot of land comprising approximately 915,000 square feet, is expected to ultimately comprise approximately 500,000 square feet of factory, warehouse and office space. Pursuant to the terms of a development agreement with the Israel Land Authority, we are required to complete certain construction of the Lehavim facility by March 2017. Upon satisfaction of the conditions under the development agreement, we expect to enter into a long-term lease agreement with the Israel Land Authority, pursuant to which we will lease the land where the Lehavim facility is situated for a term ending in February 2061, with an option to extend the lease for an additional term of 49 years. We lease our Mishor Adumim manufacturing facility, which is comprised of 164,214 square feet of factory, warehouse and office space, under a lease that terminates in July 2015, subject to automatic extensions of one-year periods. We are currently negotiating with the lessor to allow us to terminate the lease during an extension period following prior notice. Additionally, we lease our manufacturing facility in Alon Tavor, which is comprised of 40,000 square feet of factory space, under a long-term lease with the Israel Land Authority that terminates in December 2049. As part of the ramp-up plan for the Lehavim facility, which is currently scheduled to be completed by the end of 2015, we are gradually phasing out our facilities in Mishor Adumim and in Alon Tavor and intend to complete this process by the end of 2015. Our Ashkelon facility, located on the Mediterranean coast of Israel, is comprised of approximately 21,528 square feet of factory, warehouse and office space and is leased under a lease agreement that terminates in December 2016. We have an option to extend the lease for an additional 12 months. 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. We have the option to extend the lease for an additional 48 months, unless the lessor notifies us at least six months prior to the end of the term that it does not wish to extend the lease. This location is used for sales and marketing activities as well as CO2 refilling. Additional CO2 refilling takes place in the United States, Australia, Israel, the Netherlands, New Zealand, South Africa and Sweden.

 

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, Japan, 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.

  

Seasonality

 

For a discussion of seasonality, see “Item 5.A — Operating Results — Seasonality.”

 

C.Organizational Structure

 

Our company, SodaStream International Ltd., was formed in March 2007, for the purpose of fully controlling SodaStream Enterprises N.V. (formerly Soda-Club Enterprises N.V.). SodaStream Enterprises N.V., which is registered in the Netherland Antilles, is wholly-owned by SodaStream International Ltd. Our operational activities are carried out by SodaStream International B.V. (formerly Soda-Club International B.V.), which is registered in the Netherlands, and its direct and indirect subsidiaries. SodaStream International B.V. is a wholly-owned subsidiary of SodaStream Enterprises N.V.

  

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The following table sets forth the subsidiaries owned, directly or indirectly, by us as of March 31, 2015:

 

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 GmbH  Germany   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%
SodaStream Nordics AB  Sweden   100%
SodaStream Professional S.r.l.  Italy   100%
SodaStream Canada Ltd.  Canada   100%
SodaStream K.K.  Japan   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

 

Not applicable.

 

Item 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

Summary

 

SodaStream manufactures home beverage carbonation systems, which enable consumers to easily transform ordinary tap water into sparkling water and flavored sparkling water in seconds. We develop, manufacture and sell sparkling water makers and exchangeable carbon-dioxide (CO2) cylinders, as well as consumables, consisting of CO2 refills, reusable carbonation bottles and flavors to add to the sparkling water.

 

As of December 31, 2014, we sold our products through more than 70,000 individual retail stores in 45 countries. Following our purchase of the distribution business from certain of our former distributors, including Eurometalnova SPA in June 2013, covering Italy, and Synergy Trading Corporation in April 2014, covering Japan, as of December 31, 2014, we distributed our products directly in 24 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 employ a “razor/razor blade” business model, which is designed to increase sales of sparkling water makers (the razor); and to generate recurring sales of higher-margin consumables, consisting of CO2 refills, flavors and carbonation bottles (collectively, the razor blades). As sales of our sparkling water makers increase, we expect that the subsequent sales of related consumables will result in increased gross profits due to the higher gross margins associated with our consumables. However, in order to further develop our customer base, we plan to continue to focus on increasing sales of our sparkling water makers.

   

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Historically, our growth in revenues was driven by our heightened focus on promoting sparkling water maker sales in both existing markets and new markets to increase our installed base of sparkling water makers, particularly in North America, but also in Western Europe. The growth of our installed base of sparkling water makers in turn resulted in an increase in revenues from sales of our consumables. Following seven consecutive years of double-digit growth, our revenues decreased by 9.0% in 2014 as compared to 2013. In October 2014, we adopted a growth plan based on five “growth pillars.” A key element of our strategy is to expand our active installed base of sparkling water makers by further penetrating existing markets, with a focus on the United States, which is our largest individual market, and by entering new markets. Another key element of our strategy is to build consumer awareness and to educate consumers of the benefits of our products.

 

A.Operating Results

 

Key measures of our performance

 

Revenues

 

Our revenues consist primarily of sales of sparkling water makers and recurring sales of higher-margin consumables, including CO2 refills, flavors and carbonation bottles. We derive revenues from the sale of goods to our customers, who may be consumers, retail partners or distributors, depending on the sales channel through which the goods are sold. The majority of our product distribution to our ultimate customers is through retail stores. Our distribution retail coverage includes many of the leading chain stores in the markets in which we operate. In some markets, we also distribute our sparkling water makers and consumables directly to consumers through telephone service centers or the internet.

 

We record revenues from sales of these items at the gross sales price, net of returns, trade discounts, rebates and provisions for estimated returns. We recognize revenues when persuasive evidence exists (usually in the form of an executed sales agreement) that the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods and the amount of revenues can be measured reliably. If it is probable that discounts will be granted and the amount can be measured reliably, then the discount is recognized as a reduction of revenue as the sales are recognized. The timing of the transfer of risks and rewards varies depending on the individual terms of the sale agreement. For sales of products in domestic markets, transfer usually occurs when the product is received at the customer’s warehouse, but for some international shipments transfer occurs upon loading the goods onto the relevant carrier.

 

The following tables present our revenues, by product type for the periods presented, as well as such revenues by product type as a percentage of total revenues:

 

(in thousands)  Year Ended December 31, 
   2012   2013   2014 
Sparkling water makers and exchangeable CO2 cylinders  $185,875   $233,146   $172,614 
Consumables   241,922    317,798    327,400 
Other   8,519    11,779    11,760 
Total  $436,316   $562,723   $511,774 

  

   Year Ended December 31, 
   2012   2013   2014 
Sparkling water makers and exchangeable CO2 cylinders   42.6%   41.4%   33.7%
Consumables   55.4    56.5    64.0 
Other   2.0    2.1    2.3 
Total   100.0%   100.0%   100.0%

 

We believe that the number of sparkling water makers and CO2 refills sold during each period is an important indicator of the expansion rate of our business. The number of sparkling water maker units sold is indicative of the growth of our customer base and the number of CO2 refills sold is indicative of sales of consumables to our active consumer base. The number of sparkling water maker units that we sold in 2014 decreased by 27.5% compared to 2013 and the number of CO2 refills increased by 16.4%. We estimate, based on consumer surveys and sales of CO2 refills, that, as of December 31, 2014, there were approximately 9.5 million households that create a sparkling water or flavored sparkling water beverage using our system at least once every two weeks, which we refer to as active consumers.

  

We believe that the sale of every sparkling water maker can have a compounding effect because every sale increases the potential demand for our consumables, which consist of CO2 refills, flavors and carbonation bottles, over time. Each sparkling water maker that is sold comes with a filled exchangeable CO2 cylinder, which is recorded in the revenue category referred to above as “Sparkling water makers and exchangeable CO2 cylinders.” A customer would not typically need to purchase a CO2 refill, which is recorded in the sales category referred to above as “Consumables,” for several months. Our general historical experience is that the growth in consumables in a new market arises over a period of time following the growth in sparkling water maker sales and increases correspondingly to the growth in our active consumer base in such markets. These factors may result in a lag between the growth in sparkling water maker sales and growth in the sales of consumables.

 

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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.

 

In some of the markets in which our products are sold, we operate through local distributors. In 2014, one of our distributors, serving one country in Western Europe, accounted for 12.2% of our revenues and contributed a higher proportion of our operating income (as compared to its portion of our revenues). Distributors are generally required to meet annual purchase targets, defined as monetary amounts, for the first year or two of the distribution agreement, as well as to meet certain defined growth targets for each of the subsequent years until the end of the term of the agreement. In addition, annual and semi-annual discussions with distributors often include more specific volume targets per product type. If our distributors do not meet their defined purchase targets, they may lose their exclusivity rights and we also generally have the right to terminate the agreement after a notice period.

 

Cost of revenues and gross margin

 

Our cost of revenues consists primarily of raw materials and components, as well as production and production-related labor, freight costs and other direct and indirect production costs. We require certain raw materials to manufacture our sparkling water makers, exchangeable CO2 cylinders, carbonation bottles and flavors, including, in particular, aluminum, certain plastics, flavoring essences, brass, sugar, CO2, sweeteners and fruit concentrate. In addition, cost of revenues includes the cost of delivery from the production site to our distribution warehouse where the product is sold. When we sell products to our third-party distributors, they usually collect their orders from our warehouses and bear the cost of delivery.

 

Gross profit and gross margin are influenced by each of the following factors:

 

·The gross margins of our consumables are typically higher than the gross margin of our sparkling water makers. We have found that as markets mature, sales of our consumables become a larger portion of our total revenues, thus contributing to overall gross margins.

 

·The gross margin on sales in markets where we distribute directly is generally higher than markets in which we use external distributors, due to the elimination of the external distributor’s margin. In certain markets, our expansion strategy is to work with third-party distributors who we believe will be better able to increase revenues in their market than we could if we distributed our products directly. However, in 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 revenues from these markets increases.

 

·Our cost of revenues, and therefore our gross profit, is impacted by several factors, including the prices of commodities and other materials such as aluminum, plastics, flavoring essences, brass, sugar, CO2, sweeteners and fruit concentrates; production labor costs; certain manufacturing costs, which are fixed in nature; and fuel prices, which affect our freight costs.

 

·Our gross margin is exposed to exchange rate fluctuations. We are primarily exposed to Euro/U.S. Dollar and 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 and NIS being the currencies which a significant portion of our material purchasing and production costs and operational expenses is denominated. As a result, the higher the Euro/U.S. Dollar exchange rate and the lower the NIS/U.S. Dollar exchange rate, the higher our gross margin will be. We regularly purchase currency hedging options and enter into forward contracts to hedge against currency exchange risks, in particular, the weakening of the Euro against the U.S. Dollar or the strengthening of the NIS against the U.S. Dollar. See “Item 11 —Quantitative and Qualitative Disclosures About Market Risk.”

 

·Price changes due to various factors, including market conditions, competition and cost increases.

 

Operating expenses

 

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 primarily consist of rental fees and the cost of delivering our products to our customers’ premises (central retailer warehouses, individual stores, home, office 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 certain cases, we are able to pass some of the delivery costs on to customers.

 

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Our advertising and promotional expenses consist primarily of media advertising costs, trade and consumer marketing expenses and public relation expenses. We intend to continue investing in increasing our sales of sparkling water makers and consumables, particularly in the United States.

 

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.

 

Other expenses (income), net in 2014 were $10.7 million, and comprised of restructuring costs of $7.3 million and the recording of the impairment of goodwill in the amount of $3.3 million, while in 2013, they were zero.

 

Financial expenses (income)

 

Financial expenses or income, net, consist of expenses relating to: (i) borrowing costs, (ii) interest expense on loans less interest income on deposits, (iii) foreign currency exchange expenses or income and (iv) gains or losses on derivative instruments.

 

Corporate taxes

 

The regular corporate tax rate in Israel in 2014 and subsequent years is 26.5%. The Israeli corporate tax rate for the 2013 tax year was 25%. Under the Investment Law and other Israeli legislation, we may be entitled to certain tax benefits, including reduced tax rates, accelerated depreciation and amortization rates for tax purposes on certain assets and amortization of other intangible property rights for tax purposes. For more information about certain of the tax benefits available to us under Israeli law, see “Item 10.E — Taxation— Israeli tax considerations and government programs.”

 

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%.

 

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.

 

During 2013 and 2014, we reached agreements with the tax authorities in some of the jurisdictions in which we operate with respect to certain prior tax periods.

 

Because we operate in a number of countries, our income is subject to taxation in different jurisdictions with a range of tax rates. Therefore, our consolidated income tax position is subject to the distribution of our income before tax in the different jurisdictions in which we operate.

 

We estimate our effective tax rate for the coming years based on our planned future financial results in existing and new markets and the key factors for setting our tax liability, in particular, our transfer pricing policy and tax loss carry forwards. Accordingly, we estimate that our effective tax rate will range between 10% and 20% of our income before income tax. There can be no certainty that our plans will be realized and that our assumptions with regard to the key elements affecting tax rates will be accepted by the tax authorities. Therefore, our actual effective tax rate might be higher than our estimate.

 

Over the course of our business operations, we have accumulated tax loss carry forwards amounting to approximately $59.5 million as of December 31, 2014.

 

Share-based compensation

 

During the year ended December 31, 2014, we granted options to purchase 701,657 ordinary shares under our equity incentive plan, which includes 226,369 restricted share units. The total amount of share-based compensation expense derived from the options and restricted share units granted in the year ended December 31, 2014 was $6.4 million, excluding share-based compensation in respect of options and restricted share units which were granted in respect of options that were modified in 2014. The expense will be recognized over the vesting period. The total amount of share-based compensation expense derived from options and restricted share units granted in the year ended December 31, 2014, including in respect of options that were modified in 2014, was $8.5 million. The expense recognized in 2014 amounted to $3.8 million.

 

Segments

 

We review our performance in distinct operating segments representing geographical regions. Each region has similar characteristics relevant to our business and usually includes several markets in which we sell our products.

 

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The sales of our products in each market are managed either by wholly-owned subsidiaries or by external third party distributors. The reported performances of these markets are provided periodically and consolidated for presentation to our board of directors, which acts as our Chief Operating Decision Maker. The data received by the Chief Operating Decision Maker consists of revenues from external customers and segment results by market, which include items directly attributable to each market as well as those that can be allocated on a reasonable basis.

 

We have identified four reportable operating segments, each of which represents a geographical area with similar characteristics. The products sold in all of the segments are similar and generally produced at the same production sites. The identified segments are:

 

·The Americas consists of the United States, Canada and other markets in North America, Central America and South America, which are significantly influenced by the consumption culture of the United States.

 

·Western Europe consists of our markets in Western and Northern Europe, which are characterized by high standards of living and high price levels.

 

·Asia-Pacific consists of our markets in Australia and New Zealand, together with other 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. Most of these markets tend to be characterized by a lower price level in comparison to the other geographic markets in which we operate.

 

The following table presents our revenues, by segment for the periods presented, as well as segment results from each segment. Segment results are calculated as follows: (i) for markets in which marketing is performed by third-party distributors, segment results represent revenues from external customers, less direct cost of revenues and less advertising expenses for that market; and (ii) for markets in which marketing is performed by us, segment results represent revenues from external customers, less direct cost of revenues and less other operating expenses (general and administrative and sales and marketing expenses).

 

(in thousands)  The
Americas
   Western
Europe
   Asia-Pacific   CEMEA   Reportable
Segments
   Reconciliation   Consolidated 
Year ended December 31, 2012                                   
Revenues   157,705    204,332    42,367    31,912    436,316    -    436,316 
Segment results   8,565    49,196    11,085    4,225    73,071    (27,538)   45,533 
Year ended December 31, 2013                                   
Revenues   218,169    268,500    43,554    32,500    562,723    -    562,723 
Segment results   13,681    55,253    11,122    2,032    82,088    (33,160)   48,928 
Year ended December 31, 2014                                   
Revenues   142,301    281,690    53,837    33,946    511,774         511,774 
Segment results   (3,556)   60,099    8,182    5,249    69,974    (55,003)   14,971 

 

The following table presents the segments’ revenues, as a percentage of total revenues:

 

   2012   2013   2014 
The Americas   36.1%   38.8%   27.8%
Western Europe   46.9    47.7    55.0 
Asia-Pacific   9.7    7.7    10.5 
CEMEA   7.3    5.8    6.7 
Total   100.0%   100.0%   100.0%

 

One of our distributors in Western Europe accounted for 12.2% and 12.8% of our total revenues in 2014 and 2013, respectively, and one of our customers in the Americas accounted for 5.6% and 7.5% of our total revenues in 2014 and 2013, respectively.

 

Revenues from customers located in Israel amounted to $10.4 million in 2012, $13.9 million in 2013 and $11.5 million in 2014. Our Israeli sales and marketing subsidiary also serves as the exclusive distributor of Brita water filtration systems in Israel.

 

The Americas

 

Revenues in the Americas decreased by $75.9 million, or 34.8%, to $142.3 million in 2014 from $218.2 million in 2013. The decrease was primarily attributable to lower demand for sparkling water makers and flavors in the United States due to reduced demand and sales by retailers. Revenues in the Americas increased by $60.5 million, or 38.3%, to $218.2 million in 2013 from $157.7 million in 2012. The increase was primarily attributable to growth in household penetration in the United States.

 

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Segment results in the Americas decreased by $17.3 million to negative segment results of $3.6 million in 2014 from $13.7 million in 2013. This decrease was mainly due to the decrease in revenues. Segment results in the Americas increased by $5.1 million to $13.7 million in 2013 from $8.6 million in 2012. This increase was mainly due to the increase in revenues.

 

Western Europe

 

Revenues in Western Europe increased by $13.2 million, or 4.9%, to $281.7 million in 2014 from $268.5 million in 2013. This increase was primarily attributable to increased sales in Germany and Austria, partially offset by a decrease in France and Italy. Revenues in Western Europe increased by $64.2 million, or 31.4%, to $268.5 million in 2013 from $204.3 million in 2012. This increase was primarily attributable to increased sales in Germany, France and Italy, as well as the change to direct distribution in Italy since June 2013, with such change contributing approximately $2.7 million to the increase in revenues for the region.

 

Segment results in Western Europe increased by $4.8 million, or 8.7%, to $60.1 million in 2014 from $55.3 million in 2013. This increase was primarily attributable to increased sales in and profit from Germany. Segment results in Western Europe increased by $6.1 million, or 12.4%, to $55.3 million in 2013 from $49.2 million in 2012. This increase was mainly due to higher revenues in France and Germany.

 

One market in Western Europe that accounted for 12.2% of our revenues in 2014 contributed a higher proportion of our operating income, as compared to its portion of our revenues in 2014.

 

Asia-Pacific

 

Revenues in Asia-Pacific increased by $10.2 million, or 23.6%, to $53.8 million in 2014 from $43.6 million in 2013. This increase was primarily attributable to increased sales in Australia and the acquisition of the distribution business in Japan in April 2014. Revenues in Asia-Pacific increased by $1.2 million, or 2.8%, to $43.6 million in 2013 from $42.4 million in 2012. This modest increase was mainly due to increased sales in Australia and South Korea.

 

Segment results in Asia-Pacific decreased by $2.9 million, or 26.1%, to $8.2 million in 2014 from $11.1 million in 2013. This decrease was primarily attributable to the decrease in sales and profit from New Zealand and Japan. Segment results in Asia-Pacific were $11.1 million in 2013 and 2012.

 

CEMEA

 

Revenues in CEMEA increased by $1.5 million, or 4.4%, to $34.0 million in 2014 from $32.5 million in 2013. This increase was primarily attributable to increased sales in the Czech Republic. Revenues in CEMEA increased by $0.6 million, or 1.8%, to $32.5 million in 2013 from $31.9 million in 2012. The increase in 2013 was primarily attributable to continued growth in certain of our markets in the region, primarily Israel.

 

Segment results in CEMEA increased by $3.2 million, or 160%, to $5.2 million in 2014 from $2.0 million in 2013. This increase was primarily attributable to an increase in profit from Israel. Segment results in CEMEA decreased by $2.2 million, or 47.6%, to $2.0 million in 2013 from $4.2 million in 2012. The decrease in 2013 was mainly due to higher marketing expenses and changes in the product mix, primarily a higher portion of sparkling water makers with relatively lower gross margins.

 

Results of operations

 

Year ended December 31, 2014 compared to year ended December 31, 2013

 

Revenues decreased by $50.9 million, or 9.0%, to $511.8 million in 2014 from $562.7 million in 2013. The decrease was attributable primarily to a decrease of 27.5 % in the volume of sparkling water makers sold to 3.2 million units in 2014, mainly due to a decrease in sales in the United States and France, partially offset by an increase in sparkling water maker unit sales in Germany, as compared to 4.4 million units in 2013. The decrease in revenues also includes $5.0 million attributable to unfavorable changes in foreign currency exchange rates, mainly the weakening of the Australian dollar against the U.S. dollar by 7.0% in comparison to its average rate in 2013. CO2 refill unit sales increased by 16.0% to 25 million units in 2014 from 21.5 million units in 2013 and flavor unit sales decreased by 8.0% to 31.4 million units in 2014 from 34.4 million units in 2013. By segment, the key regions of revenue growth were Western Europe, with an increase of $13.2 million, and Asia-Pacific, with an increase of $10.2 million. Revenues from CEMEA increased by $1.5 million and the key region of decreased revenues was the Americas with a decrease of $75.9 million.

 

Gross profit decreased by $32.6 million, or 11.4%, to $253.0 million in 2014 from $285.6 million in 2013. Gross profit as a percentage of revenues, or gross margin, disregarding the impact of restructuring costs, increased by 40 basis points to 51.1% in 2014 compared to 50.7% in 2013. The increase was mainly due to the improved gross margins of sparkling water makers due to significantly lower discounting activities compared to 2013, and a higher portion of CO2 refills in the sales mix and was partially offset by unfavorable changes in foreign currency exchange rates.

 

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Sales and marketing expenses decreased by $8.6 million, or 4.6%, to $177.7 million in 2014 from $186.3 million in 2013. The decrease in sales and marketing expenses was mainly due to lower advertising and promotion expenses, which decreased by $9.6 million to 15.0% of revenues from 15.4% of revenues in the same period in 2013, and the impact of changes in foreign currency exchange rates and was partially offset by additional expenses associated with our Japanese distribution channel which was acquired in April 2014. As a percentage of revenues, sales and marketing expenses increased to 34.7% in 2014 from 33.1% in 2013.

 

 General and administrative expenses decreased by $0.6 million, or 1.1%, to $49.8 million in 2014 from $50.4 million in 2013. As a percentage of revenues, general and administrative expenses increased to 9.7% in 2014 from 8.9% in 2013. This decrease was mainly due to the reversal of share-based compensation expense of $4.8 million ($2.6 million with respect to prior years and $2.2 million with respect to 2014), partially offset by expenses related to information technology systems support and the Japanese distribution channel.

 

Other expenses (income), net were $10.7 million, and comprised of restructuring costs of $7.3 million and the recording of the impairment of goodwill in the amount of $3.3 million, while in 2013, they were zero.

 

Operating income, disregarding the impact of $15.6 million in restructuring costs, decreased to $30.6 million, or 6.0% of revenues, compared to $48.9 million or 8.7% of revenues in 2013. Operating income was negatively impacted by an impairment of goodwill in the amount of $3.3 million reported in other expenses, and a negative impact in the amount of $5.4 million from unfavorable changes in foreign currency exchange rates.

 

Total financial expenses (income), net increased by $3.4 million, to financial income of $1.2 million in 2014 compared to an expense of $2.2 million in 2013. This increase was mainly attributable to a reduction in the value of loans denominated in Euro.

 

Income tax expense decreased by $0.8 million to $3.9 million in 2014 from $4.7 million in 2013. The decrease was primarily attributable to lower income before tax and changes in the distribution of profit before tax between territories. Our effective tax rate for 2014 was 23.9% compared to 10.0% for 2013, mainly due to restructuring costs in 2014 which were not deductible for tax purposes in 2014.

 

Year ended December 31, 2013 compared to year ended December 31, 2012

 

Revenues increased by $126.4 million, or 29.0%, to $562.7 million in 2013 from $436.3 million in 2012. This growth was attributable primarily to an increase of 27.2% in the volume of sparkling water makers sold to 4.4 million units in 2013, compared to 3.5 million units in 2012. CO2 refills increased by 29.8% to 21.5 million units in 2013 from 16.5 million units in 2012 and flavors increased by 21.9% to 34.3 million units in 2013 from 28.1 million units in 2012, primarily due to the expansion of our active installed sparkling water maker base. By segment, the key regions of revenue growth were Western Europe, with an increase of $64.2 million, and the Americas, with an increase of $60.5 million. Revenues from Asia-Pacific and from CEMEA increased by $1.2 million and $0.6 million, respectively.

 

Gross profit increased by $49.8 million, or 21.1%, to $285.6 million in 2013 from $235.8 million in 2012. Gross profit as a percentage of revenues, or gross margin, decreased by 330 basis points to 50.7% in 2013 compared to 54.0% in 2012. The decrease was primarily due to lower sale prices and higher product costs, a shift in product mix towards products with lower gross margins and unfavorable changes in foreign currency exchange rates.

 

Sales and marketing expenses increased by $33.3 million, or 21.8%, to $186.3 million in 2013 from $153.0 million in 2012. The increase in sales and marketing expenses was due to an increase in sales expenses and advertising and promotion expenses of $21.1 million and $12.2 million, respectively. As a percentage of revenues, sales and marketing expenses decreased to 33.1% in 2013 from 35.1% in 2012.

 

General and administrative expenses increased by $12.6 million, or 33.3%, to $50.4 million in 2013 from $37.8 million in 2012. As a percentage of revenues, general and administrative expenses increased to 8.9% in 2013 from 8.7% in 2012. This increase was driven by additional expenses associated with our purchase of the Italy and Canada distributor businesses. General and administrative expenses in 2013 also included additional share-based compensation expense associated with the long-term incentive plan for our chief executive officer that was adopted in December 2012.

 

Other income, net decreased by $0.5 million to zero in 2013 from $0.5 million in 2012, primarily due to one-time capital gains from the sale of property, plant and equipment in 2012.

 

Total financial expenses, net was $2.2 million in 2013 compared to $0.9 million in 2012. This increase was mainly attributable to foreign exchange differences.

 

Income tax expense increased by $4.0 million to $4.7 million in 2013 from $0.7 million in 2012. Our effective tax rate for 2013 was 10.0% compared to 1.7% for 2012. The low effective tax rate in 2012 was primarily attributable to an adjustment of a tax provision resulting from agreements with the tax authorities in some of our jurisdictions.

 

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Seasonality

 

We have experienced in the past, and expect to continue to experience, certain fluctuations in our quarterly revenues. Historically, our revenues have generally been strongest in the third and fourth quarters and weakest in the first quarter. However, this was not the case in 2014, as revenues in the second quarter were stronger than in the third and fourth quarters. We generally attribute this historical seasonality to increased demand for our products during the warmer summer months and increased sales associated with holiday shopping.

 

Our operating expenses and, therefore, our overall margins are also seasonally impacted. For example, we typically increase our advertising and promotional expenditures in the second and fourth quarters. Consequently, our overall operating income may be lower in these quarters.

 

Our results for any quarter are not necessarily indicative of the results that may be achieved in subsequent quarters or for the full fiscal year. Our quarterly operating results should not be relied on as indications of our future performance.

 

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, 2014. 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,
2013
   June 30,
2013
   Sept. 30,
2013
   Dec. 31,
2013
   March 31,
2014
   June 30,
2014
   Sept. 30,
2014
   Dec. 31,
2014
 
Consolidated statements of operations data:                                        
Revenues  $117,639   $132,390   $144,584   $168,110   $118,172   $141,171   $125,905   $126,526 
Cost of revenues   53,554    60,452    66,366    96,781    56,326    69,914    61,428    71,018 
Gross profit   64,085    71,938    78,218    71,329    61,846    71,257    64,477    55,508 
Operating expenses:                                        
Sales and marketing   38,859    43,639    47,549    56,242    46,146    46,941    41,636    42,945 
General and administrative   11,609    13,617    12,660    12,467    13,355    13,072    13,931    9,437 
Other income, net   -    -    -    -    -    -    -    10,654 
Total operating expenses   50,468    57,256    60,209    68,709    59,501    60,013    55,567    63,036 
Operating income   13,617    14,682    18,009    2,620    2,345    11,244    8,910    (7,528)
Total financial expense (income), net   235    711    (315)   1,615    219    906    (1,783)   (534))
Income before income taxes   13,382    13,971    18,324    1,005    2,126    10,338    10,693    (6,994)
Income tax expense  (tax benefit)   1,298    1,108    1925    324    348    1,095    1,229    1,196 
Net income for the period  $12,084   $12,863   $16,399   $681   $1,778   $9,243   $9,464   $(8,190)
                                         
   March 31,
2013
   June 30,
2013
   Sept. 30,
2013
   Dec. 31,
2013
   March 31,
2014
   June 30,
2014
   Sept. 30,
2014
   Dec. 31,
2014
 
As a percentage of revenues:                                        
Revenues   100%   100%   100%   100%   100%   100%   100%   100%
Gross profit   54.5    54.3    54.1    42.4    52.3    50.5    51.2    43.9 
Operating expenses:                                        
Sales and marketing   33.0    33.0    32.9    33.5    39.0    33.3    33.1    33.9 
General and administrative   9.9    10.3    8.8    7.4    11.3    9.3    11.1    7.5 
Other income, net   -    -    -    -    -    -    -    8.4 
Total operating expenses   42.9    43.2    41.6    40.9    50.4    42.5    44.1    49.8 
Net income for the period   10.3%   9.7%   11.3%   0.4%   1.5%   6.5%   7.5%   (6.5)%
As a percentage of full year results:                                        
Revenues   20.9%   23.5%   25.7%   29.9%   23.1%   27.6%   24.6%   24.7%
Gross profit   22.4    25.2    27.4    25.0    24.4    28.2    25.5    21.9 
Operating expenses:                                        
Sales and marketing   20.9    23.4    25.5    30.2    26.0    26.4    23.4    24.2 
General and administrative   23.1    27.0    25.1    24.8    26.8    26.3    28.0    18.9 
Other income, net   -    -    -    -    -    -    -    100.0 
Total operating expenses   21.3    24.2    25.4    29.1    25.0    25.2    23.3    26.5 
Net income for the period   28.8%   30.6%   39.0%   1.6%   14.5%   75.2%   77.0%   (66.7)%

 

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, 2014, 2013 and 2012, and as of December 31, 2014 and 2013 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.

 

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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.

 

Revenue recognition

 

As described in Note 3L to our audited consolidated financial statements for the year ended December 31, 2014 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 customer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods and the amount of revenues can be measured reliably. If it is probable that discounts will be granted and the amount can be measured reliably, then the discount is recognized as a reduction of revenue as the sales are recognized. The timing of the transfer of risks and rewards varies depending on the individual terms of the sale agreement. For sales of products in domestic markets, transfer usually occurs when the product is received at the customer’s warehouse, but for most international shipments transfer occurs upon loading the goods onto the relevant carrier.

 

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, 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 transaction of exchangeable CO2 cylinders with 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 and 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.

 

Inventory

 

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.

 

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Property, plant and equipment

 

Property, plant and equipment represent a significant proportion of our assets, constituting 25.6% of total assets as of December 31, 2014 as compared to 22.1% in 2013. 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 represented approximately 26.1% 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 sparkling water makers that might require a change to the cylinder design in the future. There is no assurance that future sparkling water maker designs will be compatible with the current cylinders’ models or that changes in governmental regulations, technological developments or other factors will 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, 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 whenever events or changes in circumstance indicate that the carrying amount may not be recoverable. In addition, at least once a year, we examine 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 our 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 our financial statements.

 

Income tax

 

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 laws 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 subsidiaries regarding their future earnings situation and other parameters. The deferred tax liabilities recognized on planned dividend payments by consolidated subsidiaries depend on assumptions regarding the future earnings situation of the consolidated 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.

 

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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 and regulations.

 

Share-based compensation

 

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. In 2014, total share-based compensation expense amounted to $3.8 million. The fair value of share-based compensation is measured using the Black-Scholes formula. Measurement inputs include share price on the measurement date, the exercise price of the instrument, expected volatility (weighted average historic volatility of the company’s shares and of comparable companies over the expected term of the awards), expected life of the instruments (based on averaging the vesting schedule of the awards 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 awards). 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.

 

Changes in accounting policies

 

The Company has applied the following new standards and amendments to standards, including any consequential amendments to other standards, as of January 1, 2014.

 

1.Amendment to IAS 32, Financial Instruments, Presentation.

 

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.

 

B.Liquidity and Capital Resources

 

Our cash requirements have principally been for working capital and capital expenditures. Working capital increased by $3.4 million to $158.8 million as of December 31, 2014 from $155.4 million as of December 31, 2013. The increase in working capital was funded primarily from cash and cash equivalents on hand and long-term loans. 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 short-term credit facilities. Beginning in 2014, we also funded a portion of our working capital with long-term loans. Our capital investments have included the following: the expansion of our production capacity and capabilities; the construction of the Lehavim facility; improvements and the expansion of our distribution and corporate facilities; investments in developing new products; and investments and improvements in our information technology systems.

 

Our inventory strategy has historically included increasing inventory levels to meet anticipated and a certain level of unexpected consumer demand for our products. This includes maintaining an inventory of sparkling water makers, exchangeable CO2 cylinders and other consumables at each of our sites, at levels that we expect to sell during the next four to five 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.

 

As of December 31, 2014, we had $9.2 million outstanding under long-term loans which are recorded as current maturities in our audited consolidated financial statements appearing elsewhere in this annual report and $34.6 million outstanding under long-term loans. These loans were provided by banks in Israel. See “— Credit facilities” below.

 

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Based on our current business plan, we believe that our cash, cash equivalents, borrowings available under our short-term credit facilities and cash flow from operations, will be sufficient to meet our currently anticipated cash requirements for the next 12 months. We may require new borrowings or additional capital in order to finance our activities.

 

Cash flows

 

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, 
(in thousands)  2012   2013   2014 
Net cash from operating activities  $37,177   $2,780   $35,585 
Net cash used in investing activities   (9,228)   (43,686)   (59,974)
Net cash from (used in) financing activities   (983)   19,636    32,278 

 

Cash from 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 flow from operating activities was $35.6 million in 2014 as compared to cash flow from operating activities of $2.8 million in 2013. This was primarily due to a decrease in net cash outflows to working capital of $58.2 million to $12.3 million in 2014 from $70.5 million in 2013, an increase in adjustments to net income for a non-cash item of $9.2 million to $40.1 million in 2014 from $30.9 million in 2013, partially offset by a decrease in net income of $29.7 million to $12.3 million in 2014 from $42.0 million in 2013. Adjustments to net income for non-cash items increased in 2014 as compared to 2013 primarily due to restructuring costs and goodwill impairment partially offset by a decrease in share-based compensation expense and favorable exchange rate differences on long-term loans. The decrease in cash outflows related to working capital was primarily driven by a decrease in trade and other receivables of $21.5 million in 2014 compared to a $44.4 million increase in 2013, an increase in provisions and other current liabilities of $1.4 million in 2014 compared to a $9.2 million decrease in 2013, an increase in inventories of $12.7 million in 2014 compared to a $20.2 million increase in 2013, partially offset by a decrease in trade payables of $22.6 million in 2014 compared to a $3.3 million increase in 2013.

 

Cash from operating activities was $2.8 million in 2013 as compared to cash from operating activities of $37.2 million in 2012. This decrease was primarily due to an increase in net cash outflows to working capital of $49.1 million to $70.5 million in 2013 from $21.4 million in 2012, a decrease in net income of $1.9 million to $42.0 million in 2013 from $43.9 million in 2012, partially offset by an increase in adjustments to net income for a non-cash item of $13.9 million to $30.9 million in 2013 from $17.0 million in 2012. Adjustments to net income for non-cash items increased in 2013 as compared to 2012 primarily due to an increase in share-based compensation expense, an increase in depreciation and amortization, and an increase in income tax expense. The increase in cash outflows related to working capital was primarily driven by an increase in trade payables of $3.3 million in 2013 compared to a $40.0 million increase in 2012, a decrease in provisions and other current liabilities of $9.2 million compared to a $14.9 million increase in 2012, partially offset by an increase in trade and other receivables of $44.4 million in 2013 compared to a $49.4 million increase in 2012 and an increase in inventories of $20.2 million in 2013 compared to a $26.8 million increase in 2012.

 

Cash used in investing activities

 

Cash used in investing activities increased by $16.3 million to $60.0 million in 2014 from $43.7 million in 2013, primarily as a result of capital expenditures in connection with the construction of the Lehavim facility.

 

Cash used in investing activities increased by $34.5 million to $43.7 million in 2013 from $9.2 million in 2012, primarily as a result of a decrease in proceeds from bank deposits, partially offset by a decrease in investments in bank deposits and a decrease in acquisitions of subsidiaries.

 

The majority of our capital expenditures have historically been related to the purchase of machinery and equipment and information technology, however, beginning in 2014, a material portion of our capital expenditures was related to the construction of the Lehavim facility. In order to support our business, in addition to investing in the further construction and the ramp-up of the Lehavim facility, we intend to continue to invest in production machinery and equipment, additional CO2 filling lines, corporate facilities and information technology infrastructure in 2015 and thereafter. See “—Capital expenditures” below.

 

Furthermore, we may spend additional amounts of cash on acquisitions from time to time, if and when such opportunities arise.

 

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Cash from (used in) financing activities

 

Cash used in financing activities was $32.3 million in 2014 as compared to cash from financing activities of $19.6 million in 2013. This change was mainly due to $49.3 million in long-term loans taken from banks in Israel offset by repayments of short-term debt of $15.5 million in 2014 as compared to no repayments in 2013.

 

Cash from financing activities was $19.6 million in 2013 as compared to cash used in financing activities of $1.0 million in 2012. This change was mainly due to changes in short-term debt of $15.5 million in 2013 as compared to repayments of $3.9 million in 2012.

 

Credit facilities

 

Long-term and short-term debt

 

As of December 31, 2014, we had debt of $43.9 million under secured long-term loan agreements of which $9.2 million is recorded as current maturities in our audited consolidated financial statements appearing elsewhere in this annual report. Our long-term loans are denominated in Euros. Outstanding principal amounts under the secured long-term loan agreements, are subject to variable, LIBOR-based, interest rates, plus a margin ranging between 1.85% and 2.15%.

 

As of December 31, 2014, we had short-term credit facilities with a total borrowing capacity of $20.0 million, of which none was outstanding as of such date. In addition, as at December 31, 2014, we entered into agreements in principle with financial institutions to receive additional credit in the total amount of up to $27.0 million.

 

Capital expenditures

 

Our capital expenditures in 2014 and 2013 amounted to $55.2 million and $39.8 million, respectively. The increase in capital expenditures in 2014 as compared to 2013 was mainly due to the construction of the Lehavim facility. We anticipate our capital expenditures in 2015 to primarily be related to the further construction of the Lehavim facility, expansion of our production capacity and capabilities, including the ramp-up of the Lehavim facility, investments in developing new products and investments and improvements in our information technology systems. We are in the process of transitioning most of our manufacturing operations in Israel to the Lehavim facility. The Lehavim facility will house various manufacturing functions, including metals, bottle blowing, machining, assembly, cylinder manufacturing, CO2 refills, cylinder retesting, plastic injection and printing. The Lehavim facility is situated in an industrial park that is located in a specified development zone. We have been approved to receive certain grants under the Investment Law regarding our investment in this facility. See “Item 3.D —Risk Factors – 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” and “Item 10.E — Taxation — Israeli tax considerations and government programs —Law for the encouragement of capital investments, 5719-1959.”

 

C.Research and Development, Patents and Licenses, etc.

 

Not applicable.

 

D.Trend Information

 

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, 2014 to December 31, 2014 that are reasonably likely to have a material adverse effect on our net revenues, 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.

 

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F.Contractual Obligations

 

Our significant contractual obligations and commitments as of December 31, 2014 are summarized in the following table:

 

   Payments Due by Period 
(in thousands)  Less Than
1 Year
   1 – 3
Years
   3 – 5
Years
   More Than
5 Years
   Total 
                     
Operating lease obligations  $5,994   $4,299   $1,309   $60   $11,662 
Long-term debt obligations   9,239    27,716    6,929    -    43,884 
Purchase obligations   53,452    -    -    -    53,452 
Total  $68,685   $31,945   $8,238   $60   $108,998 

 

The above table does not include obligations in respect of long-term employee benefits in the amount of $2.2 million as of December 31, 2014.

 

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, 2015:

 

Name   Age   Position
Executive officers        
Daniel Birnbaum   52   Chief Executive Officer and Director
Daniel Erdreich   51   Chief Financial Officer
Shmuel Perez   55   Chief Operations Officer
Eyal Shohat   41   Chief Corporate Development Officer
Mika Mazor   37   Chief People Officer
Yaron Kopel   44   Chief Product, Innovation and Design Officer
Amir Eyal   44   Chief Corporate Services Officer
Directors        
Yuval Cohen (1)   52   Chairman
Eytan Glazer (1) (2) (3) (4) (5)   52   Director
Lauri A. Hanover (1) (2) (3) (4) (5)   55   Director
David Morris (1) (2) (3) (4)   45   Director
Stanley Stern (1)   58   Director

  

(1)Independent director under the Nasdaq Rules.
(2)Member of our Compensation Committee.
(3)Member of our Nominating and Governance Committee.
(4)Member of our Audit Committee.
(5)External Director under the Companies Law.

 

Executive officers

 

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. 

 

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Eyal Shohat has served as our Chief Corporate Development Officer since January 2015. Prior thereto, Mr. Shohat served as our Chief Legal Officer since May 2010. From 2007 to April 2010, Mr. Shohat was 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. 

 

Mika Mazor has served as our Chief People Officer since February 2012. From 2002 to 2012, Ms. Mazor worked at Amdocs (NYSE: DOX) in various human resources roles, including, most recently as Vice President of Human Resources for Israel and Corporate Units, after having previously served as Managing Senior Talent Unit and Human Resources Director of the European Division. From 2000 to 2002, Ms. Mazor worked in human resources for Manpower Israel. Ms. 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. Ms. Mazor is also a multi-certified organizational coach and mentor, including 360-Degree Feedback and Myers-Briggs Type Indicator (MBTI) certification.

 

Yaron Kopel joined our company in September 2011 as our Chief Product Innovation and Design Officer.. From 2009 to 2011, Mr. Kopel was the Vice President of Marketing and Innovation for Excellence Israel, a large investment house in Israel. Prior to that, Mr. Kopel was the founder of ZER4U, one of Israel’s leading flower chains, and founder of TeCasan, an upscale, women’s shoe brand in New York City. In 2003, Mr. Kopel was awarded Israel’s Young Entrepreneur of the Year in a global contest sponsored by Ernst & Young. Mr. Kopel holds a B.A. in Business and Economics from Tel Aviv Academy.

 

Shmuel Perez has served as our Chief Operations Officer since January 2015. Prior to joining SodaStream, Mr. Perez worked in the semiconductor industry for 27 years, holding a variety of senior management positions at Intel, Numonyx and Micron Technology, Inc., including, most recently, as General Manager of Micron’s wafer fabrication facility in Israel. Mr. Perez holds a B.Sc. in Industrial Engineering and an M.B.A., both from Ben Gurion University, Israel.

 

Amir Eyal has served as our Chief Corporate Services Officer since January 2015. Mr. Eyal joined us in March 2013 as Vice President, Operations. From 1999 to 2013, Amir held various operational positions at Amdocs (NYSE: DOX), including, most recently, Vice President, Global Operations and Vice President, Global Procurement. Prior thereto, Mr. Eyal worked in Civil Engineering, including as Chief Engineer of the Tel-Aviv Metropolitan Mass Transit System. Amir holds a B.Sc. in Civil Engineering from the Technion - Israel Institute of Technology.

 

Directors

 

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 $900 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 chairman of the board of directors of Kornit Digital Ltd. (Nasdaq:KRNT), as a director of several privately held portfolio companies of Fortissimo Capital and as a director of Wix.com Ltd. (Nasdaq:WIX). 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 early stage ventures, providing strategic guidance, business development services 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 A. Hanover has served as a member of our board of directors since November 2010. Ms. Hanover is one of our external directors. Since August 2013, Ms. Hanover has served as the Chief Financial Officer of Netafim Ltd. Between May 2009 and July 2013, she served as 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 Senior Vice President and Chief Financial Officer of Lumenis Ltd., a medical device company, and from 2000 to 2004, she served as 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 currently serves as an external director of Kornit Digital Ltd. (Nasdaq:KRNT) and previously served as an external director of Nova Measuring Instruments Ltd. and Ellomay Capital Ltd. 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, the late 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. Additionally, he 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.

 

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Stanley Stern has served as a member of our board of directors since February 2015. Since February 2013, Mr. Stern has served as the president of Alnitak Capital Partners, a private merchant bank and strategic advisory firm. Since December 2012, Mr. Stern has served as Chairman of the board of directors of AudioCodes Ltd. (Nasdaq:AUDC). He also currently serves on the board of directors of Foamix Pharmaceuticals Ltd. (Nasdaq:FOMX) and Ekso Bionics. Mr. Stern has over 30 years of experience as an investment banker, holding positions at Salomon Brothers, C.E. Unterberg, STI Ventures and, between 2004 and 2013, at Oppenheimer & Co., including as Managing Director and Head of Investment Banking, Technology, Israeli Banking and FIG. From 2012 until its sale in 2014, he served as a director of Given Imaging Ltd., a medical device company. From 2002 until 2013, Mr. Stern served as a director of Tucows, Inc., a publicly traded internet service provider, including as Chairman of the board of directors from 2002 until 2012. From 2005 until its sale in 2011, he served as a director and Chairman of the audit committee of Fundtech Ltd., and from 2004 until 2009, Mr. Stern served as a director of Odimo Inc. (DBA Diamond.com), an online jewelry vendor. Mr. Stern holds an M.B.A. from Harvard Business School and a B.A. from Queens College.

 

B.Compensation

 

Compensation of officers and directors

 

The aggregate compensation expensed by us and our subsidiaries to our directors and executive officers, including share-based compensation and amounts accrued for pension, severance, retirement or similar benefits, for the year ended December 31, 2014, was approximately $7.1 million. This amount does not include any business travel, relocation, professional and business association dues and expenses reimbursed to directors and executive officers, 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, other than Mr. Stanley Stern who recently joined our board of 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. All such options have vested. Mr. Cohen instructed us to pay his director fees and option grants directly to an affiliate of Fortissimo Capital and as of the first quarter of 2014 directly to him. In December 2013, our then non-employee directors were each granted options to purchase 20,000 of our ordinary shares, at an exercise price of $52.24 per share. The options vest over three years as follows: 6,666 of the options vested on the first anniversary of the date of grant and 6,667 of the options will vest on each of the second and third anniversaries of the date of grant.

 

Summary compensation table

 

The below table presents the compensation, on an individual basis, of our five most highly compensated office holders during or with respect to the year ended December 31, 2014 as required by regulations promulgated under the Companies Law.

 

All amounts set forth in the below table represent the cost to our company, as recognized in our audited consolidated financial statements for the year ended December 31, 2014, in U.S. dollars.

 

Name and Position  Salary(1)   Bonus(2)   Equity-Based
Compensation(3)
   Total 
   (in U.S. dollars) 
Daniel Birnbaum
Chief Executive Officer
   451,850    (4)   326,227(5)   778,077(6)
Daniel Erdreich
Chief Financial Officer
   322,465    0    586,939    909,404 

Yoram Evan

Chief Commercial Officer(7)

   290,544    0    573,025    863,579 

Yossi Azarzar

Chief Operating Officer(8)

   292,379    0    585,544    877,923 
Eyal Shohat
Chief Corporate Development Officer
   243,247    0    347,056    590,303 

 

(1)Amounts reported in this column include salary, social benefits and perquisites, including those mandated by applicable law.
(2)Represents the amount recognized in our audited consolidated financial statements for the year ended December 31, 2014 for bonuses to such office holder.

 

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(3)Amounts reported in this column represent the expense recorded in our audited consolidated financial statements for the year ended December 31, 2014 based on the grant date fair value in accordance with accounting guidance for share-based payment. See Notes 3J(5), 4D and 27 to our audited consolidated financial statements for the year ended December 31, 2014.
(4)$750,000 in connection with the long-term incentive plan for Mr. Birnbaum that was adopted in December 2012 was recognized in our audited consolidated financial statements for the year ended December 31, 2014. The conditions for the payment of such bonus amount have not been satisfied as of the date of this annual report.
(5)Amount reflects the reversal of share-based compensation expense of $4.8 million ($2.6 million with respect to prior years and $2.2 million with respect to 2014) in connection with the long-term incentive plan for Mr. Birnbaum that was adopted in December 2012.
(6)Does not include the bonus amount referred to in note (4) above.
(7)Mr. Evan resigned from our company in January 2015.
(8)Mr. Azarzar ceased serving as our Chief Operating Officer in January 2015 and serves in our company in another capacity.

 

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. 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 for our chief executive officer, pursuant to which 135,000 of the options vested 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.

 

Companies Law requirements

 

Pursuant to the Companies Law, 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 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.

 

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.

 

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Under the Companies Law, 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. 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.

 

Option plans

 

In 2007, we adopted the 2007 Employee Share Option Plan (the “2007 ESOP”) and, in October 2010, we adopted the 2010 Employee Share Option Plan (the “2010 ESOP”, and together with the 2007 ESOP, the “ESOP”). The ESOP allows us to grant options to purchase ordinary shares and other equity awards 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 the ESOP. As of December 31, 2014, 135,015 ordinary shares which are not subject to outstanding options or other equity awards remained available for issuance under the ESOP. As of December 31, 2014, options to purchase 1,820,526 ordinary shares had been granted and were outstanding, at a weighted average exercise price of $25.38 per share, which includes 6,935 restricted share units granted to a former shareholder of a subsidiary as part of the consideration for shares of the subsidiary and 226,631 restricted share units granted to employees. Of these outstanding options, as of December 31, 2014, options to purchase 754,345 ordinary shares were vested and exercisable.

 

In general, the vesting schedule for options granted under the ESOP provides that 25% or 33.3% of the options will vest one year after the date of grant and the remainder will vest in equal portions at the end of each quarter thereafter for 12 or eight quarters, respectively. The options, other than the options granted as of February 23, 2012, will expire ten years after the date of grant. Options granted on or after February 23, 2012, but prior to February 26, 2013, will expire six years after the date of grant. 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 options 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.

 

Under certain circumstances, ordinary shares underlying awards previously granted under the ESOP may again become available for grant. Such circumstances include if an award should expire or become unexercisable without having been exercised in full.

 

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 the ESOP under Section 102(b)(3) of the Israeli Income Tax Ordinance, which is the capital gains track. Options and shares granted or issued to Israelis in accordance with the capital gains track under the ESOP are granted or issued to a trustee and are held by the trustee for two years from the date of grant or issuance. Under the capital gains track we are not allowed an Israeli tax deduction for the grant or issuance of the options or shares.

 

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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. The compensation committee determines the eligible individuals who receive options or other awards under the ESOP, the number of ordinary shares covered by those options or other awards, the terms under which such options or other awards may be exercised and the other terms and conditions of the options or other awards, all in accordance with the provisions of the ESOP.

 

Participants in the ESOP may not transfer their options or other awards, 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 subject to awards and exercise prices, if applicable.

 

In the event that we undergo a transaction, as described below, subject to any contrary law or rule, or the terms of any award agreement in effect before the transaction, any unexercised awards will be replaced by equally ranking awards of the successor company. If the successor company refuses to issue replacement awards, the vesting and exercisability of outstanding awards may (in the discretion of the compensation committee and 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 the company’s 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, 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 and board of directors approved the same option acceleration for all of our then 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 award holder, cancel an outstanding award or amend an outstanding award, including, if applicable, the exercise price. For amendments affecting our officers, compensation 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 1% of our ordinary shares or options to purchase more than 1% of our ordinary shares as of December 31, 2014:

 

Name (Title)  Number of Option(s)   Exercise Price   Expiration Date  Total Shares
Underlying
Options
 
Daniel Birnbaum,   210,000   $20.00    Nov. 2, 2020    210,000 
Chief Executive Officer and Director   55,000   $35.35    Nov. 7, 2021    55,000 
    450,000   $35.80   Dec. 20, 2018   450,000 
                 715,000 

 

On December 20, 2012, our shareholders approved a Long-Term Incentive Plan for our chief executive officer, pursuant to which he was granted option to purchase 450,000 shares of which 135,000 of the options vested 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.

 

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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 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 2017. Class II directors, consisting of Mr. Yuval Cohen and Mr. Stanley Stern, will hold office until our annual meeting of shareholders to be held in 2015. Class III directors, consisting of Mr. David Morris, will hold office until our annual meeting of shareholders to be held in 2016. 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 above.

 

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.

 

External directors

 

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 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);

 

·control; and

 

·service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such director was appointed 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.

 

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The term “office holder” is defined under the Companies Law as a chief executive officer (referred to in the Companies Law as the general manager), chief business manager, deputy general manager, vice general manager, any other person assuming the responsibilities of any of these positions regardless of that person’s title, a director and any other manager directly subordinate to the general manager.

 

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 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 2% 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. Thereafter, an external director may be reelected by shareholders to serve in that capacity for two additional three-year terms, provided that:

 

(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;

 

(b) the reelection has been recommended by one or more shareholders holding at least 1% of the company’s voting rights and is approved by a majority of non-controlling, disinterested shareholders who hold among them at least 2% of the company’s voting rights; or

 

(c) an incumbent external director has nominated him or herself for an additional term and his or her reelection is approved by a majority of non-controlling, disinterested shareholders who hold among them at least 2% of the company’s voting rights.

 

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The term of office for external directors for Israeli companies traded on certain foreign stock exchanges, including the Nasdaq Global Select Market, may be extended indefinitely in increments of additional three-year terms, in each case provided that the audit committee and the board of directors of the company confirm that, in light of the external director’s expertise and special contribution to the work of the board of directors and its committees, the reelection for such additional period(s) is beneficial to the company, and provided that the external director is reelected subject to the same shareholder vote requirements as if elected for the first time (as described above). Prior to the approval of the reelection of the external director at a general shareholders meeting, the company’s shareholders must be informed 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 his or her term.

 

External directors may be removed from office by a special general meeting of shareholders called by the board of directors, who approves such dismissal by the same shareholder vote percentage required for their election or by a court, in each case, only under limited circumstances, including ceasing to meet the statutory qualifications for appointment or violating their duty of loyalty to the company. In such cases, the board of directors’ reasoning must be brought before the shareholders and the external director must be granted a reasonable opportunity to present his or her position. 

 

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.

 

The current term of office of each of our external directors is scheduled to end on February 7, 2017.

 

Additional provisions

 

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 and compensation committee are 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.

 

Audit committee

 

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 the 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.

 

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. In general, 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

 

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·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.

 

Nasdaq requirements

 

Under the Nasdaq 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.

 

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 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 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 Nasdaq Rules.

 

Approval of transactions with related parties

 

Under the Companies Law, 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 a personal 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 “controlling shareholder” also includes any shareholder that holds 25% or more of the voting rights of the company if no other shareholder holds more than 50% of the voting rights in the company. 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 a majority of the committee’s members are present and a majority of those present are unaffiliated directors, including at least one external director.

 

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 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 or her 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

 

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·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 includes identifying irregularities in our business management in consultation with the internal auditor or our independent auditors and suggesting an appropriate course of action to the board of directors, and approving 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.

 

Compensation committee

 

Our compensation committee consists of Ms. Hanover and Messrs. Glazer and Morris. The chairperson of the compensation committee is Ms. Hanover.

 

The compensation committee is subject to the same Companies Law restrictions as the audit committee as to who may not be a member of the committee.

 

Under the Companies Law, companies incorporated under the laws of Israel whose shares are listed for trading on a stock exchange or have been offered to the public in or outside of Israel, such as us, are required to adopt a policy governing the compensation of “office holders” (as defined in the Companies Law). Following the recommendation of our compensation committee and approval by our board of directors, our shareholders approved such a compensation policy at our annual general meeting of shareholders held in December 2013. 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, provided that either: (a) such majority includes at least a majority of the shares held by all shareholders who are not controlling shareholders and do not have a personal interest in such compensation arrangement (excluding abstentions); or (b) the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in the compensation arrangement and who vote against the arrangement does not exceed 2% of the company’s aggregate voting rights. We refer to this as the Special Approval for Compensation. Under the Companies Law, subject to certain conditions, the board of directors may adopt the compensation policy even if it is not approved by the shareholders.

 

Our board of directors has adopted a compensation committee charter setting forth the responsibilities of the committee consistent with the Nasdaq 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.

 

The Compensation Committee is also authorized to retain and terminate compensation consultants, legal counsel or other advisors to the committee and to approve the engagement of any such consultant, counsel or advisor, to the extent it deems necessary or advisable.

 

Ms. Hanover and Messrs. Glazer and Morris are independent under the Nasdaq Rules, including the additional independence requirements applicable to the members of a compensation committee.

 

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 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;

 

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·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 Nasdaq Rules.

 

Internal auditor

 

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 its representative. 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.

 

Ms. Joy Luk is an employee of our company and fills the role of our internal auditor since July 2014. Ms. Luk holds a B.A. in Accounting from the University of Texas at Austin and is a certified public accountant in Texas.

 

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 benefit for himself or herself or for 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 with 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 make such disclosure 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.

 

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A “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. A personal interest also includes 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 has no personal interest in the approval of the matter.

 

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 requirements, 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 not performed by the office holder in good faith or unless it is in the company’s interest.

 

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 of the board of directors. Our articles of association do not provide otherwise.

 

An extraordinary transaction in which an office holder has a personal interest requires approval first by the company’s audit committee and subsequently by the board of directors. The compensation of, or an undertaking to indemnify or insure, an office holder who is not a director requires approval first by the company’s compensation committee, then by the company’s board of directors, and, if such compensation arrangement or an undertaking to indemnify or insure is inconsistent with the company’s stated compensation policy or if the office holder is the chief executive officer (apart from a number of specific exceptions), then such arrangement is subject to a Special Approval for Compensation. Arrangements regarding the compensation, indemnification or insurance of a director require the approval of the compensation committee, board of directors and shareholders by ordinary majority, in that order, and under certain circumstances, a Special Approval for Compensation.

 

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, which we refer to as a Special Majority:

 

·at least a majority of the shares held by shareholders who do not have a 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 do not have a personal interest in the transaction who vote against the transaction represent no more than 2% of the voting rights in the company.

 

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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.

 

Arrangements regarding the compensation, indemnification or insurance of a controlling shareholder in his or her capacity as an office holder require the approval of the compensation committee, board of directors and shareholders by a Special Majority and the terms thereof may not be inconsistent with the company’s stated compensation policy.

 

Pursuant to regulations promulgated under the Companies Law, certain transactions with a controlling shareholder or his or her relative, or with directors, that would otherwise require approval of a company’s shareholders may be exempt from shareholder approval upon certain determinations of the audit committee and board of directors. Under these regulations, a shareholder holding at least 1% of the issued share capital of the company may require, within 14 days of the publication of such determinations, that despite such determinations by the audit committee and the board of directors, such transaction will require shareholder approval under the same majority requirements that would otherwise apply to such transactions.

 

In addition, under the Companies Law, our audit committee is obliged to set the approval process for transactions with a controlling shareholder or in which a controlling shareholder has a personal interest.

 

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, have 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. A 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 the duty of care but only if a provision authorizing such exculpation is included 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. 

 

Under the Companies Law, a 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;

 

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·reasonable litigation expenses, including attorneys’ fees, incurred by the office holder as (1) 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 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 (2) in connection with a monetary sanction; 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.

 

Under the Companies Law, a 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 harm 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 harm the company;

 

·a breach of the 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 compensation committee and the board of directors and, with respect to certain office holders or under certain circumstances, also by the shareholders. See “Item 6.C — Board Practices — Fiduciary duties and approval of specified related party transactions under Israeli law.”

 

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. 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 executive officers 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.

 

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D.Employees

 

As of December 31, 2014, we had 2,314 employees of whom 1,683 were based in Israel, 133 were in the Netherlands, 125 were in Germany, 120 were in the United States and 253 were in other countries. Of the total number of employees, approximately 389 were temporary employees (most of whom worked at our manufacturing facilities).

 

The breakdown of our employees by department is as follows: 

 

   As of December 31, 
Department  2012   2013   2014 
Operations, product development and innovation   1,645    1,952    1,722 
Sales and marketing   360    392    374 
General and administration   206    202    197 
Management   21    27    21 
Total   2,232    2,573    2,314 

 

Under applicable Israeli law, we and our employees are subject to protective labor provisions such as restrictions on working hours, minimum wages, minimum vacation, sick pay, severance pay and advance notice of termination of employment, as well as equal opportunity and anti-discrimination laws. Orders issued by the Israeli Ministry of Economy 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.

 

In general, agreements with our employees 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 at 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 at 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 generally also include non-competition and non-disclosure provisions. Our employees located in Germany are subject to local collective bargaining agreements.

 

E.Share Ownership

 

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

 

A.Major Shareholders

 

The following table sets forth information with respect to the beneficial ownership of our shares as of March 31, 2015 by:

 

·   each person or entity known by us to own beneficially 5% or more 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 March 31, 2015. Such shares are also deemed outstanding for purposes of computing the percentage ownership of the person holding the options, but not the percentage ownership of any other person.

 

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For the purpose of calculating the percentage of shares beneficially owned by any shareholder, this table lists applicable percentage ownership based on 21,018,546 ordinary shares outstanding as of March 31, 2015.

 

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.

  

Unless otherwise indicated, the address of each beneficial owner is c/o SodaStream International Ltd., Gilboa Street, Airport City, Ben Gurion Airport 7010000, Israel.

 

Name of Beneficial Owner  Shares Beneficially Owned 
   Number   Percentage 
FMR LLC and Affiliates (1)   1,898,655    9.0%
Real Property International Limited (2)   1,270,008    6.0%
Executive officers and directors          
Yuval Cohen   *    * 
Eytan Glazer   *    * 
Lauri A. Hanover   *    * 
David Morris (3)   *    * 
Stanley Stern   -    - 
Daniel Birnbaum (4)   472,992    2.2%
Daniel Erdreich   *    * 
Shmuel Perez   -    - 
Eyal Shohat   *    * 
Mika Mazor   *    * 
Yaron Kopel   *    * 
Amir Eyal   *    * 

All executive officers and directors as a group (12 persons) (5)

   655,171    3.0%

 

 

* Less than 1%.

 

(1)Based on a Schedule 13G/A filed with the SEC on February 14, 2014 by FMR LLC (“FMR”). Consists of 1,886,755 shares beneficially owned by Fidelity Management & Research Company (“Fidelity”) in its capacity as an investment adviser to various investment companies and 11,900 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. Edward C. Johnson 3d and FMR each has sole dispositive power over 1,886,755 shares and sole voting and dispositive power over 11,900 shares. 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 February 11, 2015. Includes 546,842 shares beneficially owned by Real Property International Limited, a British Virgin Islands company (which changed its name from “Real Property Investments Limited” and its domicile from Liberia), and 723,166 shares beneficially owned by Real Property Investment (Guernsey) Limited, a Guernsey company (each, a “Reporting Person”). The shares of each Reporting Person are held by Line Holdings Limited and Line 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 David Morris, one of our directors. The principal address of each Reporting Person is 237 Main Street, Gibraltar, GX11 1AA.
(3)The address for Mr. Morris is c/o KDM Partners LLP, 58 Queen Anne St., London W1G 8HW.
(4)Consists of 83,300 shares purchased in open market transactions in February 2015 and options to purchase 389,692 shares which are currently exercisable or exercisable within 60 days of March 31, 2015.
(5)Consists of 86,117 shares, options to purchase 566,491 shares and 2,563 restricted share units which are currently exercisable or have vested or exercisable or will become vested within 60 days of March 31, 2015.

  

Based on a Schedule 13G/A filed with the SEC on February 17, 2015, Clal Insurance Enterprises Holdings Ltd. ceased to be the beneficial owner of 5% or more of our ordinary shares. Based on a Schedule 13G/A filed with the SEC on February 17, 2015, Tremblant Capital Group ceased to be the beneficial owner of 5% or more of our ordinary shares. Based on a Schedule 13G/A filed with the SEC, on February 13, 2014, Cadian Capital Management, LLC and Eric Bannasch ceased to be the beneficial owner of 5% or more of our ordinary shares. Based on a Schedule 13G/A filed with the SEC on September 27, 2013, Morgan Stanley ceased to be the beneficial owner of 5% or more of our ordinary shares.

 

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Shareholders of Record

 

As of March 31, 2015, we had five shareholders of record of our ordinary shares, four of which were located in the United States, representing approximately 99.9% 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. The record holders in the United States included Cede & Co., the nominee of the Depositary Trust Company. 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. All of our ordinary shares have identical voting and other rights.

 

B.Related Party Transactions

 

Since January 1, 2014, 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

 

Employment agreements

 

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.

 

For certain arrangements with our chief executive officer, see “Item 6. B. — Compensation — Compensation of officers and directors — Certain arrangements with Daniel Birnbaum.”

 

Options

 

Since our inception, we have granted options to purchase our ordinary shares and restricted share units to certain of our officers. We describe our equity incentive plans under “Item 6.B. — Compensation — Option plans.”

 

Indemnification agreements

 

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.” 

 

C.Interests of Experts and Counsel

 

Not applicable.

 

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.

 

Legal proceedings

 

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 beverage 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.

 

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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.

 

Dividend policy

 

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 foreseeable 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 an 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.”

 

B.Significant Changes

 

No significant changes have occurred since December 31, 2014, except as otherwise disclosed in this annual report.

 

Item 9.THE OFFER AND LISTING

 

A.Listing Details

 

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:

  

   Low   High 
Year Ended December 31, 2010          
Fourth Quarter (beginning November 3, 2010)  $23.15   $43.88 
Year Ended December 31, 2011          
Annual  $27.00   $79.72 
Year Ended December 31, 2012          
Annual  $28.28   $48.13 
Year Ended December 31, 2013          
Annual  $45.25   $77.80 
First Quarter  $45.25   $53.99 
Second Quarter  $47.25   $77.80 
Third Quarter  $55.00   $74.00 
Fourth Quarter  $48.39   $66.80 
Year Ended December 31, 2014          
Annual  $19.85   $51.71 
First Quarter  $35.27   $51.71 
Second Quarter  $33.00   $47.30 
Third Quarter  $28.65   $36.53 
Fourth Quarter  $19.85   $29.49 
Last Six Months          
October 2014  $20.13   $29.49 
November 2014  $21.19   $23.64 
December 2014  $19.85   $22.04 
January 2015  $17.81   $20.30 
February 2015  $16.80   $20.61 
March 2015  $16.82   $20.50 

  

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On March 31, 2015, the last reported sale price of our ordinary shares on the Nasdaq Global Select Market was $20.26 per share. 

 

B.Plan of Distribution

 

Not applicable.

 

C.Markets

 

See “—Listing Details” above.

 

D.Selling Shareholders

 

Not applicable.

 

E.Dilution

 

Not applicable.

 

F.Expenses of the Issue

 

Not applicable.

 

Item 10.ADDITIONAL INFORMATION

 

A.Share Capital

 

Not applicable.

 

B.Memorandum and Articles of Association

 

Objects and Purposes

 

We are registered with the Israeli Registrar of Companies. Our registration number is 51-395125-1. Our purpose as set forth in our articles of association is to engage in any lawful act or activity.

 

Voting

 

Holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders at a shareholder meeting. Shareholders may vote at shareholder 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.

 

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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. However, citizens of countries which are, or have been, in a state of war with Israel, and in certain cases, their affiliates, 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 directors are elected, upon expiration of the term of office of any director, by the holders of a simple majority of our ordinary shares at a general shareholder meeting (excluding abstentions). As a result, the holders of our ordinary shares that represent more than 50% of the voting power represented at a shareholder meeting and voting thereon (excluding abstentions) have the power to elect any or all of our directors whose positions are being filled at that meeting, subject to the special approval requirements for external directors described under “Item 6.C — Board Practices — External directors.” Vacancies on our board of directors may be filled by a vote of a simple majority of the directors then in office as described under “Item 6.C — Board Practices — Board of directors and officers.” For additional information regarding the election of and voting by directors, please refer to “Item 6.C — Board Practices.”

 

Dividend and liquidation rights

 

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 foreseeable obligations as they become due. Under the Companies Law, the distribution amount is further limited to the greater of retained earnings or earnings generated over the two most recent years. In the event that we do not have retained earnings and earnings legally available for distribution, as defined in the Companies Law, we may seek the approval of the 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.

 

In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares on a pro-rata basis. Dividend and liquidation rights may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.

 

Redemption rights

 

Our ordinary shares are not redeemable and do not have preemptive rights.

 

Shareholder meetings

 

We are required to convene an annual general meeting of our shareholders once every calendar year within a period of not more than 15 months following the preceding annual general meeting. Our board of directors may convene a special general meeting of our shareholders and is required to do so at the request of two directors or one quarter of the members of our board of directors, or at the request of one or more holders of 5% or more of our share capital and 1% of our voting power, or the holder or holders of 5% or more of our voting power. All shareholder meetings require prior notice of at least 21 days and, in certain cases, 35 days. The chairperson of our board of directors presides over our general meetings and is appointed by the board of directors. If the chairperson was not appointed or is not present within 15 minutes from the appointed time, the shareholders present shall appoint a chairperson. Subject to the provisions of the Companies Law and the regulations promulgated there under, shareholders entitled to participate and vote at general meetings are the shareholders of record on a date to be decided by the board of directors, which may be between four and 40 days prior to the date of the meeting, depending on the type of meeting and whether written proxies are being used.

 

Quorum

 

The quorum required for a meeting of shareholders consists of at least two shareholders present in person, by proxy or by written ballot, who hold or represent between them at least 25% of our voting power. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place, or to such other time, if indicated in the invitation to the meeting or in the notice of the meeting, any time and place set forth in the prior notice to the shareholders, or to a later time, as determined by the chairperson with consent of at least a majority of our voting rights. At the reconvened meeting, if a quorum is not present within half an hour, the meeting will take place with whatever number of participants are present, unless the meeting was called pursuant to a request by our shareholders, in which case the quorum required is the number of shareholders required to call the meeting as described under “— Shareholder meetings.”

 

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Resolutions

 

Under the Companies Law, unless otherwise provided in the articles of association or applicable law, all resolutions of the shareholders require a simple majority of the voting rights represented at the meeting, in person, by proxy or by written ballot, and voting on the resolution (excluding abstentions). A resolution for the voluntary winding up of the company requires the approval by the holders of 75% of the voting rights represented at the meeting, in person, by proxy or by written ballot and voting on the resolution.

 

Under our articles of association, resolutions to change the minimum and maximum number of our directors require the approval of holders of at least two-thirds of our voting shares.

 

Access to corporate records

 

Under the Companies Law, all shareholders generally have the right to review minutes of our general meetings, our shareholder register, including with respect to material shareholders, our articles of association, our financial statements and any document we are required by law to file publicly with the Israeli Companies Registrar or the Israeli Securities Authority. Any shareholder who specifies the purpose of its request may request to review any document in our possession that relates to any action or transaction with a related party which requires shareholder approval under the Companies Law. We may deny a request to review a document if we determine that the request was not made in good faith, that the document contains a commercial secret or a patent or that the document’s disclosure may otherwise impair our interests.

 

Acquisitions under Israeli law

 

Full tender offer

 

A person wishing to acquire shares of a public Israeli company and who would as a result hold over 90% of the target company’s issued and outstanding share capital is required by the Companies Law to make a tender offer to all of the company’s shareholders for the purchase of all of the issued and outstanding shares of the company. A person wishing to acquire shares of a public Israeli company and who would as a result hold over 90% of the issued and outstanding share capital of a certain class of shares is required to make a tender offer to all of the shareholders who hold shares of the same class for the purchase of all of the issued and outstanding shares of the same class. If the shareholders who do not respond to or accept the offer hold less than 5% of the issued and outstanding share capital of the company or of the applicable class, all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law (provided that a majority of the offerees that do not have a personal interest in such tender offer shall have approved it, which condition shall not apply if offerees holding less than 2% of the company’s issued and outstanding share capital failed to approve such tender offer). However, a shareholder that had its shares so transferred, whether the shareholder accepted the tender offer or not, may, within six months from the date of acceptance of the tender offer, petition the court to determine whether the tender offer was for less than fair value and that the fair value should be paid as determined by the court unless the acquirer stipulated that a shareholder that accepts the offer may not seek appraisal rights. If the shareholders who did not respond or accept the tender offer hold at least 5% of the issued and outstanding share capital of the company or of the applicable class, or the shareholders who did not accept the tender offer hold 2% or more of the issued and outstanding share capital of the company (or of the applicable class), the acquirer may not acquire shares of the company that will increase its holdings to more than 90% of the company’s issued and outstanding share capital or of the applicable class from shareholders who accepted the tender offer.

 

Special tender offer

 

The Companies Law provides that an acquisition of shares of a public Israeli company must be made by means of a special tender offer if as a result of the acquisition the purchaser would become a holder of at least 25% of the voting rights in the company. This rule does not apply if there is already another holder of at least 25% of the voting rights in the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a holder of more than 45% of the voting rights in the company, if there is no other shareholder of the company who holds more than 45% of the voting rights in the company. These requirements do not apply if the acquisition (i) occurs in the context of a private placement by the company that received shareholder approval, (ii) was from a shareholder holding at least 25% of the voting rights in the company and resulted in the acquirer becoming a holder of at least 25% of the voting rights in the company, or (iii) was from a holder of more than 45% of the voting rights in the company and resulted in the acquirer becoming a holder of more than 45% of the voting rights in the company. The special tender offer may be consummated only if (i) at least 5% of the voting power attached to the company’s outstanding shares will be acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.

 

In the event that a special tender offer is made, a company’s board of directors is required to express its opinion on the advisability of the offer, or shall abstain from expressing any opinion if it is unable to do so, provided that it gives the reasons for its abstention. An office holder in a target company who, in his or her capacity as an office holder, performs an action the purpose of which is to cause the failure of an existing or foreseeable special tender offer or is to impair the chances of its acceptance, is liable to the potential purchaser and shareholders for damages, unless such office holder acted in good faith and had reasonable grounds to believe he or she was acting for the benefit of the company. However, office holders of the target company may negotiate with the potential purchaser in order to improve the terms of the special tender offer, and may further negotiate with third parties in order to obtain a competing offer.

 

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If a special tender offer was accepted by a majority of the shareholders who announced their stand on such offer, then shareholders who did not announce their stand or who had objected to the offer may accept the offer within four days of the last day set for the acceptance of the offer.

 

In the event that a special tender offer is accepted, then the purchaser or any person or entity controlling it or under common control with the purchaser or such controlling person or entity shall refrain from making a subsequent tender offer for the purchase of shares of the target company and cannot execute a merger with the target company for a period of one year from the date of the offer, unless the purchaser or such person or entity undertook to effect such an offer or merger in the initial special tender offer.

 

Merger

 

The Companies Law permits merger transactions if approved by each party’s board of directors and, unless certain requirements described under the Companies Law are met, a majority of each party’s shareholders and, in the case of the target company, a majority vote of each class of its shares, voted on the proposed merger at a shareholders meeting. The board of directors of a merging company is required pursuant to the Companies Law to discuss and determine whether in its opinion there exists a reasonable concern that as a result of a proposed merger, the surviving company will not be able to satisfy its obligations towards its creditors, such determination taking into account the financial status of the merging companies. If the board of directors has determined that such a concern exists, it may not approve a proposed merger. Following the approval of the board of directors of each of the merging companies, the boards of directors must jointly prepare a merger proposal for submission to the Israeli Registrar of Companies.

 

For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority of the shares represented at the shareholders meeting that are held by parties other than the other party to the merger, or by any person who holds 25% or more of the outstanding shares or the right to appoint 25% or more of the directors of the other party, vote against the merger. In addition, if the non-surviving entity of the merger has more than one class of shares, the merger must be approved by each class of shareholders. If the transaction would have been approved but for the separate approval of each class or the exclusion of the votes of certain shareholders as provided above, a court may still approve the merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the value of the parties to the merger and the consideration offered to the shareholders. Pursuant to the Companies Law, if a merger is with a company’s controlling shareholder or if the controlling shareholder has a personal interest in the merger, then the merger is instead subject to the same special majority approval that governs all extraordinary transactions with controlling shareholders (as described above under “Item 6.C — Board Practices — Fiduciary duties and approval of specified related party transactions under Israeli law.”)

 

Under the Companies Law, each merging company must inform its secured creditors of the proposed merger plans. Creditors are entitled to notice of the merger pursuant to regulations. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger, and may further give instructions to secure the rights of creditors.

 

In addition, a merger may not be completed unless at least 50 days have passed from the date that a proposal for approval of the merger was filed with the Israeli Registrar of Companies and 30 days from the date that shareholder approval of both merging companies was obtained.

 

Anti-takeover measures

 

Our articles of association provide for a classified board of directors. See “Item 6.C — Board Practices — Board of directors and officers.”

 

The Companies Law allows us to create and issue shares having rights different from those attached to our ordinary shares, including shares providing certain preferred or additional rights to voting, distributions or other matters and shares having preemptive rights. Currently, we do not have any authorized or issued shares other than ordinary shares. In the future, if we do create and issue a class of shares other than ordinary shares, such class of shares, depending on the specific rights that may be attached to them, may delay or prevent a takeover or otherwise prevent our shareholders from realizing a potential premium over the market value of their ordinary shares. The authorization of a new class of shares will require an amendment to our articles of association which requires the prior approval of a simple majority of our shares represented and voting at a general meeting. Shareholders voting at such a meeting will be subject to the restrictions under the Companies Law described in “— Voting.”

 

C.Material Contracts

 

None.

 

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D.Exchange Controls

 

There are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or the proceeds from the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding certain transactions. However, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time.

 

E.Taxation

 

Israeli tax considerations and government programs

 

The following is a brief summary of the material Israeli tax laws applicable to us, and some Israeli Government programs benefiting us. This section also contains a discussion of material Israeli tax consequences concerning the ownership of and disposition of our ordinary shares. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of this kind of investor include residents of Israel or traders in securities who are subject to special tax regimes not covered in this discussion. Since some parts of this discussion are based on new tax legislation that has not yet been subject to judicial or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion. The discussion below is subject to change, including due to amendments under Israeli law or changes to the applicable judicial or administrative interpretations of Israeli law, which change could affect the tax consequences described below.

 

General corporate tax structure in Israel

 

Israeli companies are generally subject to corporate tax, currently at the rate of 26.5% of their taxable income. The corporate tax rate for the tax years 2014 and 2013 was 26.5% and 25%, respectively. However, the effective tax rate payable by a company that derives income from a Preferred Enterprise (as discussed below) may be considerably less. Capital gains derived by an Israeli company are subject to the prevailing corporate tax rate.

  

Law for the encouragement of industry (taxes), 5729-1969

 

The Law for the Encouragement of Industry (Taxes), 5729-1969, generally referred to as the Industry Encouragement Law, provides several tax benefits for industrial companies. We believe that one of our Israeli subsidiaries currently qualifies as an “Industrial Company” within the meaning of the Industry Encouragement Law. The Industry Encouragement Law defines an “Industrial Company” as a company resident in Israel, of which 90% or more of its income in any tax year, other than income from defense loans, is derived from an “Industrial Enterprise” owned by it and which is located in Israel. An “Industrial Enterprise” is defined as an enterprise whose principal activity in a given tax year is industrial production.

 

The following corporate tax benefits, among others, are available to Industrial Companies:

 

·Amortization over an eight-year period of the cost of purchased know how and patents and of rights to use a patent and know-how which are used for the development or advancement of Industrial Enterprises;

 

·Under specified conditions, an election to file consolidated tax returns with related Israeli Industrial Companies; and

 

·Expenses related to a public offering are deductible in equal amounts over three years.

 

We intend to continue to qualify as an “Industrial Company” in the future. However, there can be no assurance that we will continue to qualify as an “Industrial Company” or that the benefits described above will be available in the future.

 

Law for the encouragement of capital investments, 5719-1959

 

The Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law, was significantly amended as of January 1, 2011 (the “2011 Amendment”). The 2011 Amendment introduced new benefits to replace those granted in accordance with the provisions of the Investment Law in effect prior to the 2011 Amendment. However, companies entitled to benefits under the Investment Law as in effect prior to January 1, 2011 were entitled to choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead, irrevocably, to forego such benefits and have the benefits of the 2011 Amendment apply.

 

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Tax benefits prior to the 2011 Amendment

 

The Investment Law provided certain incentives for capital investments in a production facility (or other eligible assets) made by an “Approved Enterprise”, as defined by the Investment Law, upon approval by the Investment Center of the Israel Ministry of the Economy. Each certificate of approval for an Approved Enterprise relates to a specific investment program, delineated both by the financial scope of the investment and by the physical characteristics of the facility or the asset. In general, an Approved Enterprise is entitled to receive a grant from the Government of Israel or an alternative package of tax benefits, known as the alternative benefits track. The tax benefits from any certificate of approval relate only to taxable income attributable to the specific program. If a company has more than one approval or only a portion of its capital investments are approved, its effective tax rate is the weighted average of the applicable rates.

 

One of our subsidiaries in Israel received grants and was entitled to tax benefits relating to investment programs that were subject to Approved Enterprise certificates.

 

The benefits available to an Approved Enterprise were subject to the fulfillment of conditions stipulated in the Investment Law and its regulations and the criteria in the specific certificate of approval. If we are found not to have met these conditions, we may be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index, and interest.

 

If a company elected the alternative benefits track and distributes a dividend out of income derived by its Approved Enterprise during a tax exemption period, it will be subject to corporate tax in respect of the amount of the dividend distributed (grossed-up to reflect the pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate which would have been applicable without the benefits under the alternative benefits track.

 

Tax benefits under the 2011 Amendment

 

The 2011 Amendment canceled the availability of the benefits granted to companies under the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company” through its “Preferred Enterprise” (as such terms are defined in the Investment Law) as of January 1, 2011. The definition of a Preferred Company includes a company incorporated in Israel that is not wholly-owned by a governmental entity, and that has, among other things, Preferred Enterprise status and is controlled and managed from Israel. Pursuant to the 2011 Amendment, a Preferred Company is entitled to a reduced corporate tax rate of 15% with respect to its income derived by its Preferred Enterprise in 2011 and 2012, unless the Preferred Enterprise is located in a specified development zone, in which case the rate will be 10%. Under the 2011 Amendment, such corporate tax rate will be reduced from 15% and 10%, respectively, to 12.5% and 7%, respectively, in 2013 and 2014 and to 12% and 6% in 2015 and thereafter, respectively. However, in August 2013, the Israeli Knesset approved an amendment to the Investment Law, pursuant to which such scheduled gradual reduction was repealed beginning in 2014 and the rates would revert to 16% and 9% (as applicable) in 2014 and thereafter.

 

Dividends paid out of income attributed to a Preferred Enterprise are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty. However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty, will apply).

 

The 2011 Amendment also provided transitional provisions to address companies already enjoying existing tax benefits under the Investment Law. These transitional provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as amended in 2011 with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval that was granted to an Approved Enterprise which chose to receive grants before the 2011 Amendment became effective will remain subject to the provisions of the Investment Law as in effect on the date of such approval, and subject to certain other conditions; (ii) terms and benefits included in any certificate of approval that was granted to an Approved Enterprise which had participated in an alternative benefits track before the 2011 Amendment became effective will remain subject to the provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are met; and (iii) a Beneficiary Enterprise (as such term is used in the Investment Law) can elect to continue to benefit from the benefits provided to it before the 2011 Amendment came into effect, provided that certain conditions are met.

 

We believe that one of our Israeli subsidiaries, whose enterprise is located in a specified development zone, known as Development Area A, meets the conditions provided in the 2011 Amendment to the Investment Law and it elected to apply the provisions of the Investment Law as amended in 2011. The 2011 Amendment also provides that companies in Development Area A may be entitled to receive grants. Our Israeli subsidiary has been approved to receive grants. We intend to continue to qualify for benefits and grants under the Investment Law in the future. However, there can be no assurance that we will comply with the required conditions or that we will be entitled to any grants or additional benefits under the Investment Law.

 

We have been approved to receive grants under certain other Israeli Government programs. Our receipt of such grants is subject to our satisfying certain conditions.

 

The termination or substantial reduction of any of the benefits available under the Investment Law or of any grants we expect to receive could increase our tax liabilities and harm our financial condition and results of operations.

 

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Israeli transfer pricing regulations

 

On November 29, 2006, Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Tax Ordinance, came into force (the “Transfer Pricing Regulations”). Section 85A of the Tax Ordinance and the Transfer Pricing Regulations generally require that all cross-border transactions carried out between parties that have a special relationship be conducted according to an arm’s length principle standard and be taxed accordingly and that the intercompany prices be supported by a transfer pricing study.

 

Taxation of our shareholders

 

Taxation of Non-Israeli shareholders on receipt of dividends. Non-residents of Israel are generally subject to Israeli withholding tax on the receipt of dividends paid on our ordinary shares at the rate of 25%, unless a relief is provided in a treaty between Israel and the shareholder’s country of residence (subject to receipt of a valid certificate from the Israeli Tax Authority allowing for a reduce tax rate). With respect to a person who is a “substantial shareholder” at the time of receiving the dividend or on any date in the twelve months preceding it, the applicable withholding tax rate is 30%, unless such “substantial shareholder” holds such shares through a nominee company, in which case the rate is 25%. A “substantial shareholder” is generally a person who holds, directly or indirectly, alone or together with another, , at least 10% of any of the “means of control” of the corporation. “Means of control” generally include the right to vote, to receive profits, to nominate a director or an executive officer, to receive assets upon liquidation, or to order someone who holds any of the aforesaid rights how to act, and all regardless of the source of such right.

 

A distribution of dividends to non-Israeli residents is subject to withholding tax at source at a rate of 20% if the dividend is distributed from income attributed to a Preferred Enterprise, unless a reduced tax rate is provided under an applicable tax treaty. If the dividend is attributable partly to income derived from a Preferred Enterprise and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the types of income.

 

Under the United States-Israel Tax Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our ordinary shares who is a United States resident (for purposes of the United States-Israel Tax Treaty) is 25%. However, generally, the maximum rate of withholding tax on dividends not generated by a Preferred Enterprise that are paid to a United States corporation holding 10% or more of our outstanding voting capital throughout the tax year in which the dividend is distributed as well as the previous tax year, is 12.5%, provided that no more than 25% of our gross income for such preceding year is derived from certain types of dividends and interest. Furthermore, dividends paid from income derived from a Preferred Enterprise are subject to withholding tax at a rate of 15% for such U.S. corporation shareholder, provided that the conditions related to our gross income for the previous year is met.

 

U.S. residents who are subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for United States federal income tax purposes in the amount of the taxes withheld, subject to detailed limitations under U.S. laws applicable to foreign tax credits.

 

A non-resident of Israel who receives dividends from which tax was duly withheld is generally exempt from the duty to file returns in Israel in respect of such income, provided such income was not derived from a business conducted in Israel by the taxpayer for more than 180 days, and the taxpayer has no other taxable sources of income in Israel with respect to which a tax return is required to be filed.

 

We cannot assure you that, in the event we declare a dividend, we will designate the profits that are being distributed in a way that will reduce shareholders’ tax liability.

 

Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders.  A non-Israeli resident who derives capital gains from the sale of shares in an Israeli resident company that were purchased after the company was listed for trading on a stock exchange outside of Israel will be exempt from Israeli tax so long as the shares were not held through a permanent establishment that the non-resident maintains in Israel. However, non-Israeli corporations will not be entitled to the foregoing exemption if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation or (ii) is the beneficiary of or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. Such exemption would not be available to non-Israeli residents dealing in securities in Israel which would be subject to Israeli tax at the rates applicable to business income (at the corporate tax rate for a corporation (26.5% in 2014) and the marginal tax rate of up to 48% for an individual in 2014).

 

Additionally, a sale of securities by a non-Israeli resident may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty. Under the United States-Israel Tax Treaty, the sale, exchange (whether from a merger, acquisition or similar transaction) or disposition of our ordinary shares by a shareholder who is a United States resident (for purposes of that treaty), holding the ordinary shares as a capital asset is generally exempt from Israeli capital gains tax unless (i) the capital gain arising from the disposition can be attributed to a permanent establishment in Israel; (ii) the shareholder holds, directly or indirectly, shares representing 10% or more of the voting capital during any part of the 12 month period preceding the disposition, subject to certain conditions; or (iii) such U.S. resident is an individual and was present in Israel for 183 days or more during the relevant taxable year. In such case, the sale, exchange or disposition of our ordinary shares would be subject to Israeli tax, to the extent applicable; however, under the United States Israel Tax Treaty, the taxpayer would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations under U.S. law applicable to foreign tax credits. The United States Israel Tax Treaty does not relate to U.S. state or local taxes.

 

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In some instances where our shareholders may be liable for Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale.

 

Excess Tax

 

Individuals who are subject to tax in Israel are also subject to an additional tax at a rate of 2% on annual income exceeding NIS 800,000 in a tax year, which amount is linked to the annual change in the Israeli consumer price index (NIS 811,560 for 2014), including, but not limited to, dividends, interest and capital gain, subject to the provisions of an applicable tax treaty.

 

United States federal income taxation

 

The following is a description of the material United States federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares. This description addresses only the United States federal income tax consequences to holders of our ordinary shares and that will hold such ordinary shares as capital assets. This description does not address tax considerations applicable to holders that may be subject to special tax rules, including:

 

·financial institutions or insurance companies;

 

·real estate investment trusts, regulated investment companies or grantor trusts;

 

·dealers or traders in securities or currencies;

 

·tax-exempt entities;

 

·certain former citizens or long-term residents of the United States;

 

·persons that received our shares as compensation for the performance of services;

 

·persons that will hold our shares as part of a “hedging” or “conversion” transaction or as a position in a “straddle” for United States federal income tax purposes;

 

·holders that will hold our shares through a partnership or other pass-through entity;

 

·U.S. Holders (as defined below) whose “functional currency” is not the U.S. Dollar; or

 

·holders that own directly, indirectly or through attribution 10.0% or more, of the voting power or value, of our shares.

 

Moreover, this description does not address the United States federal estate and gift or alternative minimum tax consequences of the acquisition, ownership and disposition of our ordinary shares.

 

This description is based on the United States Internal Revenue Code, 1986, as amended (the “Code”) existing, proposed and temporary United States Treasury Regulations and judicial and administrative interpretations thereof, in each case as in effect and available on the date hereof. All of the foregoing is subject to change, which change could apply retroactively and could affect the tax consequences described below.

 

For purposes of this description, a “U.S. Holder” is a beneficial owner of our ordinary shares that, for United States federal income tax purposes, is:

 

·a citizen or resident of the United States;

  

·a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States or any state thereof, including the District of Columbia;

 

·an estate the income of which is subject to United States federal income taxation regardless of its source; or

 

·a trust if such trust has validly elected to be treated as a United States person for United States federal income tax purposes or if (1) a court within the United States is able to exercise primary supervision over its administration and (2) one or more United States persons have the authority to control all of the substantial decisions of such trust.

 

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A “Non-U.S. Holder” is a beneficial owner of our ordinary shares that is neither a U.S. Holder nor a partnership (or other entity treated as a partnership for United States federal income tax purposes).

 

If a partnership (or any other entity treated as a partnership for United States federal income tax purposes) holds our ordinary shares, the tax treatment of a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult its tax advisor as to its tax consequences of acquiring, owing and disposing of our ordinary shares.

 

Distributions

 

Subject to the discussion below under “Passive foreign investment company considerations,” if you are a U.S. Holder, the gross amount of any distribution made to you with respect to your ordinary shares, before reduction for any Israeli taxes withheld therefrom, other than certain distributions, if any, of our ordinary shares distributed pro rata to all our shareholders, will be includible in your income as dividend income to the extent such distribution is paid out of our current or accumulated earnings and profits as determined under United States federal income tax principles. Subject to the discussion below under “Passive foreign investment company considerations,” non-corporate U.S. Holders may qualify for the lower rates of taxation with respect to dividends on ordinary shares applicable to long-term capital gains (i.e., gains from the sale of capital assets held for more than one year), provided that certain conditions are met, including certain holding period requirements and the absence of certain risk reduction transactions. Moreover, such lower rate of taxation shall not apply if we are a PFIC for the taxable year in which we pay a dividend, or if we were a PFIC for the preceding taxable year. However, such dividends will not be eligible for the dividends received deduction generally allowed to corporate U.S. Holders. Subject to the discussion below under “Passive foreign investment company considerations,” to the extent, if any, that the amount of any distribution by us exceeds our current and accumulated earnings and profits as determined under United States federal income tax principles, it will be treated first as a tax-free return of your adjusted tax basis in your ordinary shares and thereafter as capital gain. We do not expect to maintain calculations of our earnings and profits under United States federal income tax principles and, therefore, if you are a U.S. Holder you should expect that the entire amount of any distribution generally will be reported as dividend income to you.

 

If you are a U.S. Holder, Israeli tax withheld on dividends paid to you with respect to your ordinary shares may be deducted from your taxable income or credited against your U.S. federal income tax liability. The rules relating to the determination of the foreign tax credit are complex, and you should consult your tax advisor to determine whether and to what extent you will be entitled to this credit. Subject to certain exceptions, dividends paid to you with respect to your ordinary shares will be treated as foreign source income, which may be relevant in calculating your foreign tax credit limitation. However, for periods in which we are a “United Stated-owned foreign corporation”, a portion of dividends paid by us may be treated as U.S. source solely for purposes of the foreign tax credit. We would be treated as a United States-owned foreign corporation if 50% or more of the total value or total voting power of our stock is owned, directly, indirectly or by attribution, by United States persons. To the extent any portion of our dividends is treated as U.S. source income pursuant to this rule, the ability of a U.S. Holder to claim a foreign tax credit for any Israeli withholding taxes payable in respect of our dividends may be limited. A U.S. Holder entitled to benefits under the United States-Israel Tax Treaty may, however, elect to treat any dividends as foreign source income for foreign tax credit purposes if the dividend income is separated from other income items for purposes of calculating the U.S. Holder’s foreign tax credit. U.S. Holders should consult their own tax advisors about the impact of, and any exception available to, the special sourcing rule described in this paragraph, and the desirability of making, and the method of making, such an election.

 

The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends that we distribute generally should constitute “passive category income,” or, in the case of certain U.S. Holders, “general category income.” A foreign tax credit for foreign taxes imposed on distributions may be denied if you do not satisfy certain minimum holding period requirements.

 

Subject to the discussion below under “Backup withholding tax and information reporting requirements,” if you are a Non-U.S. Holder, you generally will not be subject to United States federal income (or withholding) tax on dividends received by you on your ordinary shares, unless you conduct a trade or business in the United States and such income is effectively connected with that trade or business (or, if required by an applicable income tax treaty, the dividends are attributable to a permanent establishment or fixed base that such holder maintains in the United States).

 

Sale, exchange or other disposition of ordinary shares

 

Subject to the discussion below under “Passive foreign investment company considerations,” if you are a U.S. Holder, you generally will recognize gain or loss on the sale, exchange or other disposition of your ordinary shares equal to the difference between the amount realized on such sale, exchange or other disposition and your adjusted tax basis in your ordinary shares. Such gain or loss will be capital gain or loss. If Israeli tax is imposed on the sale, exchange or other disposition of our ordinary shares, a U.S. Holder's amount realized will include the gross amount of the proceeds of the deposits before deduction of the Israeli tax. The adjusted tax basis in an ordinary share generally will be equal to the cost of such ordinary share. Except as discussed below with respect to foreign currency gain or loss, if you are a non-corporate U.S. Holder, capital gain from the sale, exchange or other disposition of ordinary shares is generally eligible for the preferential rate of taxation applicable to long-term capital gains if your holding period for such ordinary shares exceeds one year (i.e., such gain is long-term capital gain). The deductibility of capital losses for United States federal income tax purposes is subject to limitations.

 

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Any such gain or loss that a U.S. Holder recognizes generally will be treated as U.S. source income or loss for foreign tax credit limitation purposes. Because gain for the sale or other disposition of our ordinary shares will be so treated as U.S. source income; and you may use foreign tax credits to offset only the portion of U.S. federal income tax liability that is attributed to foreign source income; you may be unable to claim a foreign tax credit with respect to the Israeli tax, if any, on gains. You should consult your tax advisor as to whether the Israeli tax on gains may be creditable against your U.S. federal income tax on foreign-source income from other sources.

 

Subject to the discussion below under “Backup withholding tax and information reporting requirements,” if you are a Non-U.S. Holder, you generally will not be subject to United States federal income or withholding tax on any gain realized on the sale or exchange of such ordinary shares unless:

 

·such gain is effectively connected with your conduct of a trade or business in the United States; or

 

·you are an individual and have been present in the United States for 183 days or more in the taxable year of such sale or exchange and certain other conditions are met.

 

Passive foreign investment company considerations

 

A non-United States corporation will be classified as a “passive foreign investment company,” or a PFIC, for United States federal income tax purposes in any taxable year in which, after applying certain look-through rules, either

 

·at least 75% of its gross income is “passive income”; or

 

·at least 50% of the average value of its gross assets (which may be determined, in part, by the market value of our ordinary shares, which is subject to change) is attributable to assets that produce “passive income” or are held for the production of passive income.

 

Passive income for this purpose generally includes dividends, interest, royalties, rents, gains from commodities and securities transactions, the excess of gains over losses from the disposition of assets which produce passive income, and includes amounts derived by reason of the temporary investment of funds raised in offerings of our ordinary shares. If a non-United States corporation owns at least 25% by value of the stock of another corporation, the non-United States corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation and as receiving directly its proportionate share of the other corporation’s income.

 

We believe that we were not classified as a PFIC for the taxable year ended on December 31, 2014. Because PFIC status is based on our income, assets and activities for the entire taxable year, it is not possible to determine whether we will be characterized as a PFIC for the 2015 taxable year until after the close of the year. Moreover, we must determine our PFIC status annually based on tests which are factual in nature, and our status in future years will depend on our income, assets and activities in those years. In addition, because the market price of our ordinary shares is likely to fluctuate and because that market price may affect the determination of whether we will be considered a PFIC, there can be no assurance that we will not be considered a PFIC for any taxable year.

 

If we were a PFIC, and you are a U.S. Holder, then unless you make one of the elections described below, a special tax regime will apply to both (a) any “excess distribution” by us to you (generally, your ratable portion of distributions in any year which are greater than 125% of the average annual distributions received by you in the shorter of the three preceding years or your holding period for our ordinary shares) and (b) any gain realized on the sale or other disposition of the ordinary shares. Under this regime, any excess distribution and realized gain will be treated as ordinary income and will be subject to tax as if (i) the excess distribution or gain had been realized ratably over your holding period, (ii) the amount deemed realized in each year had been subject to tax in each year of that holding period at the highest marginal rate for such year (other than income allocated to the current period or any taxable period before we became a PFIC, which would be subject to tax at the U.S. Holder’s regular ordinary income rate for the current year and would not be subject to the interest change discussed below), and (iii) the interest charge generally applicable to underpayments of tax had been imposed on the taxes deemed to have been payable in those years. In addition, dividend distributions made to you will not qualify for the lower rates of taxation applicable to long-term capital gains discussed above under “— Distributions.”

 

Certain elections are available to U.S. Holders of shares that may serve to alleviate some of the adverse tax consequences of PFIC status described above. If we agreed to provide the necessary information, you could avoid the interest charge imposed by the PFIC rules by making a qualified electing fund (a “QEF”) election, in which case you generally would be required to include in income on a current basis your pro rata share of our ordinary earnings as ordinary income and your pro rata share of our net capital gains as long-term capital gain. We do not expect to provide to U.S. Holders the information needed to report income and gain pursuant to a QEF election, and we make no undertaking to provide such information in the event that we are a PFIC.

 

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Under an alternative tax regime, you may also avoid certain adverse tax consequences relating to PFIC status discussed above by making a mark-to-market election with respect to your ordinary shares annually, provided that the shares are “regularly traded” on a “qualified exchange. ” Shares will be marketable if they are regularly traded on certain United States stock exchanges (including Nasdaq) or on certain non-United States stock exchanges. For these purposes, the shares will generally be considered regularly traded during any calendar year during which they are traded, other than in negligible quantities, on at least 15 days during each calendar quarter. U.S. Holders should be aware, however, that if we are determined to be a PFIC, the interest charge regime described above could be applied to indirect distributions or gains deemed to be attributable to U.S. Holders in respect of any of our subsidiaries that also may be determined to be a PFIC, and the mark-to-market election generally would not be effective for such subsidiaries.

 

If you choose to make a mark-to-market election, you would recognize as ordinary income or loss each year in which we are a PFIC an amount equal to the difference as of the c