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 - Property, Plant and Equipment
Note 8 - Intangible Assets
Note 9 - Inventories
Note 10 - Other Receivables
Note 11 - Cash and Cash Equivalents
Note 12 - Capital and Reserves
Note 13 - Loans and Borrowings
Note 14 - Employee Benefits
Note 15 - Provisions
Note 16 - Other Current Liabilities
Note 17 - Sales and Marketing
Note 18 - General and Administrative
Note 19 - Other Expense
Note 20 - Financial Expense (Income), Net
Note 21 - Income Tax
Note 22 - Operational Leases
Note 23 - Financial Instruments
Note 24 - Contingencies
Note 25 - Net Income per Share
Note 26 - Share-Based Payments
Note 27 - Related Parties
Note 28 - Subsequent Events
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SodaStream Earnings 2016-12-31

Balance SheetIncome StatementCash Flow

20-F 1 v461340_20f.htm 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

 

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

 

For the fiscal year ended December 31, 2016

 

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 7019900, Israel

(Address of principal executive offices)

 

Daniel Birnbaum
Chief Executive Officer
SodaStream International Ltd.
Gilboa Street
Airport City 7019900, Israel
Telephone: +972 (3) 976-2317
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, 2016, the registrant had outstanding 21,360,756 ordinary shares, par value 0.645 per share.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No 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 ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, 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 ¨   Accelerated filer x   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. ¨ Item 17 ¨ Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No 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 18
Item 4A. Unresolved Staff Comments 24
Item 5. Operating and Financial Review and Prospects 24
Item 6. Directors, Senior Management and Employees 37
Item 7. Major Shareholders and Related Party Transactions 50
Item 8. Financial Information 52
Item 9. The Offer and Listing 53
Item 10. Additional Information 54
Item 11. Quantitative and Qualitative Disclosures About Market Risk 66
Item 12. Description of Securities Other than Equity Securities 67
   
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies 67
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 67
Item 15. Controls and Procedures 67
Item 16. [Reserved] 68
Item 16A. Audit Committee Financial Expert 68
Item 16B. Code of Ethics 68
Item 16C. Principal Accountant Fees and Services 68
Item 16D. Exemptions from the Listing Standards for Audit Committees 69
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 69
Item 16F. Change in Registrant’s Certifying Accountant 69
Item 16G. Corporate Governance 69
Item 16H. Mine Safety Disclosure 69
   
PART III
Item 17. Financial Statements 69
Item 18. Financial Statements 69
Item 19. Exhibits 69
Signatures 71
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,” “U.S. dollars,” “$” or “dollars” are to U.S. dollars, the official currency of the United States; and references to “NIS,” “shekel” or “Israeli shekel” are to New Israeli Shekels, the official currency of the State of Israel.

 

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

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (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, in some cases, can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions that convey uncertainty of future events or outcomes and the negatives of those terms. These statements include, but are not limited to, statements regarding:

 

  growing our business by continuing to position our brand around health and wellness;
     
  our plans to develop and introduce new products;
     
  our plans to increase our installed base in our markets and generate ongoing demand for our consumables;
     
  our intention to use certain marketing techniques for expansion into select new markets and broaden our penetration in existing markets;
     
  increasing the number of stores in markets where we sell our products;
     
  our belief that the sale of sparkling water makers will increase the sale of consumables;
     
  entering select new markets, including in collaboration with distributors;
     
  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, 2016 and the consolidated balance sheet data as of December 31, 2015 and December 31, 2016 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, 2012 and 2013 and the consolidated balance sheet data as of December 31, 2012, 2013 and 2014 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)  2012   2013   2014   2015   2016 
Consolidated statements of operations data:                         
Revenues  $436,316   $562,723   $511,774   $413,135   $476,065 
Cost of revenues   200,491    277,153    258,686    216,364    231,087 
Gross profit   235,825    285,570    253,088    196,771    244,978 
Operating expenses:                         
Sales and marketing   153,009    186,289    177,668    138,641    144,657 
General and administrative   37,767    50,353    49,795    47,258    43,522 
Other expenses   (484)   -    10,654    631    2,327 
Total operating expenses   190,292    236,642    238,117    186,530    190,506 
Operating income   45,533    48,928    14,971    10,241    54,472 
Interest expense, net   169    551    401    350    523 
Other financial expenses (income), net   767    1,695    (1,593)   (5,192)   1,597 
Total financial expenses (income), net   936    2,246    (1,192)   (4,842)   2,120 
Income before income tax   44,597    46,682    16,163    15,083    52,352 
Income tax expense   737    4,655    3,868    3,006    7,886 
Net income  $43,860   $42,027   $12,295   $12,077   $44,466 
Net income per ordinary share:                         
Basic  $2.16   $2.02   $0.59   $0.57   $2.10 
Diluted  $2.09   $1.96   $0.58   $0.57   $2.07 
Shares used in computing net income per ordinary share:                         
Basic   20,343,829    20,790,930    20,968,498    21,036,681    21,183,238 
Diluted   20,968,168    21,427,958    21,251,118    21,116,994    21,516,267 

 

 2 

 

 

   Year Ended December 31, 
(in thousands)  2012   2013   2014   2015   2016 
Other financial and operating data (unaudited):                         
Total number of sparkling water makers sold   3,499    4,449    3,225    2,417    2,941 
Total number of CO2 refills sold (1)   16,543    21,479    25,012    26,755    29,407 
EBITDA(2)  $55,657   $63,921   $32,018   $27,184   $73,923 
Adjusted EBITDA(3)  $55,657   $63,921   $50,979   $37,333*  $75,753 
Adjusted net income (3)  $43,860   $42,027   $27,944   $21,595   $44,466 

 

* Reclassified

(See the table “Reconciliation of net income to EBITDA” below)

 

   As of December 31, 
(in thousands)  2012   2013   2014   2015   2016 
Consolidated balance sheet data:                         
Cash and cash equivalents  $62,068   $40,885   $46,880   $34,534   $50,250 
Bank deposits   -    -    -    -    7,000 
Working capital (4)   95,137    155,382    158,840    140,690    124,762 
Total assets   412,377    484,999    487,298    452,729    465,927 
Loans and borrowings   -    15,452    43,884    36,822    - 
Total liabilities   137,887    153,393    156,523    118,541    82,408 
Total shareholders’ equity   274,490    331,606    330,775    334,188    383,519 

 

(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 total financial expense (income), net, taxes, depreciation and amortization. We present EBITDA as a supplemental performance measure because we believe that it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structures (affecting financial expenses (income), net), tax positions (such as the impact on periods or companies of changes in effective tax rates) and the age and 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 financial expense (income), income tax, depreciation and amortization, and further eliminates the effect of restructuring costs and impairment of goodwill and other intangible assets. For 2014, Adjusted EBITDA eliminates the effect of goodwill impairment in addition to eliminating the effect of restructuring costs. For 2015, Adjusted EBITDA eliminates the effect of impairment of other intangible assets and restructuring costs. For 2016, Adjusted EBITDA eliminates impairment of other intangible assets. For 2014 and 2015, Adjusted net income is a non-IFRS measure which eliminates the effect of restructuring costs. We believe that Adjusted net income and Adjusted EBITDA, as described above, should be considered in evaluating the company’s operations. Adjusted net income excludes restructuring costs because it is mostly a non-cash expense that does not reflect the performance of the company’s underlying business and operations. Adjusted EBITDA facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structures (affecting financial expenses (income), net), tax positions (such as the impact on periods or companies of changes in effective tax rates) and the age and depreciation charges and amortization of fixed and intangible assets, respectively (affecting relative depreciation and amortization expense, respectively) and Adjusted net income and Adjusted EBITDA are useful to an investor in evaluating our operating performance because they are widely used by investors, securities analysts and other interested parties to measure a company’s operating performance without regard to one-time costs associated with non-recurring events and without regard to non-cash items. EBITDA and Adjusted EBITDA presented in this annual report are defined differently than in the company’s previous annual reports on Form 20-F. EBITDA 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 and bank deposits, minus (ii) total current liabilities, excluding loans and borrowings.

 

 3 

 

 

   Year Ended December 31, 
(in thousands)  2012   2013   2014   2015   2016 
Reconciliation of net income to EBITDA:                         
Net income  $43,860   $42,027   $12,295   $12,077   $44,466 
Financial expense (income), net   936    2,246    (1,192)   (4,842)   2,120 
Income tax expense   737    4,655    3,868    3,006    7,886 
Depreciation and amortization   10,124    14,993    17,047    16,943    19,451 
EBITDA  $55,657   $63,921   $32,018   $27,184   $73,923 
Restructuring costs   -    -    15,649    9,518    - 
Goodwill and other intangible assets impairment   -    -    3,312    631*   1,830 
Adjusted EBITDA  $55,657   $63,921   $50,979   $37,333   $75,753 

 

* Reclassified

 

   Year Ended December 31, 
(in thousands)  2012   2013   2014   2015   2016 
Reconciliation of net income to adjusted net income:                         
Net income  $43,860   $42,027   $12,295   $12,077   $44,466 
Restructuring costs   -    -    15,649    9,518    - 
Adjusted net income  $43,860   $42,027   $27,944   $21,595   $44,466 

 

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, including 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, a significant portion of our growth efforts are focused on the United States, the world’s largest market for carbonated beverages and an important potential growth market. Our success depends, in large part, upon long-term consumer acceptance and adoption of our products. We face several challenges in achieving consumer acceptance and adoption of our home beverage carbonation systems, including, among other things, identifying and addressing market trends and consumers’ tastes and preferences, which often differ between markets, adapting to changes in market trends and consumers’ tastes and preferences in our existing markets, encouraging consumers to make sparkling water beverages at home rather than purchasing sparkling water beverages and consumers’ willingness to exchange empty CO2 cylinders for filled CO2 cylinders. In recent years, we have invested, and we expect to continue to invest, amounts in positioning our brand around health and wellness. We may not be successful in establishing such positioning and such positioning might not appeal to consumers. We may not achieve the anticipated positive results or growth from positioning our brand around health and wellness, even if we succeed in establishing 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. In recent years, we have invested, and we expect to continue to invest, amounts to establish our positioning around health and wellness and our future growth depends in part on our successfully positioning our brand and products in a manner that appeals to consumers. To create and maintain product and brand awareness, we engage in extensive advertising and promotional campaigns in certain key markets that we believe have significant growth potential, such as the United States. Our future growth and results of operations depend in part on the effectiveness and efficiency of these campaigns and our media spending, including our ability to:

 

  raise awareness of our home beverage carbonation systems and brand; 
     
  determine the appropriate creative message and media mix to raise awareness of our products and our brand in a manner that appeals to consumers;
     
  create and tailor specific advertisements and promotion campaigns for the consumers we target in the markets in which we sell our products; and
     
  effectively manage advertising costs, including creative and media costs.

 

We believe that our ability to drive sales of our products depends on raising awareness of our brand in a manner that appeals to consumers. Our advertising and marketing campaigns require significant financial resources and may require additional funds depending on the results they generate.

 

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

 

Our 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. Failure to do so could negatively impact our efforts to increase our sales in the markets in which we operate and seek to operate and have a material adverse effect on our business, financial condition, results of operations and prospects.

 

Our future success also requires that we have adequate capacity in our manufacturing facilities to manufacture the quantities of products to support our current sales level and the anticipated increased levels that may result from our growth. There can be no assurance as to the timing or our ability to achieve planned, needed, or desired manufacturing capacity levels. We believe that the capacity of our current manufacturing facilities and subcontractors is sufficient to meet anticipated demand for our products through 2017.

 

In addition, we have experienced, and may in the future experience, difficulties that are common in the installation, functionality and operation of manufacturing equipment. Failures or delays in obtaining and installing the necessary equipment, technology and other resources or their malfunction could result in manufacturing delays, which could harm our business, financial condition and results of operations. There can also be no assurance that demand for our products will increase commensurate with the increased production capability available following the completion of the Lehavim facility, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

 5 

 

 

A single facility houses the majority of our production operations. Business interruptions at our Lehavim facility or at any of our other manufacturing facilities could adversely impact our production capabilities for extended periods of time, which would have a material adverse effect on our business, financial condition, results of operations and prospects.

 

We currently produce most of our products at a single facility, the Lehavim facility located in the southern part of Israel, including metals (such as cylinder manufacturing and cylinder retesting), CO2 refills, plastic injection, bottle blowing and printing, machining and assembly. We continue to manufacture flavors in Ashkelon, 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 or other natural disasters, fires, accidents, work stoppages, power outages, water shortages, acts of terrorism or war, or other reasons, we may be unable to produce our products for extended periods of time. A facility and certain equipment located in a facility would be difficult to replace and could require substantial replacement lead-time. Catastrophic events could also destroy any inventory located at a facility. Lost sales or increased costs that we may experience due to the disruption of operations may not be recoverable under our insurance policies, and longer-term business disruptions could result in a loss of customers. The occurrence of any of such events could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

We lease some of our facilities from third parties, including our manufacturing facilities in Ashkelon where we manufacture our flavors. As such, there is a risk that we will not be able to renew the lease agreements, which could lead to a disruption of our operations, or that the terms of the leases under any such renewals will be on less favorable terms. The lease for our manufacturing facilities in Ashkelon ends in December 2017 and we do not currently expect to successfully negotiate renewing such lease. If we are not successful in renewing such lease or in establishing an alternative manufacturing facility in a timely manner, the production of our flavors may be delayed, which could have a material adverse effect on our business, financial condition and results of operations. While we have commenced the preliminary works for the construction of a new facility for the production of our flavors in Lehavim, there can be no assurance that we will be successful in completing the new facility in a timely manner.

 

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 23 countries. Our third-party distributors accounted for 12.4% of our revenues in 2016 and one of our distributors, serving one country in Western Europe, accounted for 8.4% of our revenues in 2016. 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 do not successfully manage the reverse logistics, it will make it more difficult for our customers to obtain replacement CO2 cylinders, which could negatively affect our brand and our revenues in that market. Any disruption in our distribution network could have a negative effect on our ability to sell our products and maintain our customers, which may, in turn, materially adversely affect our business, financial condition, results of operations and prospects.

 

 6 

 

 

We may face competition from sales of consumables and, in particular, with respect to refilling our exchangeable 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 systems or as a separate component. Our agreements with retailers contain an acknowledgement that we retain title to the exchangeable CO2 cylinders. In addition, the packaging in which the cylinders are distributed, as well as the cylinders themselves, bear notices advising consumers that the cylinders are provided under license. Nevertheless, these contractual arrangements have not always been effective, and in a number of locations, suppliers of CO2 not authorized by us have sought or may in the future seek, to refill our exchangeable CO2 cylinders or refill other exchangeable CO2 cylinders marketed as compatible with our systems. In addition to creating potential safety and public health risks, such sales of consumables by third parties unauthorized by us may result in lost sales opportunities for us, negatively impact customer retention and could harm our reputation if these products cause damage when used with our products.

 

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

 

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 use other methods of carbonation. The entry of new competitors into our market or the acquisition of our existing competitors by companies with substantial resources could result in further increased competition and harm our business. Increased competition from existing or new competitors may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects. Additionally, our competitors’ arrangements with their collaborators may prevent us from entering into similar, or other, arrangements with such collaborators.

 

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 brand and reputation due to the lower quality of these counterfeit products compared to our products. The risk of counterfeiting may increase with the expansion of our business and increased recognition of our brand name. Finally, we face competition from beverage companies, including large global companies, for the dollars spent by consumers on non-alcoholic beverages. These include primarily manufacturers of carbonated soft drinks and sparkling water.

 

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

 

We may be unable to retain our customers in markets where we have an established presence due to changes in consumer preferences, 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 higher profit margins from our consumables, the continued use of our home beverage carbonation systems by, and the repeat sales of our consumables to, consumers who have already purchased our systems are important to our business. In markets where we have an established presence, we face the challenge of retaining customers due to changes in consumer preferences, 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, in recent years, we have made significant efforts to position 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, which often differ between markets, including where they shop, could result in a reduction in the number of our customers, which could lead to lower revenues and increased inventories, and would have a material adverse effect on our business, financial condition, results of operations and prospects.

 

 7 

 

 

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

 

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

 

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

 

  washing our non-dishwasher safe carbonation bottles in the dishwasher or otherwise exposing them to severe heat, which could cause the bottles to burst during the carbonation process;
     
  carbonating substances other than water with our sparkling water makers, which could cause the sparkling water makers to fail and possibly cause damage to the other components of our home beverage carbonation systems; and
     
  subjecting our exchangeable CO2 cylinders to pressure beyond their measured stress resistance, which could cause the cylinder to burst.

 

The failure or misuse of any of the components of our home beverage carbonating systems may cause personal injury and damage to property. In addition, any unauthorized use of our home beverage carbonation systems, including by using third-party consumables with our systems, could lead to failure or malfunction of the systems which in turn could cause personal injury or property damage. Potential personal injury and property damage may also result from the deterioration of the quality or contamination of the materials used in our systems. Product safety or quality issues, actual or perceived, including allegations of product contamination or other issues, even when false or unfounded, could subject us to product liability and other claims, tarnish the image of the affected brands and may cause consumers to choose other products. Such issues or allegations may also require us to conduct product recalls and result in higher than anticipated rates of warranty returns and other returns of goods. For example, in the fourth quarter of 2016, we conducted a voluntary recall of dishwasher safe carbonation bottles. Such recall did not have a material effect on our business or results of operations.

 

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, brand and reputation.

 

Our product liability insurance for personal injury and damage to property may not be sufficient or available to cover product liability claims, or similar claims, against us, which could materially adversely 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.

 

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

 

 8 

 

 

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, Russia, Argentina and others, in which legal protection of intellectual property rights is less robust than in the United States and other developed markets in which we currently operate. We are prepared to protect our intellectual property rights vigorously; however, our patent portfolio is limited in certain markets and, as such, we may be unable to institute effective legal action against third parties engaged in copying our sparkling water makers and components.

 

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

 

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

 

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

 

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

 

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

 

 9 

 

 

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

 

The dollar is our functional and reporting currency. However, a significant portion of our cost of revenues and operating expenses are incurred in NIS, and to a lesser extent, in other currencies, such as the Euro. As a result, we are exposed to the risks that the Israeli shekel or these other currencies may appreciate relative to the dollar. In any such event, the dollar cost of our non-dollar denominated operations would increase and our dollar-denominated results of operations would be adversely affected. Furthermore, because a material portion of our revenues is denominated in currencies other than the dollar, the strengthening of the dollar in relation to other currencies, in particular the Euro, will negatively affect our results of operations. For example, in 2016, our revenues and operating income were negatively impacted from changes in foreign currency exchange rates by approximately $2.7 million and $3.9 million, respectively. We cannot predict any future trends and rates of devaluation (if any) of the Israeli shekel or any of these other currencies against the dollar. Although we currently engage in hedging transactions to minimize our currency exchange rate risk, future currency exchange rate fluctuations that we have not adequately hedged could adversely affect our profitability and may vary from quarter to quarter. We are also exposed to credit risk if counterparties to our derivative instruments are unable to meet their obligations.

 

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

 

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

 

We may have exposure to greater tax liabilities than anticipated.

 

We have endeavored to structure our activities in a manner so as to minimize our and our subsidiaries’ aggregate tax liabilities. However, we have operations in various taxing jurisdictions, and our tax liabilities in one or more jurisdictions could be more than reported in respect of prior taxable periods and more than anticipated in respect of future taxable periods. In this regard, the amount of income taxes that we pay in future taxable periods could be higher if earnings are lower than anticipated in jurisdictions where lower statutory tax rates apply and higher than anticipated in jurisdictions where higher statutory tax rates apply.

 

In addition, we have entered into transfer pricing arrangements that establish transfer prices for our inter-company operations. However, our transfer pricing procedures are not binding on the applicable taxing authorities. No official authority in any country has made a binding determination as to whether or not we are operating in compliance with its transfer pricing laws. Accordingly, taxing authorities in any of the countries in which we operate could challenge our transfer prices and require us to adjust them to reallocate our income and potentially to pay additional taxes for prior tax periods. For example, the tax authorities in the United States, have increased their focus on transfer pricing procedures 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.

 

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.

 

The base erosion and profit shifting (“BEPS”) project undertaken by the Organization for Economic Cooperation and Development (“OECD”) may have adverse consequences to our tax liabilities. The BEPS project contemplates changes to numerous international tax principles, as well as national tax incentives, and these changes, which may be adopted in different manners by individual countries, could adversely affect our provision for income taxes. It is hard to predict how the principles and recommendations developed by the OECD in the BEPS project will translate into specific national laws, and therefore we cannot predict at this stage the magnitude of the effect of such rules on our financial results.

 

 10 

 

 

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, governmental authorities in certain of our markets, such as Finland, France and certain states in the United States, have imposed taxes on sugar-sweetened beverages which apply to our flavors, and other governmental authorities, such as the United Kingdom and other states in the United States, have introduced, or considered levying, similar taxes. If such taxes are introduced and were to apply to our flavors, the sales and consumption of such flavors might decrease and thereby have a material adverse impact on our financial condition and results of operations.

 

An increase in the cost or shortage of supply of the raw materials, some of which are commodities, for our products could have a material adverse effect on our business, financial condition and results of operations.

 

We use certain raw materials to produce our sparkling water makers, exchangeable CO2 cylinders and consumables. The most important of these materials are aluminum, brass, certain plastics, flavoring essences, sugar, CO2, sweeteners and fruit concentrate. These materials represent a significant portion of our cost of goods sold. The availability and cost of such raw materials have fluctuated in the past and may fluctuate in the future due to movements in currency exchange rates, government policies and regulations, increased demand for, or decreased supply of, such materials, crop failures, fluctuations in commodity markets, weather conditions, shortages or other reasons or unforeseen circumstances. To the extent that any of the foregoing or other factors increase the prices or limit the supply of such materials, and we are unable to increase our prices or adequately hedge against such changes in a manner that offsets such changes, our business, financial condition and results of operations could be materially adversely affected.

 

Disruption of our supply chain could adversely affect our business.

 

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

 

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

 

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

 

 11 

 

 

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 policies and regulations and weather conditions. Additionally, we may be unable to maintain favorable arrangements with respect to the costs of transporting products, which could result in increased expenses and negatively affect our operations. If we are unable to hedge against such increases or raise the prices of our products to offset the changes, our results of operations could be materially adversely affected.

 

Adverse or uncertain conditions in the global economy could negatively impact customer demand for our products.

 

A number of economic factors, including gross domestic product, availability of consumer credit, consumer sentiment, retail trends, fiscal and credit market uncertainty, and foreign currency exchange rates, generally affect demand for our products. Consumer purchases of discretionary items tend to decline during recessionary periods, when disposable income is lower, 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, or the imposition of trade restrictions by, any of the countries in which we conduct significant business or in any of the markets we are targeting for expansion, may cause significant changes in both the volume and mix of our product sales, which could materially adversely affect our business, financial condition and results of operations. We may be required to implement cost reduction efforts, including restructuring activities, which may adversely affect our ability to capitalize on opportunities in a market recovery. Regional, political and economic instability in countries in which we do business may adversely affect business conditions, disrupt our operations, and have an adverse effect on our financial condition and results of operations. Uncertainty about future economic and industry conditions also makes it more challenging for us to forecast demand for our products, make business decisions, and identify and prioritize the risks that may affect our business, sources and uses of cash, financial condition and results of operations. In addition, our operations are subject to general credit, liquidity, foreign exchange, market and interest rate risks.

 

These conditions may similarly affect key suppliers, which could impair their ability to deliver parts and result in delays for our products or added costs.

 

If we do not timely and appropriately adapt to changes resulting from the uncertain macroeconomic environment and industry conditions, or to difficulties in the financial markets, our business, financial condition and results of operations may be materially and adversely affected.

 

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

 

Our success depends on the continued service of our senior management. The loss of the services of any of these individuals could delay or prevent the successful implementation of our business plans, or could otherwise affect our ability to manage our company effectively. Given their extensive knowledge of the home beverage carbonation industry, we believe that it would be difficult to find replacements should any of them leave. Our inability to find suitable replacements for 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 borrowings available under our short-term credit facilities from financial institutions will be sufficient to meet our currently anticipated cash requirements for the next 12 months. However, in the future, we may require additional capital in order to finance our activities. We may be unable to obtain requisite financing or such financing may not be available on terms that are acceptable to us. The incurrence of additional debt would result in increased debt service obligations and the terms of which may include operating or other covenants that might, among other things, restrict our ability to pay dividends to our shareholders. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects. If we were to issue equity to raise capital, it would dilute the holdings of our existing shareholders.

 

Disruptions to our IT systems due to system failures or cybersecurity attacks may impact our operations, result in sensitive customer information being compromised, which would negatively materially affect our reputation 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. Our systems have been, and are expected to continue to be, the target of malware and other cyber-attacks. Although we have invested in measures to reduce these risks, there can be no assurance that our current information technology (IT) systems are 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. A cyber-attack on our systems or networks that impairs our IT systems could disrupt our business operations and our ability to manufacture or sell our products. 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.

 

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Additionally, we have access to customer information in the ordinary course of business. If a significant data breach occurred, our reputation may be adversely affected, customer confidence may be diminished, or we may be subject to legal claims, any of which may contribute to the loss of customers and have a material adverse effect on us.

 

Compliance with 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 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. Potential costs, including costs of remediation and other changes to products, processes or sources of supply, 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 adversely impact our ability to manufacture and market our products.

 

Risks Related to our Operations in Israel

 

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

 

We are incorporated under the laws of the State of Israel, and our principal offices and our manufacturing facilities are located in Israel. Accordingly, political, economic and military conditions in Israel and the surrounding region directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors, the Hamas (an Islamist militia and political group that controls the Gaza Strip) and Hezbollah (an Islamist militia and political group based in Lebanon). Although Israel has entered into peace treaties with Egypt and Jordan, and various agreements with the Palestinian National Authority, it is unclear whether any negotiations that may occur between Israel and the Palestinian Authority will result in any additional agreements. In recent years, including in 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. In addition, Israel faces threats from more distant neighbors, in particular, Iran, which is believed to have a strong influence among extremist groups in the region, such as Hamas in the Gaza Strip and Hezbollah in Lebanon.

 

Recent political uprisings and social unrest in various countries in the Middle East and North Africa are affecting the political stability of those countries. This instability may lead to deterioration of the political relationships that exist between Israel and these countries, and have raised concerns regarding security in the region and the potential for armed conflict. Among other things, this instability may affect the global economy and marketplace through changes in oil and gas prices.

 

Any hostilities between Israel and its neighbors and any future armed conflict, terrorist activity, political instability or violence in the region could adversely affect our operations in Israel and adversely affect the market price of our ordinary shares. Further escalation of tensions or violence might result in a significant downturn in the economic or financial condition of Israel, which could have a material adverse effect on our operations in Israel and our business.

 

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

 

In addition, several countries, principally in the Middle East, restrict doing business with Israel, and additional countries may impose restrictions on doing business with Israel and Israeli companies whether as a result of hostilities in the region or otherwise. These restrictions may limit our ability to distribute our products in these countries or establish distributor relationships with companies operating in these regions. The State of Israel and Israeli companies have been and are today subjected to threats of economic boycotts. In recent years, there have been increased efforts by activists to cause companies and consumers to boycott Israeli goods based on Israeli government policies. Such actions, particularly if they become more widespread, may adversely impact our ability to sell our products. Any hostilities involving Israel or any interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel, could adversely affect our business, financial condition and results of operations. We may also be targeted by cyber terrorists because we are an Israeli company.

 

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Our employees at our Lehavim facility in Israel have recently joined the Histadrut (General Federation of Labor in Israel) and established an employees’ committee, which may result in, among other things, our incurring additional labor costs and experiencing work stoppages and/or reduced operational flexibility.

 

In the fourth quarter of 2016, we were notified by the Histadrut (General Federation of Labor in Israel) that our Israeli subsidiary’s employees at our Lehavim facility have decided to join the Histadrut and that they have established an employees’ committee. In accordance with applicable law, we have commenced negotiations with the committee and the Histadrut with respect to entering into a collective bargaining agreement. In the course of such negotiations, the employees’ committee has the right to issue a dispute notice to us, which under Israeli law would permit the employees to initiate a work stoppage not earlier than 15 days following the date of the notice. In March 2017, the employees’ committee issued a dispute notice to us. As of the date of this annual report, the 15-day period has not lapsed, and while negotiations with the employees’ committee and the Histadrut are continuing, we cannot predict whether or not a work stoppage will be initiated in connection with such dispute notice. Work stoppages could adversely impact our ability to meet customer demand for our products. Depending on the course of negotiations with the committee and the Histadrut, we could incur increased operational costs and/or experience work stoppages. If we enter into a collective bargaining agreement, such agreement may result in increased labor costs and limit our operational flexibility and we may also experience work stoppages. Any of the foregoing could adversely affect our business, financial condition and results of operations.

 

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

 

Our operations could be disrupted by the obligations of our employees to perform military service. Generally, adult citizens and permanent residents of Israel until the age of 40 (or older, for individuals who hold certain positions in the Israeli armed forces reserves) are, unless exempt, obligated to perform up to 36 days (and in some cases more) military reserve duty annually. Additionally, all Israeli residents of this age may be called to active duty at any time under emergency circumstances. Many of our employees are currently obligated to perform annual reserve duty. In response to increased tension and hostilities in the region, there have been, at times, call-ups of military reservists, and it is possible that there will be additional call-ups in the future. Our operations could be disrupted by the absence of one or more of our key employees for a significant period due to military service. Such disruption could have a material adverse effect on our business and results of operations.

 

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

 

One of our Israeli subsidiaries is eligible for tax benefits under the Israeli Law for the Encouragement of Capital Investments, 5719-1959 (the “Investment Law”) and the Israeli Law for the Encouragement of Industry (Taxes), 5729-1969. To remain eligible for these tax benefits, this subsidiary must continue to meet certain conditions stipulated in the Investment Law and the regulations promulgated thereunder, as amended. If this subsidiary does not meet these requirements, the tax benefits could be canceled and it could be required to refund any tax benefits and investment grants that it received in the past. Furthermore, these tax benefits may be reduced or discontinued in the future. The termination or reduction of these tax benefits would increase our tax liability, which would harm our financial condition and results of operations. See “Item 10.E. — Taxation — Israeli tax considerations and government programs — Law for the encouragement of capital investments, 5719-1959.”

 

We have received and have been approved to receive grants under certain Israeli Government programs and may apply from time to time in the future, to receive additional grants, including under the Investment Law. The receipt of approved grants and future grants, if approved, is subject to our satisfying certain conditions stipulated in applicable Israeli legislation and letters of approval. If we fail to meet these conditions, the grants could be canceled and we may be required to refund the amounts received, as adjusted by the Israeli consumer price index, and interest, and may become subject to other monetary penalties, which would harm our financial condition and results of operations. In addition, in order to secure fulfillment of the conditions related to the receipt of the grants, a floating lien was registered in favor of the State of Israel on substantially all of the assets of our Israeli subsidiary. The exercise of such lien could have a material adverse effect on our business.

 

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

 

We are incorporated in Israel. All of our executive officers 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.

 

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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. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith towards the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters, such as an amendment to the company’s articles of association, an increase in the company’s authorized share capital, a merger and approval of related party transactions that require shareholder approval. In addition, shareholders have a general duty to refrain from discriminating against other shareholders and a shareholder who knows that it possesses the power to determine the outcome of a shareholders’ vote or to appoint or prevent the appointment of a director or executive officer in a company has a duty of fairness towards the company with regard to such vote or appointment. There is limited case law available to assist us in understanding the nature of these duties or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations. See “Item 6.C. — Board Practices — Fiduciary duties and approval of specified related party transactions under Israeli law — Duties of shareholders.”

 

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

 

As a foreign private issuer whose shares are listed on the Nasdaq Global Select Market, we have elected to follow certain home country corporate governance practices instead of certain requirements of the Nasdaq Stock Market Rules (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.

 

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

 

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

 

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

 

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

 

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

 

The price of our ordinary shares may fluctuate significantly.

 

Our ordinary shares were first offered publicly in our initial public offering in November 2010, at a price of $20.00 per share, and our ordinary shares have subsequently traded on the Nasdaq Global Select Market as high as $79.72 per share and as low as $11.40 per share and were trading at $49.92 per share as of March 1, 2017.

 

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;
     
  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;
     
  recalls and/or adverse events associated with our products;
     
  announcements concerning our products by us or regulatory authorities;
     
  changes in earnings’ estimates, if provided, investors’ perceptions or recommendations by securities analysts or our failure to achieve analysts’ earnings estimates;
     
  developments in our industry;
     
  price and volume fluctuations on other exchanges on which our ordinary shares are listed for trading;

 

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

 

Our ordinary shares are traded on more than one market and this may result in price variations.

 

In addition to being listed on the Nasdaq Global Select Market, our ordinary shares are also listed for trade on the Tel Aviv Stock Exchange (the “TASE”). Trading in our ordinary shares on these markets takes place in different currencies (U.S. dollars on the Nasdaq Global Select Market and NIS on the TASE), and at different times (resulting from different time zones, trading days and public holidays in the United States and Israel). The trading prices of our ordinary shares on these two markets may differ due to these and other factors. Any decrease in the price of our ordinary shares on one market could cause a decrease in the trading price of our ordinary shares on the other market.

 

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

 

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

 

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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”). On December 15, 2015, our ordinary shares commenced trading on the TASE.

 

Our principal executive offices are located at Gilboa Street, Airport City, Ben Gurion Airport 7019900 Israel and our telephone number is +972-3-976-2317. Our authorized representative in the United States and agent for service of process in the United States, SodaStream USA, Inc., is located at 136 Gaither Drive, Suite 200, Mount Laurel, NJ 08054. Our website address is www.sodastream.com. The information contained on, or that can be accessed through, our website does not constitute a part of this annual report and is not incorporated by reference herein.

 

Principal Capital Expenditures

 

Our capital expenditures for fiscal years 2014, 2015 and 2016 amounted to $60.9 million, $53.7 million and $28.0 million, respectively. Capital expenditures are defined as investment in property, plant and equipment and in intangible assets. The decrease in capital expenditures in 2015 as compared to 2014 was mainly due to the progress achieved in the construction and ramp-up of the Lehavim facility and the decrease in 2016 as compared to 2015 was mainly due to the completion of the ramp-up of the Lehavim facility and the new logistics center on the Lehavim site. Our capital expenditures in 2016 were primarily financed by cash flow from operations. We anticipate our capital expenditures in 2017 to primarily be related to the construction of a new facility for the production of flavors and the completion of the construction of our new administration building on the Lehavim site, expansion of our production capacity and capabilities, investments in developing new products, and improvements in our information technology systems. We anticipate our capital expenditures in 2017 to be primarily financed from cash flow generated from operations and utilization of existing credit facilities. 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 and other products promote health and wellness and empower people with simple, creative and fun ways to make water exciting and to drink more water. Our products are also environmentally friendly, cost-effective and are customizable and fun to use. In addition, our products offer convenience by eliminating the need to carry bottles and cans home from the supermarket, to store them at home or to regularly dispose of empty bottles and cans. Educating consumers about these benefits is a key element of our strategy to build awareness and strengthen our brand.

 

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We believe that we are the world’s largest sparkling water company (in terms of volume consumption) and the world’s leading manufacturer of home beverage carbonation systems. Such belief is based on consumer surveys we commissioned that show that SodaStream has the largest market share in each of a dozen of the largest markets in which we operate. Based on, among other metrics, an estimated average of three CO2 refills purchased per household and a portion of sparkling water maker sales, we estimate that, as of December 31, 2016, there were approximately 11 million households that use our sparkling water makers, whom we refer to as active consumers. We continue to grow our installed base and believe that many of the largest carbonated beverage and sparkling water markets remain virtually untapped.

 

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, 2016, we sell our products through more than 80,000 individual retail stores in 45 countries, including approximately 10,000 retail stores in the United States. In 2016, we distributed our products directly in 22 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 decreased by 19.3% from $511.8 million in 2014 to $413.1 million in 2015 and increased by 15.2% to $476.1 million in 2016. We had net income of $12.3 million, $12.1 million and $44.5 million in 2014, 2015 and 2016, respectively. From 2014 through 2016, our revenues from sparkling water makers and exchangeable CO2 cylinders decreased from $172.6 million to $170.8 million, and our revenues from sales of consumables decreased from $327.4 million to $297.0 million.

 

Industry background

 

According to GlobalData, the global carbonated beverage industry generated approximately $350 billion in sales turnover in 2016. 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 and offer a simple, fun and sustainable way to enjoy sparkling water by making water exciting.

 

Consumers initially purchase a “starter kit,” consisting of a sparkling water maker and one or two carbonation bottles. The starter kit also includes an exchangeable CO2 cylinder which is provided under license and can produce varying amounts of sparkling water, depending on the CO2 content and other factors.

 

Sparkling water makers. We 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 and, other than the “Power” model, do not require electricity. The CO2 cylinder fits in a rear compartment and with a simple push, carbonates water. Our sparkling water makers are sold in a variety of designs and colors and accommodate different CO2 cylinder sizes.

 

Exchangeable CO2 cylinders. The basis of the SodaStream home beverage carbonation system is the carbonation of water by means of an aluminum or, in some cases, steel, cylinder containing compressed liquid CO2. The cylinder is inserted by the consumer into the sparkling water maker. Certain models of sparkling water makers can accommodate more than one size of cylinders, while others fit only one size. The actual amount of sparkling water produced per cylinder varies based on the CO2 content, the type of sparkling water maker used, user preference (the amount of carbonation released during each carbonation) and other factors. We only use beverage-grade CO2 in our cylinders. We also sell natural sourced CO2 (derived from natural underground sources) in certain markets, in addition to CO2 extracted from other sources.

 

CO2 refills. We provide beverage-grade CO2 refills through authorized retailers that participate in our cylinder exchange program. These retailers generally maintain a stock of filled cylinders in their inventory. Consumers typically exchange their empty cylinders at retail stores or through online orders for full cylinders and since the cylinders are provided under license, they only pay for the CO2. In some markets, direct home delivery and exchange is also available, and we use third-party carriers to exchange the empty cylinders for full ones. Empty cylinders are then delivered to a filling plant where they are inspected, cleaned and refilled for distribution. We conduct CO2 refilling in the United States, Australia, Germany, Israel, the Netherlands, South Africa and Sweden and also at a third-party facility in New Zealand. We periodically evaluate opening additional refilling stations in our existing markets based on demand for CO2 refills and other factors.

 

Carbonation bottles. Our home beverage carbonation systems produce sparkling water in a high pressure-resistant plastic or glass bottle, which we manufacture specifically for repeated usage. These specially-designed carbonation bottles are the only bottles intended for use with our home beverage carbonation systems. The glass bottle, as well as some versions of the plastic bottle, is dishwasher-safe. For the high-end market, we offer sparkling water makers specifically intended to be used with glass bottles, which are appropriate for a more formal table setting. Carbonation bottles can easily be personalized and are offered in a variety of colors, designs and sizes. The plastic bottles are BPA-free and are designed to have a lifespan of four years. Consumers often purchase additional carbonation bottles to allow for several bottles of sparkling water and flavored sparkling water to be available at the same time.

 

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Flavors. We work with leading international flavor and essence manufacturers which provide research and product development services, including sensory testing in order to enhance our flavor offerings and cater to consumers’ tastes and address market trends. Our flavors come in a highly concentrated form, customized for our home beverage carbonation systems. Our portfolio of flavors includes naturally flavored sparkling water mixes, as well as our classic flavors. In some markets, our flavors are sold in 440 ml bottles, which typically produce between seven and nine liters of flavored sparkling water, while in other markets, our flavors are sold in 375 ml, 500 ml or 750 ml bottles, which typically produce between nine and 18 liters of flavored sparkling water.

 

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.

 

Other accessories. We also sell additional accessories for our products that are manufactured by third parties.

 

Distribution

 

We mostly market our products through retail channels. We distribute our products in 45 countries, 22 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 80,000 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 22 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 2016, our distributors accounted for 12.4% 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 seek 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 and sparkling water, 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 during the term of the agreement, which generally increase from year to year. 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.

 

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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.

 

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

 

Marketing

 

Our marketing objective is to establish and position SodaStream as a sparkling water brand around health and wellness. A key element of our strategy to achieve this marketing objective is to build consumer awareness and to educate consumers about the benefits of our products. Consumer demand activities are designed primarily to increase the installed base of sparkling water makers as measured in terms of percentage of household penetration in each market. Secondarily, we promote “users for life” so as to generate ongoing demand for our consumables (CO2 refills, flavors and carbonation bottles). We believe that widespread availability and easy access to consumables are key to customer retention and loyalty.

 

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

 

Acquiring a new customer is only the beginning of a relationship with the customer. To this end, we continuously test and apply various marketing tools to improve customer retention. In addition to enhancing our product offerings and improving the user experience, we employ subscription programs, newsletters, warranties, trade-in promotions and various other programs to keep the customer engaged. We offer easy access to CO2 refills through mass distribution of our cylinder exchange program and 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 substantially all of our products ourselves in our own production sites or in sites of subcontractors under our guidelines and supervision. We believe that in light of our strict quality control and the safety and regulatory standards to which we are subject, self-manufacture is the best and most efficient way to ensure that our customers receive quality products. We manufacture our products primarily in Israel and conduct CO2 refilling in eight locations around the world.

 

In 2015, most of our manufacturing operations were moved to our new manufacturing facility located in the southern part of Israel, the Lehavim facility. The Lehavim facility houses various manufacturing functions, including metals (such as cylinder manufacturing and cylinder retesting), CO2 refills, plastic injection, bottle blowing and printing, machining and assembly. We manufacture our flavors that are distributed worldwide at our facility in Ashkelon, located on the Mediterranean coast of Israel. The lease for our manufacturing facilities in Ashkelon ends in December 2017 and we do not currently expect to successfully negotiate renewing such lease. If we are not successful in renewing such lease or in establishing an alternative manufacturing facility in a timely manner, the production of our flavors may be delayed, which could have a material adverse effect on our business, financial condition and results of operations. While we have commenced the preliminary works for the construction of a new facility for the production of our flavors in Lehavim, there can be no assurance that we will be successful in completing the new facility in a timely manner.

 

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Our future success requires that we have adequate capacity in our manufacturing facilities to manufacture sufficient products to support our current level of sales and the anticipated increased levels. We were able to meet demand in 2015 and 2016 and believe that the capacity of our current manufacturing facilities and subcontractors is sufficient to meet anticipated demand for our products through 2017.

 

We manufacture our products in accordance with applicable safety and regulatory requirements around the world. We also have implemented specific quality assurance procedures throughout the various stages and processes of manufacturing which are intended to ensure the quality of all of our products.

 

We use certain raw materials, some of which are commodities, to manufacture our sparkling water makers, carbonation bottles, CO2 cylinders and flavors. The most important of these materials are aluminum, brass, certain plastics, flavoring essences, sugar, CO2, sweeteners and fruit concentrate. We believe that these materials are readily available from multiple sources and that we have sufficient inventory to continue manufacturing during the time it would take us to locate and qualify an alternative source of supply. The cost of such raw materials has fluctuated in the past. From time to time, we engage in long-term purchase agreements and in hedging transactions to lower the impact of such fluctuations.

 

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 superior user experience. Over the years, we have introduced several new models of sparkling water makers, including the “Source,” a sparkling water maker that combines beauty, functionality and efficiency, the “Crystal,” a higher-end model that utilizes glass carbonation bottles, the “Power,” an electrically powered innovative sparkling water maker and the “Spirit,” which is sold as the “Fizzi” or the “Easy” in certain markets, an affordably priced  and elegantly-designed sparkling water maker that incorporates the advanced “snap-n-lock” bottle mechanism. In 2015, we also unveiled the “Mix,” a new high-end carbonation machine that can carbonate almost any liquid. We are continuously seeking to enhance our flavor offerings and cater to consumers’ tastes and address market trends.

 

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 and designs for most of the sparkling water makers we introduced in the last few years, including the “Power,” “Source” and the “Spirit.” We place trademarks on all of our products, including carbonation bottles, CO2 cylinders and flavors. We have monitored and challenged the sale of products that we believe infringe our intellectual property rights in the past and we intend to continue to protect our intellectual property rights in the future.

 

Competition

 

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

 

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

 

Government regulation

 

Our products, which include both food products and compressed gas, are subject to governmental regulation in most jurisdictions in which we do business. Food products, such as flavors and beverage-grade CO2, are subject to regulation both at regional levels such as the European Union, as well as on a national level. These regulations require us to vary product formulations and labeling. In addition, certain marketing claims regarding our flavors differ from jurisdiction to jurisdiction as a result of local regulations.

 

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The transport of compressed gases, such as the CO2 in our cylinders, is regulated in most jurisdictions. The manufacturing process and cylinder features vary by jurisdiction, and we manufacture different cylinders, each of which is subject to a separate regulatory regime, for use in the European Union, the United States (Department of Transportation) and Canada (Transport Canada). The various regulatory bodies have different requirements for periodic re-testing of cylinders that vary from between five to 10 years, procedures for which we are largely self-certified. In addition, the transport of cylinders is regulated on an international level and all of our cylinders and cylinder packaging bear a “green diamond” precautionary symbol for a Class 2.2 product under the European Agreement Concerning the International Carriage of Dangerous Goods by Road (ADR). In the United States and certain other jurisdictions, our cylinders are regulated as hazardous materials.

 

Facilities

 

Our headquarters in Airport City, Israel is comprised of approximately 28,300 square feet of office space, which we lease under a lease agreement that terminates in April 2018. Our Lehavim facility is located on a plot of land comprising approximately 915,000 square feet in the southern part of Israel. In October 2015, we entered into a long-term lease agreement with the Israel Land Authority pursuant to which we lease the land where the Lehavim facility is situated for a term ending in February 2061, with an option to extend the lease for an additional term of 49 years. Our Ashkelon facility, located on the Mediterranean coast of Israel, is comprised of approximately 21,500 square feet of factory, warehouse and office space and is leased under a lease agreement that terminates in December 2017. We do not currently expect to successfully negotiate renewing such lease. While we have commenced the preliminary works for the construction of a new facility for the production of our flavors in Lehavim, there can be no assurance that we will be successful in completing the new facility in a timely manner. (See “Item 3.D. — Risk Factors — A single facility houses the majority of our production operations. Business interruptions at our Lehavim facility or at any of our other manufacturing facilities could adversely impact our production capabilities for extended periods of time, which would have a material adverse effect on our business, financial condition, results of operations and prospects.”) Additionally, we have CO2 refilling facilities in the United States, Australia, Germany, Israel, the Netherlands, South Africa and Sweden and also at a third-party facility in New Zealand.

 

Our European commercial and logistics center is managed from Rijen, the Netherlands. We have sales and marketing offices in Australia, Canada, Denmark, Finland, Germany, Israel, Italy, Japan, the Netherlands, Norway, South Africa, Sweden, Switzerland, the United Kingdom and the United States. We believe that our existing facilities are adequate for our current needs and that suitable additional or alternative space will be available on commercially reasonable terms to meet our future needs.

 

We have entered into a development agreement with the Israel Land Authority with respect to an approximately 247,000 square feet plot of land which is adjacent to the land where our manufacturing facility in Lehavim is located for the potential expansion and/or further consolidation of our manufacturing capabilities, including for the construction of a new facility for the production of our flavors.

 

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., which is registered in the Netherlands, and its direct and indirect subsidiaries. SodaStream International B.V. is a wholly-owned subsidiary of SodaStream Enterprises N.V.

 

The following table sets forth the subsidiaries owned, directly or indirectly, by us as of March 1, 2017:

 

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%
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%

 

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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, 2016, we sold our products through more than 80,000 individual retail stores in 45 countries. As of December 31, 2016, we distributed our products directly in 22 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.

 

Historically, our growth in revenues was driven by our heightened focus on promoting sparkling water maker sales in both existing markets and new markets to increase our installed base of sparkling water makers, particularly in North America and in Western Europe. Historically, the growth of our installed base of sparkling water makers in turn resulted in an increase in revenues from sales of our consumables. A key element of our strategy is to expand our active installed base of sparkling water makers by further penetrating existing markets, and by entering select new markets. Another key element of our strategy is to build consumer awareness and to educate consumers about the benefits of our products.

 

A.Operating Results

 

Key measures of our performance

 

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.

 

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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, 
   2014   2015   2016 
Sparkling water makers and exchangeable CO2 cylinders  $172,614   $131,749*  $170,790 
Consumables   327,400    272,276*   297,011 
Other   11,760    9,110*   8,264 
Total  $511,774   $413,135   $476,065 

* Reclassified

  

   Year Ended December 31, 
   2014   2015   2016 
Sparkling water makers and exchangeable CO2 cylinders   33.7%   31.9%   35.9%
Consumables   64.0    65.9    62.4 
Other   2.3    2.2    1.7 
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. In 2016, the number of sparkling water maker units that we sold increased by 22% and the number of CO2 refills that we sold increased by 10%, as compared to 2015. Based on, among other metrics, an estimated average of three CO2 refills purchased per household and a portion of sparkling water maker sales, we estimate that, as of December 31, 2016, there were approximately 11 million households that use our sparkling water makers, whom we refer to as active consumers.

  

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

 

While we anticipate that this trend will continue, a variety of factors, including customer retention rates, the growth of our reverse logistics network, 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 2016, one of our distributors, serving one country in Western Europe, accounted for 8.4% of our revenues. Distributors are generally required to meet annual purchase targets during the term of the agreement, which generally increase from year to year. 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.

 

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Cost of revenues and gross margin

 

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

 

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

 

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

 

  The gross margin on sales in markets where we distribute directly is generally higher than markets in which we use 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, we distribute directly, and thus we believe our gross margins will be positively impacted as the portion of our revenues from these markets increases.

 

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

 

  Our gross margin is exposed to exchange rate fluctuations. We are primarily exposed to Euro/U.S. Dollar and NIS/U.S. Dollar currencies movements, with the U.S. Dollar and Euro being the principal currencies of our sales and the U.S. Dollar and NIS being the currencies which a significant portion of our material purchasing and production costs 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 fluctuations.

 

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, homes, offices or other locations, 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. In certain cases, we are able to pass some of the delivery costs on to customers.

 

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

 

Our general and administrative expenses consist primarily of wages, salaries and other employee benefits for our managerial and administrative personnel, share-based payment expenses, rental fees and building maintenance, communications and support costs, as well as legal, professional advisors and audit and review costs.

 

Other expenses in 2016 were $2.3 million and comprised mainly of an impairment of other intangible assets in the amount of $1.8 million. Other expenses in 2015 were $0.6 million, and comprised of impairment of an intangible asset.

 

Financial expenses (income)

 

Financial expenses or income, net, consist of expenses relating to: (i) borrowing costs which are not capitalized, (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.

 

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Corporate taxes

 

The regular corporate tax rate in Israel in 2015 and 2016 was 26.5% and 25%, respectively. The corporate tax rate in Israel for 2017 is 24% and is to be reduced to 23% in 2018 and thereafter. 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 of approximately 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.

 

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 15% and 25% 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 $20.0 million as of December 31, 2016.

 

Share-based compensation

 

During the year ended December 31, 2016, we granted options to purchase 95,000 ordinary shares under our equity incentive plan and 13,000 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, 2016 was $0.3 million. The remaining expense will be recognized over the vesting period. For certain arrangements with our chief executive officer, see “Item 6.B. — Compensation — Compensation of officers and directors — Certain arrangements with Daniel Birnbaum.”

 

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.

 

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.

 

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

 

(in thousands)  The
Americas
   Western
Europe
   Asia-Pacific   CEMEA   Reportable
Segments
   Reconciliation   Consolidated 
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 
Year ended December 31, 2015                                   
Revenues   102,104    251,496    40,711    21,644    415,955    (2,820)   413,135 
Segment results   6,485    48,444    5,232    3,272    63,433    (53,192)   10,241 
Year ended December 31, 2016                                   
Revenues   114,747    286,512    49,614    25,192    476,065    -    476,065 
Segment results   17,433    71,983    10,308    3,678    103,402    (48,930)   54,472 

 

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

 

   2014   2015   2016 
The Americas   27.8%   24.5%   24.1%
Western Europe   55.0    60.5    60.2 
Asia-Pacific   10.5    9.8    10.4 
CEMEA   6.7    5.2    5.3 
Total   100.0%   100.0%   100.0%

 

One of our distributors in Western Europe accounted for 8.4%, 9.0% and 12.2% of our total revenues in 2016, 2015 and 2014, respectively, and one of our customers in the Americas accounted for 6.6%, 7.4% and 5.9% of our total revenues in 2016, 2015 and 2014, respectively.

 

Revenues from customers located in Israel amounted to $11.5 million in 2014, $11.1 million in 2015 and $ 11.8 million in 2016. 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 increased by $12.7 million, or 12.4%, to $114.8 million in 2016 from $102.1 million in 2015. The increase was primarily due to higher demand for sparkling water makers in the United States and Canada. Revenues in the Americas decreased by $40.2 million, or 28.2%, to $102.1 million in 2015 from $142.3 million in 2014. The decrease was primarily due to lower demand for sparkling water makers and flavors in the United States, which was partially due to the product transition as part of our repositioning and growth plan that was adopted in October 2014.

 

Segment results in the Americas increased by $10.9 million, or 168.8%, to $17.4 million in 2016 from $6.5 million in 2015. This increase was mainly due to a higher demand for products, the product sales mix and a decrease in general and administrative expenses. Segment results in the Americas increased by $10.1 million to positive segment results of $6.5 million in 2015 from negative segment results of $3.6 million in 2014. This increase was mainly due to higher portion of CO2 refills in the sales mix and a decrease in sales and marketing expenses.

 

Western Europe

 

Revenues in Western Europe increased by $35.0 million, or 13.9%, to $286.5 million in 2016 from $251.5 million in 2015. This increase was due to higher demand for sparkling water makers and CO2 refills driven by most of the markets in the region and mainly by Germany, Switzerland and the Nordics. Revenues in Western Europe decreased by $30.2 million, or 10.7%, to $251.5 million in 2015 from $281.7 million in 2014. This decrease was mainly due to the impact of changes in foreign currency exchange rates. Excluding the impact of foreign currency exchange rates, in 2015 as compared to 2014, Western Europe revenue increased approximately 5.8% due to increased sales in Germany, Austria and Switzerland, partially offset by declines in France and the Nordics.

 

Segment results in Western Europe increased by $23.5 million, or 48.6%, to $72.0 million in 2016 from $48.4 million in 2015. This increase was primarily due to an increase in revenues, price increases, changes in the mix of sparkling water makers sold and a general costs and expenses reduction. Segment results in Western Europe decreased by $11.7 million, or 19.4%, to $48.4 million in 2015 from $60.1 million in 2014. This increase was mainly due to the weakening of the Euro against the U.S. dollar.

 

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Asia-Pacific

 

Revenues in Asia-Pacific increased by $8.9 million, or 21.9%, to $49.6 million in 2016 from $40.7 million in 2015. This increase was primarily due to higher demand for products driven by Japan and South Korea. Revenues in Asia-Pacific decreased by $13.1 million, or 24.4%, to $40.7 million in 2015 from $53.8 million in 2014. This decrease was primarily due to changes in foreign currency exchange rates and a decrease in sparkling water makers and flavor unit sales in Australia and South Korea, partially offset by increased sales in Japan.

 

Segment results in Asia-Pacific increased by $5.1 million, or 97.0%, to $10.3 million in 2016 from $5.2 million in 2015. This increase was primarily due to an increase in revenues, price increases and changes in the mix of sparkling water makers sold. Segment results in Asia-Pacific decreased by $3.0 million, or 36.1%, to $5.2 million in 2015 from $8.2 million in 2014. This decrease was primarily due to the negative impact of changes in foreign currency exchange rates.

 

CEMEA

 

Revenues in CEMEA increased by $3.5 million, or 16.4%, to $25.2 million in 2016 from $21.7 million in 2015. This increase was primarily due to higher demand for products driven by the Czech Republic and Israel. Revenues in CEMEA decreased by $12.3 million, or 36.2%, to $21.7 million in 2015 from $34.0 million in 2014. This decrease was primarily due to lower sales in the Czech Republic.

 

Segment results in CEMEA increased by $0.4 million, or 12.4%, to $3.7 million in 2016 from $3.3 million in 2015. This increase was primarily due to an increase in revenues in the Czech Republic and Israel. Segment results in CEMEA decreased by $1.9 million, or 37.7%, to $3.3 million in 2015 from $5.2 million in 2014. This decrease was primarily due to a decrease in revenues in the Czech Republic.

 

Results of operations

 

Year ended December 31, 2016 compared to year ended December 31, 2015

 

Revenues increased by $63.0 million, or 15.2%, to $476.1 million in 2016 from $413.1 million in 2015. The increase was primarily due to increased consumer demand for sparkling water makers and consumables in the majority of the markets. Sparkling water maker unit sales increased by 22.0% to 2.9 million units in 2016 from 2.4 million units in 2015, CO2 refill unit sales increased by 10.0% to 29.4 million units in 2016 from 26.8 million units in 2015 and flavor unit sales decreased by 2.0% to 22.0 million units in 2016 from 22.3 million units in 2015. By segment, revenues increased in each of the regions.

 

Gross profit increased by $48.2 million, or 24.5%, to $245.0 million in 2016 from $196.8 million in 2015. Gross profit as a percentage of revenues, or gross margin, increased by 390 basis points to 51.5% in 2016 compared to 47.6% in 2015. The increase was mainly due to production optimization in the Lehavim facility, price increases and more favorable changes in the mix of sparkling water makers sold, partially offset by a higher portion of sparkling water makers in the product mix and unfavorable changes in foreign exchange rates.

 

Sales and marketing expenses increased by $6.1 million, or 4.3%, to $144.7 million in 2016 from $138.6 million in 2015. The increase in sales and marketing expenses was mainly due to higher advertising and promotion expenses, which increased by $9.8 million to $64.9 million, or 13.6% of revenue, from $55.1 million, or 13.3% of revenue, in 2015. Other selling expenses decreased to $79.8 million, or 16.8% of revenue, from $83.5 million, or 20.2% of revenue, in 2015.

 

General and administrative expenses decreased by $3.7 million, or 7.9%, to $43.5 million in 2016 from $47.3 million in 2015, partially due to a decrease in share-based payment expenses of $1.7 million. As a percentage of revenues, general and administrative expenses decreased to 9.1% in 2016 from 11.4% in 2015.

 

Other expenses were $2.3 million, mainly reflecting the impairment of intangible assets, compared to $0.6 million in 2015, reflecting an impairment of intangible assets.

 

Operating income increased to $54.5 million, or 11.4% of revenues, compared to $19.8 million or 4.8% of revenues in 2015, due to an increase in revenues, gross margin improvements and operating expense optimization, partially offset by the negative impact of changes in foreign currency exchange rates of $3.9 million. For this comparison, operating income in 2015 was calculated excluding the exceptional restructuring costs.

 

Total financial expenses (income), net were financial expenses of $2.1 million in 2016 compared to financial income of $4.8 million in 2015. The 2015 financial income included an exceptional $5.1 million gain from the devaluation of loans denominated in Euro and income of $2.7 million from derivative financial instruments following the sharp reduction of the Euro/U.S. dollar exchange rate during the year.

 

Income tax expense was $7.9 million compared to $3.0 million in 2015, representing an effective tax rate of 15.1% in 2016 compared to 19.9% in 2015. The changes in the effective tax rate reflect the changes in the distribution of profit before tax between territories.

 

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Year ended December 31, 2015 compared to year ended December 31, 2014

 

Revenues decreased by $98.7 million, or 19.3%, to $413.1 million in 2015 from $511.8 million in 2014. The decrease was primarily due to a decrease of 25.0 % in the volume of sparkling water makers sold to 2.4 million units in 2015, 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 3.2 million units in 2014. The decrease in revenues also includes $58.6 million due to unfavorable changes in foreign currency exchange rates, primarily as a result of the weakening of the Euro/U.S. dollar exchange rate by 17.0%, the Australian dollar/U.S. dollar exchange rate by 17.0% and the Swedish Krona/U.S. dollar exchange rate by 19.0% in comparison to their average exchange rates in 2014. CO2 refill unit sales increased by 7.0% to 26.8 million units in 2015 from 25.0 million units in 2014 and flavor unit sales decreased by 29.0% to 22.3 million units in 2015 from 31.4 million units in 2014. By segment, the key region of decreased revenues was the Americas with a decrease of $40.2 million.

 

Gross profit decreased by $56.3 million, or 22.2%, to $196.8 million in 2015 from $253.1 million in 2014. Gross profit as a percentage of revenues, or gross margin, disregarding the impact of restructuring costs, decreased by 150 basis points to 49.6% in 2015 compared to 51.1% in 2014. The decrease was mainly due to the impact of unfavorable changes in foreign currency exchange rates on revenue, partially offset by a higher portion of CO2 refills in the sales mix.

 

Sales and marketing expenses decreased by $39.1 million, or 22.0%, to $138.6 million in 2015 from $177.7 million in 2014. The decrease in sales and marketing expenses was mainly due to lower advertising and promotion expenses, which decreased by $21.8 million to 13.3% of revenues from 15.0% of revenues in the same period in 2014, and the impact of changes in foreign currency exchange rates. As a percentage of revenues, sales and marketing expenses decreased to 33.6% in 2015 from 34.7% in 2014.

 

General and administrative expenses decreased by $2.5 million, or 5.1%, to $47.3 million in 2015 from $49.8 million in 2014. As a percentage of revenues, general and administrative expenses increased to 11.4% in 2015 from 9.7% in 2014. The decrease in general and administrative expenses was mainly due to a reduction in administrative costs, partially offset by an increase in share-based payment expenses.

 

Other expenses were $0.6 million, and comprised of impairment of an intangible asset. Other expenses 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.

 

Operating income disregarding the impact of $9.5 million in restructuring costs, decreased to $19.8 million, or 4.8% of revenues, compared to $30.6 million or 6.0% of revenues in 2014. Operating income was negatively impacted by changes in foreign currency exchange rates by approximately $14.1 million.

 

Total financial expenses (income), net changed by $3.7 million, to financial income of $4.8 million in 2015 compared to financial income of $1.2 million in 2014. The increase in financial income was mainly due to the devaluation of long-term loans denominated in Euro due to the weakening of the Euro/U.S. dollar exchange rate in 2015.

 

Income tax expense was $3.0 million compared to $3.9 million in 2014. Our effective tax rate for 2015 was 19.9% compared to 23.9% for 2014, mainly due to lower income before tax and changes in the distribution of profit before tax between territories.

 

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. 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, 2016. 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.

 

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(in thousands)  March 31,
2015
   June 30,
2015
   Sept. 30,
2015
   Dec. 31,
2015
   March 31,
2016
   June 30,
2016
   Sept. 30,
2016
   Dec. 31,
2016
 
Consolidated statements of operations data:                                        
Revenues  $90,344   $99,834   $110,015   $112,942   $100,873   $119,164   $124,228   $131,800 
Cost of revenues   44,893    51,307    59,255    60,909    49,701    58,695    59,889    62,802 
Gross profit   45,451    48,527    50,760    52,033    51,172    60,469    64,339    68,998 
Operating expenses:                                        
Sales and marketing   32,461    35,118    36,031    35,031    32,671    38,022    34,943    39,021 
General and administrative   11,641    11,456    11,772    12,389    10,581    10,969    10,833    11,139 
Other expenses   -    -    -    631    -    2,327    -    - 
Total operating expenses   44,102    46,574    47,803    48,051    43,252    51,318    45,776    50,160 
Operating income   1,349    1,953    2,957    3,982    7,920    9,151    18,563    18,838 
Total financial expense (income), net   (5,668)   592    (72)   306    910    194    210    806 
Income before income taxes   7,017    1,361    3,029    3,676    7,010    8,957    18,353    18,032 
Income tax expense   970    401    787    848    917    1,142    3,443    2,384 
Net income (loss) for the period  $6,047   $960   $2,242   $2,828   $6,093   $7,815   $14,910   $15,648 
                                         
   March 31,
2015
   June 30,
2015
   Sept. 30,
2015
   Dec. 31,
2015
   March 31,
2016
   June 30,
2016
   Sept. 30,
2016
   Dec. 31,
2016
 
As a percentage of revenues:                                        
Revenues   100%   100%   100%   100%   100%   100%   100%   100%
Gross profit   50.3    48.6    46.1    46.1    50.7    50.7    51.8    52.4 
Operating expenses:                                        
Sales and marketing   35.9    35.2    32.8    31.0    32.4    31.9    28.1    29.6 
General and administrative   12.9    11.5    10.7    11.0    10.5    9.2    8.7    8.5 
Other expenses   -    -    -    0.6    -    2.0    -    - 
Total operating expenses   48.8    46.7    43.5    42.6    42.9    43.1    36.8    38.1 
Net income (loss) for the period   6.7%   1.0%   2.0%   2.5%   6.0%   6.6%   12.0%   11.9%
As a percentage of full year results:                                        
Revenues   21.9%   24.2%   26.6%   27.3%   21.2%   25.0%   26.1%   27.7%
Gross profit   23.1    24.7    25.8    26.4    20.9    24.7    26.2    28.2 
Operating expenses:                                        
Sales and marketing   23.4    25.3    26.0    25.3    22.6    26.3    24.1    27.0 
General and administrative   24.7    24.2    24.9    26.2    24.3    25.2    24.9    25.6 
Other income, net   -    -    -    100.0    -    100.0    -    - 
Total operating expenses   23.6    25.0    25.6    25.8    22.7    26.9    24.1    26.3 
Net income (loss) for the period   50.1%   7.9%   18.6%   23.4%   13.7%   17.6%   33.5%   35.2%

 

Application of critical accounting policies and use of estimates

 

Our accounting policies affecting our financial condition and results of operations are more fully described in our consolidated financial statements for the years ended December 31, 2016, 2015 and 2014, and as of December 31, 2016 and 2015 included elsewhere in this annual report. The preparation of our financial statements requires management to make judgments, estimates and assumptions that affect the amounts reflected in the consolidated financial statements and accompanying notes, and related disclosure of contingent assets and liabilities. We base our estimates upon various factors, including past experience, where applicable, external sources and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and could have a material adverse effect on our reported results.

 

In many cases, the accounting treatment of a particular transaction, event or activity is specifically dictated by accounting principles and does not require management’s judgment in its application, while in other cases, management’s judgment is required in the selection of the most appropriate alternative among the available accounting principles, that allow different accounting treatment for similar transactions.

 

We believe that the accounting policies discussed below are critical to our financial results and to the understanding of our past and future performance, as these policies relate to the more significant areas involving management’s estimates and assumptions. We consider an accounting estimate to be critical if (1) it requires us to make assumptions because information was not available at the time or it included matters that were highly uncertain at the time we were making our estimate; and (2) changes in the estimate or different estimates that we could have selected may have had a material impact on our financial condition or results of operations.

 

Revenue recognition

 

As described in Note 3M to our audited consolidated financial statements for the year ended December 31, 2016 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.

 

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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.

 

Regarding the implementation and impact of IFRS 15, Revenue from contracts with customers, see Note 3S(2) to our audited consolidated financial statements for the year ended December 31, 2016 included elsewhere in this annual report.

 

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 general and administrative 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.

 

Property, plant and equipment

 

Property, plant and equipment represent a significant proportion of our assets, constituting 35.3% of total assets as of December 31, 2016 as compared to 34.3% in 2015. 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 15.1% of our total property, plant and equipment as of December 31, 2016.

 

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 models of cylinders 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.

 

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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.

 

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 2016, total share-based compensation expense amounted to $4.8 million.

 

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The fair value of share-based compensation for non-market conditions 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 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.

 

We estimate the fair value of our awards with market conditions using a Monte Carlo simulation in order to take into account the probability of satisfying the market condition. This approach involves generating random stock price paths through a lattice type structure. Each path results in a certain financial outcome, such as accelerated vesting or specific option payout. We make this estimate using the conditions that exist at the grant date. The derived service period, which may be the requisite service period, is also determined at this time. Compensation cost for our awards with a market condition is recognized ratably using the accelerated attribution method if the award is subject to graded vesting over the requisite service period. The compensation cost for our awards with a market condition is not reversed if the market condition is not satisfied. We have estimated the expected term of the awards granted to our chief executive officer which were approved in December 2015 based on the contractual term of such awards.

 

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

 

We have not applied any new standards and amendments to standards, including any consequential amendments to other standards, as of January 1, 2016.

 

B.Liquidity and Capital Resources

 

Our cash requirements have principally been for working capital and capital expenditures. Working capital decreased by $15.9 million to $124.8 million as of December 31, 2016 from $140.7 million as of December 31, 2015. The decrease in working capital was mainly due to a decrease in inventories, which decreased by $25.0 million to $88.0 million as of December 31, 2016 from $113.0 million as of December 31, 2015. 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. In 2015, we also funded a portion of our capital investments with long-term loans. Our capital investments have included the following: completion of the ramp-up of the Lehavim facility and the new logistics center on the Lehavim site as well as the progress achieved in the construction of our new administration building on the Lehavim site; 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 three to four 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.

 

Based on our current business plan, we believe that our cash, cash equivalents, borrowings available under our short-term credit facilities and cash flows 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.

 

Working capital is defined as (i) total current assets, excluding cash and cash equivalents and bank deposits, minus (ii) total current liabilities, excluding loans and borrowings.

 

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)  2014   2015   2016 
Net cash from operating activities  $35,585   $40,008   $81,932 
Net cash used in investing activities   (59,974)   (48,730)   (33,081)
Net cash from (used in) financing activities   32,278    (1,848)   (32,781)

 

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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 increased by $41.9 million to $81.9 million in 2016 from $40.0 million in 2015. The increase in the operating cash flow was primarily due to net income in 2016, which increased by $32.4 million to $44.5 million, from $12.1 million in 2015. Adjustments to net income for non-cash items increased by $7.7 million to $34.3 million in 2016 from $26.6 million in 2015 and included $16.0 million depreciation of property, plant and equipment, which increased by $2.8 million from $13.2 million in 2015. The 2015 operating cash flow included an exceptional $6.9 million adjustment for non-cash restructuring costs. Working capital changes added $9.0 million to the operating cash flow in 2016, primarily due to inventory reduction of $22.4 million resulting from the transfer of production to our new factory in Lehavim and other inventory management optimization activities.

 

Cash flow from operating activities was $40.0 million in 2015 as compared to cash flow from operating activities of $35.6 million in 2014. This was primarily due to a decrease in net cash outflows to working capital by $19.5 million to a net cash inflows to working capital of $7.2 million in 2015 from a net cash outflow to working capital of $12.3 million in 2014, partially offset by a decrease in adjustments to net income for a non-cash item of $13.5 million to $26.6 million in 2015 from $40.1 million in 2014 and a decrease in net income of $0.2 million to $12.1 million in 2015 from $12.3 million in 2014. Adjustments to net income for non-cash items decreased in 2015 as compared to 2014 primarily due to lower restructuring costs and impairment of goodwill and other intangible assets offset by an increase in share-based payments expenses. The decrease in cash outflows related to working capital was primarily driven by a decrease in inventory of $19.9 million and in trade payables and other current liabilities by $24.7 million in 2015 compared to a $12.7 million increase in inventory and $22.1 million decrease in trade payables and other current liabilities in 2014, partially offset by a decrease in trade and other receivables of $12.2 million in 2015 compared to a $21.5 million increase in 2014.

 

Cash used in investing activities

 

Cash used in investing activities decreased by $15.6 million to $33.1 million in 2016 from $48.7 million in 2015, primarily due to the reduced capital expenditures needed for the construction of the Lehavim facility as a result of the near completion of the project.

 

Cash used in investing activities decreased by $11.3 million to $48.7 million in 2015 from $60.0 million in 2014, primarily as a result of lower capital expenditures in connection with the construction and ramp-up of the Lehavim facility.

 

The majority of our capital expenditures have historically been related to the purchase of machinery and equipment and information technology, however, in 2014, 2015 and 2016, a material portion of our capital expenditures was related to the construction and the ramp-up of the Lehavim facility and to the construction of our new logistics center and new administration building on the Lehavim site. In order to support our business, we intend to continue to invest in production machinery and equipment, and information technology infrastructure in 2017 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.

 

Cash from (used in) financing activities

 

Cash used in financing activities was $32.8 million in 2016 as compared to cash used in financing activities of $1.8 million in 2015. This change was mainly due to repayments of debt in the amount of $34.2 million in 2016 under long-term loans taken from banks in Israel in prior years, compared to repayments of $16.2 million in 2015. As of December 31, 2016, we did not have any long-term loans outstanding compared to long-term loans taken from banks in Israel in the amount of $10.0 million in 2015.

 

Cash used in financing activities was $1.8 million in 2015 as compared to cash used in financing activities of $32.3 million in 2014. This change was mainly due to long-term loans taken from banks in Israel in the amount of $10.0 million in 2015, compared to $49.3 million taken in 2014, offset by repayments of long-term debt of $16.2 million in 2015 as compared to repayments of short-term debt of $15.5 million in 2014.

 

Credit facilities

 

Long-term and short-term debt

 

As of December 31, 2016, we did not have any long-term debt.

 

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As of December 31, 2016, we had short-term credit facilities with a total borrowing capacity of $11.0 million, of which none was outstanding as of such date. In addition, as at December 31, 2016, we entered into agreements in principle with financial institutions to receive additional credit in the total amount of up to $47.0 million. As at December 31, 2016, no debt was outstanding in connection with such agreements in principle.

 

Capital expenditures

 

Our capital expenditures in 2016 and 2015 amounted to $28.0 million and $53.7 million, respectively. The decrease in capital expenditures in 2016 as compared to 2015 was mainly due to the completion of the ramp-up of the Lehavim facility and the new logistics center on the Lehavim site. We anticipate our capital expenditures in 2017 to primarily be related to the construction of a new facility for the production of flavors and the completion of the construction of our new administration building on the Lehavim site, expansion of our production capacity and capabilities, investments in developing new products and improvements in our information technology systems. The Lehavim facility houses various manufacturing functions, including metals (such as cylinder manufacturing and cylinder retesting), CO2 refills, plastic injection, bottle blowing and printing, machining and assembly. The Lehavim facility is situated in an industrial park that is located in a specified development zone. We have received and 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 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” 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, 2016 to December 31, 2016 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.

 

F.Contractual Obligations

 

Our significant contractual obligations and commitments as of December 31, 2016 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  $5,455   $5,516   $1,406   $-   $12,377 
Purchase obligations   29,818    -    -    -    29,818 
Total  $35,273   $5,516   $1,406   $-   $42,195 

 

The above table does not include obligations in respect of long-term employee benefits in the amount of $2.3 million as of December 31, 2016.

 

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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 1, 2017:

 

Name   Age   Position
Executive officers        
Daniel Birnbaum   54   Chief Executive Officer and Director
Daniel Erdreich   53   Chief Financial Officer
Eyal Shohat   43   Chief Corporate Development Officer
Matti Yahav   40   Vice President, Global Marketing
Galit Zucker   47   Chief People Officer
Directors        
Stanley Stern (1) (2) (3)   59   Chairman
Lauri A. Hanover (1) (2) (4)   57   Director
David Morris (1) (2) (3)   47   Director
Jonathan Kolodny (1)   47   Director
Richard Hunter (1) (4)   47   Director
Avishai Abrahami (1)   45   Director
Yehezkel (Chezy) Ofir (1) (3) (4)   65   Director
Torsten Koster (1) (4)   48   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.

 

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 company, 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 a B.A. from The Hebrew University of Jerusalem and an M.B.A. from Harvard Business School.

 

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 TASE. 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.

 

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 TASE and the London Stock Exchange. 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.

 

Matti Yahav has served as our Vice President, Global Marketing since June 2015. Mr. Yahav joined us in January 2015 and served as our Product Marketing Director. From 2008 to 2014, Mr. Yahav worked at Osem-Nestle in various marketing roles, including Marketing Manager and Brand Manager. Mr. Yahav holds a B.A. in Economics and Management from the Academic College of Tel Aviv - Yaffo and an M.B.A. from Tel Aviv University.

 

Galit Zucker has served as our Chief People Officer since November 2016. Prior thereto, Ms. Zucker served as Head of Global Delivery, Human Resources at Amdocs Ltd. (Nasdaq: DOX) from March 2013 to October 2016. From October 2010 to December 2012, Ms. Zucker served as Head of Learning and Organizational Development at Better Place Ltd., and from September 2009 to October 2010, as Director of Human Resources, Customer Service Division at Bezeq International Ltd. Prior to that, from 1999 to 2004, she served as Manager of Human Resources at Cellcom Ltd. (NYSE: CEL). Ms. Zucker holds a B.A. in Economics and Business Administration from Bar-Ilan University.

 

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Directors

 

Stanley Stern has served as a member of our board of directors since February 2015 and as Chairman of our board of directors since December 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), Ormat Technologies, Inc. (NYSE:ORA), Ekso Bionics (OTCQB:EKSO) and Tigo Energy, Inc. Mr. Stern has over 30 years of experience as an investment banker, holding positions at Salomon Brothers, C.E. Unterberg, STI Ventures, and between 1982 and 1999, and again between 2004 and 2013, at Oppenheimer & Co., including as Managing Director and Head of Investment Banking, Head of Technology, Israeli Banking and Financial Institutions Groups (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.

 

Lauri A. Hanover has served as a member of our board of directors since November 2010. Since August 2013, Ms. Hanover has served as Vice President and 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.

 

Jonathan Kolodny has served as a member of our board of directors since December 2015. Mr. Kolodny has served as Chief Executive Officer of Keter Plastic Ltd. since October 2016. Prior to that, from 2013 to 2016, he served as Chief Executive Officer of Jardin International Holding of the Keter Group. Between 1994 and 2013, Mr. Kolodny held various positions at McKinsey & Company, including as a Director and Senior Partner from 2007 until 2013. Mr. Kolodny received a B.A. in Computer Science from Harvard College and a Ph.D. in Cognitive Neuroscience from the University of Cambridge.

 

Richard Hunter has served as a member of our board of directors since December 2015. Mr. Hunter has served as Chairman of Holmes Place International, a European health club operator, since 2012, a director of Gad Dairy, an Israeli dairy, since 2016 and SuperCofix, an Israeli discount supermarket chain, since 2016. In 2013, Mr. Hunter co-founded Green Lantern, a private equity firm focusing on investments in consumer packaged goods businesses. In addition, from 2012 to 2015, Mr. Hunter has served as Chief Executive Officer of McCann Tel Aviv, an advertising, media, and digital agency. From 2010 to 2012, Mr. Hunter served as Chief Operating Officer of Shufersal, one of Israel’s largest supermarket chains. Prior to that, from 2007 to 2010, he served as Chief Executive Officer of 013 Netvision, an Israeli telecommunications company. From 1999 to 2007, Mr. Hunter held various positions at McKinsey & Company, including Partner, where he focused on retail and consumer packaged goods (CPG). Mr. Hunter received an LL.B. from the College of Management in Tel Aviv, and an M.B.A. from INSEAD in Fontainebleau, France.

 

Avishai Abrahami has served as a member of our board of directors since May 2016. Mr. Abrahami is the co-founder of Wix.com Ltd. (Nasdaq:WIX), where he has served as the Chief Executive Officer since September 2010 and as a director since 2006. He also served as Chairman of the board of directors of Wix from November 2013 until February 2016 and as Co-Chief Executive Officer from 2006 until 2010. From 2004 to 2006, Mr. Abrahami was the Vice President of strategic alliances at Arel Communications and Software Ltd. In 1998, Mr. Abrahami co-founded Sphera Corporation, a company which develops software for managing data centers, and served as its Chief Technology Officer from 1998 until 2000 and as its Vice President of product marketing from 2000 until 2003. In 1993, he co-founded AIT Ltd., a software company, and served as its Chief Technology Officer until the company’s sale in 1997.

 

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Professor Yehezkel (Chezy) Ofir has served as a member of our board of directors since May 2016. Professor Ofir has over 30 years of business consulting experience and, over the past 25 years, served as a director at various companies, including as an external director of Adama Agricultural Solutions Ltd. from 2012 until 2015, as a director at Shufersal Ltd. (TASE: SAE) from 2004 to 2010, and as a director at Alon Blue Square Israel Ltd. (formerly, Blue Square Israel) from 1995 until 2001. He has served as a director at Micronet Enertec Technologies, Inc. (Nasdaq:MICT) since April 2013 and also serves as acting Chairman of the Board of Directors of the Israeli Postal Bank Company Ltd. Professor Ofir is a faculty member at The Hebrew University of Jerusalem. Professor Ofir holds a B.Sc. and an M.Sc. in Industrial Engineering from Ben Gurion University and a Ph.D. and an M.Phil. in Business Administration from Columbia University.

 

Torsten Koster has served as a member of our board of directors since December 2016. Mr. Torsten has served as a member of the board of directors of Banque Heritage in Geneva, Switzerland since April 2016. From March to October 2015, Mr. Koster served as group Chief Financial Officer of Nestlé Skin Health S.A. From March 2011 to March 2015, he served as group Chief Financial Officer of Nestlé Nespresso S.A. From March 2007 to March 2011, Mr. Koster served as Chief Financial Officer of Nestlé Russia and Eurasia. From June 2006 to March 2007, he served as Finance Project Manager of Nestlé S.A. (VX:NESN) and, prior to that, he served as its Deputy Head Of Internal Audit from August 2003 to June 2006. Mr. Koster served as Chief Financial Officer of ELCA Informatique S.A. from 2000 to 2003 and as Chief Financial Officer of Lukoil S.A. from 1998 to 2000. Between 1991 and 1999, Mr. Koster served in various finance positions at Nestlé S.A. Mr. Koster holds an M.B.A. from HEC – Université de Lausanne.

 

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, 2016, was approximately $6.2 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 (including via remote communication) and a fee of $250 per written consent of the board or a committee thereof. The chairman of our board of directors receives an annual cash retainer of $60,000. We also reimburse our directors for expenses arising from their board membership. Of our current non-employee directors, each of Ms. Hanover and Mr. Morris was 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 and in December 2013, was granted options to purchase 20,000 of our ordinary shares, at an exercise price of $52.24 per share. All of such options have vested. Of our current non-employee directors, in December 2015, Messrs. Stern, Kolodny and Hunter were each granted options to purchase 30,000 of our ordinary shares, at an exercise price of $15.49, $15.00 and $15.00 per share, respectively. One third of such options have vested and the remainder will vest in equal installments in November 2017 and November 2018. Our board of directors has approved grants of options to purchase 30,000 of our ordinary shares to each of Messrs. Abrahami, Ofir and Koster at an exercise price of $14.73, $14.73 and $40.97 per share, respectively. Such grants are subject to shareholder approval, which as of the date of this annual report, has not been received.

 

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

 

Summary compensation table

 

The below table presents the compensation, on an individual basis, of our five most highly compensated office holders with respect to the year ended December 31, 2016 as required by regulations promulgated under the Companies Law.

 

All amounts set forth in the below table are in U.S. dollars and, except as otherwise indicated, represent the cost to our company, as recognized in our audited consolidated financial statements for the year ended December 31, 2016.

 

Name and Position  Salary(1)   2016 Annual
Bonus(2)
   Equity-Based
Compensation(3)
   Total 
Daniel Birnbaum
Chief Executive Officer
   451,444    365,344(4)   1,882,801    2,699,589 
Daniel Erdreich
Chief Financial Officer
   342,892    117,432    399,653    859,977 
Eyal Shohat
Chief Corporate Development Officer
   256,609    117,432    267,339    641,380 

Amir Eyal

Chief Operations Officer(5)

   284,903    -    187,086    471,989 
Matti Yahav
Vice President, Global Marketing
   176,498    86,117    123,469    386,084 

 

(1)Amounts reported in this column include salary, social benefits and perquisites, including those mandated by applicable law.
(2)The payment of the bonus amount is subject to our revised compensation policy being ratified.
(3)Amounts reported in this column represent the expense recorded in our audited consolidated financial statements for the year ended December 31, 2016 based on the grant date fair value in accordance with accounting guidance for share-based payment. See Notes 3K(5), 4D and 26 to our audited consolidated financial statements for the year ended December 31, 2016.
(4)Does not include the Deferred Conditional Bonus Amount. For details, see “— Certain arrangements with Daniel Birnbaum” below.
(5)Mr. Eyal ceased serving in the capacity of our Chief Operations Officer in 2017.

 

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Certain arrangements with Daniel Birnbaum

 

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, our shareholders approved, 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.

 

In April 2016, Mr. Daniel Birnbaum unilaterally notified us that 50% of the 2015 annual bonus amount to which he was entitled under the terms of the annual cash bonus plan for our chief executive officer for 2015 and 50% of the bonus amount to which he was entitled under the four-year long-term incentive plan for our chief executive officer that was adopted in December 2012, in the aggregate amount of $726,870 (the “Deferred Conditional Bonus Amount”) shall, subject to certain conditions, be deferred and only be payable if we achieve a performance condition that our operating income for the year ending December 31, 2016, as disclosed in our consolidated financial results for the year ending December 31, 2016 on Form 6-K, equals or exceeds the targeted amount set forth in our annual budget approved by our board of directors (excluding expenses resulting from exceptional non-recurring events). The Deferred Conditional Bonus Amount was recognized in our audited consolidated financial statements in 2014 and 2015. The performance condition was achieved and the Deferred Conditional Bonus Amount was paid to Mr. Birnbaum in 2017.

 

On December 22, 2015, our shareholders approved a grant of options to purchase 600,000 of our ordinary shares to Mr. Birnbaum with an exercise price of $15.00 per share. 300,000 of the options vested as of the date of grant; 150,000 of the options vested in November 2016, and are exercisable; and 150,000 of the options vest in November 2017, provided, however, that such options shall only become exercisable if at any time following November 26, 2017, the closing price of our ordinary shares for any five consecutive trading days exceeds $27.00.

 

On December 22, 2015, our shareholders also approved, in the event of a “strategic investment” (as defined below), a one-time grant of options to Mr. Birnbaum to purchase 100,000 of our ordinary shares, provided that Mr. Birnbaum is serving as our chief executive officer at the time of the closing of the strategic investment. Such options, if granted, will vest over three years as follows: 33,333 options will vest on the first year anniversary of the closing of the strategic investment and the remainder will vest at the end of each three-month period over the second and third year following the closing of the strategic investment. The exercise price of such options will equal the price paid by the investor at the closing of the strategic investment for one of our shares. A “strategic investment” means an investment in shares of the Company by a third party who is not a director or officer of the Company or an affiliate of any of the foregoing, in a transaction or a series of related transactions, in the aggregate amount of not less than $25.0 million and regarding which, in the reasonable judgment of our board of directors, the identity of such investor or such investor would make a contribution to the prospects of the Company beyond the actual sum for the purchase of the shares of the Company.

 

Our shareholders also approved, in the event of a strategic investment, that a one-time cash bonus be paid to Mr. Birnbaum in an amount equal to 1.0% of the cash amount invested by the investor at the closing of the strategic investment, up to a maximum bonus amount of $500,000, provided that Mr. Birnbaum is serving as our chief executive officer at the time of the closing of the strategic investment.

 

Companies Law requirements

 

Pursuant to the Companies Law, the compensation (including insurance, indemnification and exculpation) 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

 

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  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, subject to certain exceptions, to be approved first by the compensation committee; second by the company’s board of directors; and third, if such compensation arrangement is inconsistent with the company’s stated compensation policy, the company’s shareholders provided that either:

 

  a majority of the shares held by shareholders who are not controlling shareholders and do not have a personal interest in such matter and who are present and voting at the meeting are voted in favor of approving the compensation package, excluding abstentions; or

 

  the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in such matter voting against the compensation package does not exceed 2% of the aggregate voting rights in the company.

 

Under the 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. With regards to an office holder who is neither a director nor the chief executive officer, an existing compensation arrangement may be amended with the approval of the chief executive officer, so long as the amendment is not material and is consistent with the company’s stated compensation policy and that such approval method is provided for in the company’s stated compensation policy. 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 Plan”) and, in October 2010, we adopted the 2010 Employee Share Option Plan (the “2010 Plan”, and together with the 2007 Plan, 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 who our compensation committee considers valuable to us. The ESOP is intended to benefit us by enhancing our ability to attract and retain qualified 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 and restricted share units that were granted under the ESOP. As of December 31, 2016, no ordinary shares remained available for new equity awards under the 2007 Plan and 550,414 ordinary shares remained available for new equity awards under the 2010 Plan. As of December 31, 2016, options to purchase 1,430,111 ordinary shares had been granted and were outstanding under the ESOP, at a weighted average exercise price of $19.07 per share and restricted share units to purchase 90,776 ordinary shares were outstanding. Of these outstanding awards, as of December 31, 2016, options to purchase 1,019,031 ordinary shares were vested and exercisable.

 

The vesting schedules for equity awards granted under the ESOP generally provide that 25% or 33.3% of the equity awards will vest one year after the date of grant and the remainder will vest in equal portions at the end of each three-month period thereafter over four or three years, respectively. The equity awards granted as of February 23, 2012, will expire 10 years after the date of grant. Equity awards granted on or after February 23, 2012, but prior to February 26, 2013, will expire six years after the date of grant. Equity awards granted on or after February 26, 2013 generally expire five years after the date of grant if not exercised earlier. In general, when a grantee’s employment or service with us terminates, his or her equity awards will no longer continue to vest following termination, and the holder may exercise any vested equity awards for a period of 180 days following termination without cause. If a grantee’s employment with us terminates due to disability or if the termination of employment results from his or her death, then the grantee or his or her estate (as applicable) generally has 12 months to exercise the equity award; however, the equity award may not be exercised after its scheduled expiration date. If termination of employment results from the dismissal of the grantee for cause, his or her outstanding equity awards will expire upon termination.

 

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

 

The exercise prices, if applicable, is determined by the compensation committee and specified in each award agreement. In general, the exercise price for options is the fair market value of our shares on the date of grant as determined in good faith by our board of directors.

 

We have elected to issue our options, restricted share units 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, restricted share units and shares granted or issued 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, restricted share units or shares.

 

Our compensation committee administers the ESOP. However, our board of directors has residual authority to exercise any powers or duties of the compensation committee concerning the ESOP. The compensation committee determines the eligible individuals who receive equity awards under the ESOP, the number of ordinary shares covered by those equity awards, the terms under which such equity awards may be exercised and the other terms and conditions of the equity awards, all in accordance with the provisions of the ESOP.

 

Participants in the ESOP may not transfer their equity 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 equity 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 equity awards will be replaced by equally ranking equity awards of the successor company. If the successor company refuses to issue replacement equity awards, the vesting and exercisability of outstanding equity 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 or shares. In the event that a proposal for liquidation is submitted to shareholders, certain award holders will also be entitled to exercise their awards during a 10-day period to participate in a liquidation distribution. In the event of a change of control in the company, options granted to our executive officers, including our chief executive officer, may be accelerated and become exercisable as at the date on which the change of control will become effective.

 

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 directors and 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.”

 

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, 2016:

 

Name (Title)  Number of Option(s)   Exercise Price   Expiration Date  Total Shares
Underlying
Options
 
Daniel Birnbaum,   210,000(1)  $20.00    Nov. 2, 2020    210,000(1)
Chief Executive Officer and Director                  
                   
    600,000   $15.00   Nov. 26, 2020   600,000 
                 810,000 

 

(1) Exercised subsequent to December 31, 2016.

 

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C.Board Practices

 

Board of directors and officers

 

Our board of directors currently consists of nine directors.

 

Our articles of association provide that we may have between five and nine directors. Removal of any director shall be upon the vote of the holders of two-thirds of our voting shares, except as provided by applicable law.

 

Under our articles of association, our directors are divided into three classes (other than the external directors, if applicable; see — “External directors”). 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 external directors when applicable). 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. Daniel Birnbaum, Mr. Jonathan Kolodny and Mr. Torsten Koster, will hold office until our annual meeting of shareholders to be held in 2017. Class II directors, consisting of Ms. Lauri Hanover, Mr. Stanley Stern and Mr. Avishai Abrahami, will hold office until our annual meeting of shareholders to be held in 2018. Class III directors, consisting of Mr. David Morris, Mr. Richard Hunter and Prof. Yehezkel (Chezy) Ofir, will hold office until our annual meeting of shareholders to be held in 2019. 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, including if the number of directors then in office is less than five. 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.

 

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. 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. External directors must meet certain independence criteria to ensure that they are unaffiliated with the company and its controlling shareholder, as well certain other criteria. External directors are elected for three-year terms in accordance with specific rules set forth in the Companies Law and the regulations promulgated thereunder and may be removed from office only under limited circumstances. Under the Companies Law, each committee of a company’s board of directors that is authorized to exercise powers of the board of directors is required to include at least one external director, and all external directors must be members of the company’s audit committee and compensation committee.

 

Pursuant to regulations promulgated under the Companies Law, companies with shares traded on a U.S. stock exchange, including the Nasdaq Global Select Market, may, subject to certain conditions, “opt out” from the Companies Law requirements to appoint external directors and related Companies Law rules concerning the composition of the audit committee and compensation committee of the board of directors. In accordance with these regulations, we elected to “opt out” from the Companies Law requirements to appoint external directors and related Companies Law rules concerning the composition of the audit committee and compensation committee of the board of directors.

 

Under these regulations, the exemptions from such Companies Law requirements will continue to be available to us so long as: (i) we do not have a “controlling shareholder” (as such term is defined under the Companies Law), (ii) our shares are traded on a U.S. stock exchange, including the Nasdaq Global Select Market, and (iii) we comply with the director independence requirements, the audit committee and the compensation committee composition requirements, under U.S. laws (including applicable Nasdaq Rules) applicable to U.S. domestic issuers.

 

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Audit committee

 

Under the Companies Law, the board of directors of any public company must appoint an audit committee. Our audit committee consists of Ms. Hanover and Messrs. Hunter, Ofir and Koster. The chairperson of the audit committee is Ms. Hanover.

 

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. Our board of directors has determined that each member of our audit committee is independent as such term is defined in Rule 10A-3 under the Exchange Act, and that each member of our audit committee satisfies the additional requirements applicable under the Nasdaq Rules to members of audit committees.

 

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.

 

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

 

  establishing procedures for the handling of employees’ complaints as to the management of our business and the protection to be provided to such employees.

 

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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. Stern, and Morris. The chairperson of the compensation committee is Ms. Hanover.

 

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 and approved an amendment thereto at our annual general meeting of shareholders held in December 2015. 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 and who are present and voting (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. Our board of directors has approved a revised compensation policy, which is subject to ratification by our shareholders. Under the Companies Law, subject to certain conditions, the board of directors may ratify the compensation policy even if it is not ratified 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.

 

Our board of directors has determined that each member of our compensation committee is 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 Messrs. Stern, Ofir, and Morris.

 

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;

 

  reviewing developments relating to corporate governance issues;

 

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  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.

 

Our board of directors has determined that each member of our nominating and governance committee is 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. Ilana Shchory serves as our internal auditor. Ms. Shchory is a certified internal auditor and a certified public accountant and serves as a partner of the Israeli accounting firm of Barzily & Co.

 

Fiduciary duties and approval of specified related party transactions under Israeli law

 

Fiduciary duties of office holders

 

The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company.

 

The duty of care of an office holder is based on the duty of care set forth in connection with the tort of negligence under the Israeli Torts Ordinance (New Version), 5728-1968. This duty of care requires an office holder to act with the degree of proficiency with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of care includes a duty to use reasonable means, in light of the circumstances, to obtain:

 

  information on the advisability of a given action brought for his or her approval or performed by virtue of his or her position; and

 

all other important information pertaining to these actions.

 

The duty of loyalty requires an office holder to act in good faith and for the benefit of the company, and includes the duty to:

 

  refrain from any act involving a conflict of interest between the performance of his or her duties in the company and his or her other duties or personal affairs;

 

  refrain from any activity that is competitive with the business of the company;

 

  refrain from exploiting any business opportunity of the company for the purpose of gaining a personal 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 a transaction 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 who grants a voting proxy or the interest of the proxy holder (whether or not the person granting the proxy has a personal interest), in each case, whether or not the proxy holder has discretion how to vote on 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 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, subject to certain exceptions, shareholders by an 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.

 

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.

 

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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 and arrangements with a controlling shareholder or his or her relative, or with directors or office holders, which would otherwise require approval of a company’s shareholders, may be exempt from shareholder approval under certain conditions.

 

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.

 

Approval of private placements

 

Under the Companies Law, a significant private placement of securities requires approval by the board of directors and shareholders. A private placement is considered a significant private placement if it will cause a person to become a controlling shareholder or if:

 

  the securities issued amount to 20% or more of the company’s outstanding voting rights before the issuance;

 

  some or all of the consideration is other than cash or listed securities or the transaction is not on market terms; and

 

  the transaction will increase the relative holdings of a shareholder who holds 5% or more of the company’s outstanding share capital or voting rights or that will cause any person to become, as a result of the issuance, a holder of more than 5% of the company’s outstanding share capital or voting rights.

 

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 breach of the duty of care with respect to a 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 pursuant to an undertaking made in advance of an event or following an event, provided a provision authorizing such indemnification is contained in its articles of association:

 

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  financial liability imposed on him or her in favor of another person pursuant to a judgment, settlement or arbitrator’s award approved by a court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such an undertaking must be limited to events which, in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking shall detail the abovementioned events and amount or criteria;

 

  reasonable litigation expenses, including attorneys’ fees, incurred by the office holder as (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, we are not aware of any pending or threatened litigation or proceeding involving any of our directors or officers in which indemnification is sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.

 

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.

 

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D.Employees

 

As of December 31, 2016, we had 2,194 employees of whom 1,625 were based in Israel, 134 were in Germany, 152 were in the Netherlands, 106 were in the United States and 177 were in other countries. Of the total number of employees, approximately 508 were temporary employees (most of whom worked at our manufacturing facilities).

 

The breakdown of our employees by main category of activity is as follows: 

 

   As of December 31, 
Main Category of Activity  2014   2015   2016 
Operations, product development and innovation   1,722    1,472    1,709 
Sales and marketing   374    299    301 
General and administration   197    160    157 
Management   21    19    27 
Total   2,314    1,950    2,194 

 

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 and Industry 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 Israeli subsidiary’s employees at our Lehavim facility have joined the Histadrut (General Federation of Labor in Israel). In accordance with applicable law, we have commenced negotiations with the committee and the Histadrut with respect to entering into a collective bargaining agreement. In the course of such negotiations, the employees’ committee has the right to issue a dispute notice to us, which under Israeli law would permit the employees to initiate a work stoppage not earlier than 15 days following the date of the notice. In March 2017, the employees’ committee issued a dispute notice to us. As of the date of this annual report, the 15-day period has not lapsed, and while negotiations with the employees’ committee and the Histadrut are continuing, we cannot predict whether or not a work stoppage will be initiated in connection with such dispute notice. Depending on the course of negotiations with the committee and the Histadrut, we could incur increased operational costs and/or experience work stoppages, which could adversely affect our business, financial condition and results of operations. See “Item 3.D. — Risk Factors — Our employees at our Lehavim facility in Israel have recently joined the Histadrut (General Federation of Labor in Israel) and established an employees’ committee. We have commenced negotiations with the Histadrut and employees’ committee that could cause us to incur additional labor costs or experience work stoppages.”

 

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 1, 2017 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.

 

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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 1, 2017. 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.

 

For the purpose of calculating the percentage of shares beneficially owned by any shareholder, this table lists applicable percentage ownership based on 21,697,861 ordinary shares outstanding as of March 1, 2017.

 

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 power 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 7019900, Israel.

 

Name of Beneficial Owner  Shares Beneficially Owned 
   Number   Percentage 
Real Property International Limited (1)   1,267,008    5.8%
Executive officers and directors          
Stanley Stern   *    * 
Lauri A. Hanover   *    * 
David Morris (2)   *    * 
Jonathan Kolodny   *    * 
Yehezkel (Chezy) Ofir   -    - 
Richard Hunter   -    - 
Avishai Abrahami   -    - 
Torsten Koster   -    - 
Daniel Birnbaum (3)   543,420    2.5%
Daniel Erdreich   *    * 
Eyal Shohat   *    * 
Matti Yahav   *    * 
Galit Zucker   -    - 

All executive officers and directors as a group (13 persons) (4)

   696,541    3.1%

 

 

* Less than 1%. 

 

  (1) Based on a Schedule 13G/A filed with the SEC on February 14, 2017 and information provided by the shareholder to the Company. Includes 543,842 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 late father of David Morris, one of our directors. The principal address of Real Property International Limited is 237 Main Street, Gibraltar, GX11 1AA and the principal address of Real Property Investment (Guernsey) Limited is PO Box 119, Martello Court, Admiral Park, St. Peter Port, Guernsey, GY1 3HB.
  (2) The address for Mr. Morris is c/o KDM Partners LLP, Farley Court, Second Floor, Allsop Place, London, NW1 5LG.
  (3) Consists of 93,420 shares purchased in open market transactions and options to purchase 450,000 shares which are currently exercisable or exercisable within 60 days of March 1, 2016.
  (4) Consists of 97,088 shares, options to purchase 597,866 shares and 1,587 restricted share units which are currently exercisable or have vested or exercisable or will become vested within 60 days of March 1, 2016.

 

Significant changes in the ownership of major shareholders

 

On February 5, 2014, Real Property International Limited and its affiliates filed a Schedule 13G/A with the SEC stating that it beneficially owned 1,508,258 ordinary shares. On February 11, 2015, Real Property International Limited and its affiliates and filed a Schedule 13G/A with the SEC stating that it beneficially owned 1,270,008 ordinary shares. Based on a Schedule 13G/A filed with the SEC on February 14, 2017 and information provided by the shareholder to the Company, Real Property International Limited and its affiliates beneficially owned 1,267,008 ordinary shares.

 

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Based on a Schedule 13G/A filed with the SEC on February 21, 2017, Teleios Capital Partners GmbH 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 14, 2017, Nantahala Capital Management, LLC ceased to be the beneficial owner of 5% or more of our ordinary shares.

 

Shareholders of record

 

As of March 1, 2017, we had four shareholders of record of our ordinary shares, all of which were located in the United States. 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

 

The following is a description of material transactions, or series of related material transactions, since January 1, 2016, to which we were or will be a party and in which the other parties included or will include our directors, executive officers, holders of 10% or more of our voting securities or any member of the immediate family of any of the foregoing persons.

 

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. 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

 

Since our IPO, we have not distributed our net income as dividends to our shareholders but rather re-invested such income in our business. We do not currently anticipate that we will pay any dividends to holders of our ordinary shares in the foreseeable future. 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 a 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, 2016, 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, 2012          
Annual  $28.28   $48.13 
Year Ended December 31, 2013          
Annual  $45.25   $77.80 
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 
Year Ended December 31, 2015          
Annual  $11.40   $24.38 
First Quarter  $16.80   $20.61 
Second Quarter  $17.42   $24.38 
Third Quarter  $11.40   $21.50 
Fourth Quarter  $13.38   $17.99 
Year Ended December 31, 2016          
Annual  $11.66   $41.33 
First Quarter  $11.66   $16.15 
Second Quarter  $13.63   $22.43 
Third Quarter  $20.78   $30.70 
Fourth Quarter  $23.77   $41.33 
Most Recent Quarter and Six Months          
First Quarter 2017 (through March 1, 2017)  $38.36   $51.25 
October 2016  $23.77   $26.93 
November 2016  $24.85   $37.08 
December 2016  $35.84   $41.33 
January 2017  $38.36   $44.10 
February 2017  $43.31   $51.25 
March 2017 (through March 1, 2017)  $49.27   $50.15 

 

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On March 1, 2017, the last reported sale price of our ordinary shares on the Nasdaq Global Select Market was $49.92 per share.

 

Our ordinary shares have been listed on the TASE under the symbol “SODA” since December 15, 2015. The following table sets forth for the periods indicated the high and low sales prices per ordinary share as reported on the TASE:

 

    Low     High  
Year Ended December 31, 2016 (since December 15, 2015)                
Annual   NIS 46.84     NIS 159.90  
First Quarter   NIS 46.84     NIS 64.00  
Second Quarter   NIS 51.60     NIS 85.43  
Third Quarter   NIS 79.55     NIS 116.90  
Fourth Quarter   NIS 92.65     NIS 159.90  
Most Recent Quarter and Six Months                
First Quarter 2017 (through March 1, 2017)   NIS 145.40     NIS 190.90  
October 2016   NIS 92.65     NIS 102.00  
November 2016   NIS 92.67     NIS 146.80  
December 2016   NIS 138.10     NIS 159.90  
January 2017   NIS 145.40     NIS 166.90  
February 2017   NIS 163.60     NIS 190.90  
March 2017 (through March 1, 2017)   NIS 178.40     NIS 182.70  

 

On March 1, 2017, the last reported sale price of our ordinary shares on the TASE was NIS 181.80 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.

 

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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, if applicable, by written ballot. Israeli law does not allow public companies to adopt shareholder resolutions by means of written consent in lieu of a shareholder meeting. Shareholder voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future. The Companies Law provides that a shareholder, in exercising his or her rights and performing his or her obligations toward the company and its other shareholders, must act in good faith and avoid abusing his or her powers including when voting at general meetings on matters such as amending the articles of association, increasing the company’s authorized capital and approving mergers and related party transactions that require shareholder approval. A shareholder also has a general duty to refrain from discriminating against other shareholders. The remedies generally available upon a breach of contract apply in the event of breach of the above mentioned duties, and in the event of harm, other remedies shall also be available to the injured shareholder. In addition, any controlling shareholder, any shareholder who knows that its vote can determine the outcome of a shareholder vote and any shareholder who, under a company’s articles of association, can appoint or prevent the appointment of an office holder or has other power with respect to the company, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty, except to state that the remedies generally available upon a breach of contract will apply also in the event of a breach of the duty to act with fairness. Except as otherwise disclosed in this annual report, an amendment to our articles of association to change the rights of our shareholders requires the prior approval of a simple majority of our shares represented and voting at a general meeting.

 

Share ownership restrictions

 

The ownership or voting of ordinary shares by non-residents of Israel is not restricted in any way by our articles of association or the laws of the State of Israel. 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, if applicable. 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.”

 

In November 2016, we entered into a Support Agreement with Teleios Capital Partners GmbH (“Teleios”), further to which we nominated Mr. Torsten Koster for election as a member of our board of directors at our annual general meeting held in December 2016. Under the agreement, we agreed to nominate Mr. Koster or a different individual designated by Teleios, and reasonably acceptable to our board of directors, at any subsequent annual general meeting occurring within 18 months following the 2016 annual general meeting, provided that Teleios continues to hold at least 2.5% of our outstanding ordinary shares. Under the agreement, Teleios agreed to certain customary standstill provisions for 18 months following the 2016 annual general meeting, including not to participate in any solicitation of proxies, not to form a “group” with any other shareholder, nor to acquire shares in excess of 12.99% of the our outstanding voting securities. In addition, Teleios agreed to abstain or vote against any shareholder proposal that is not supported by our board of directors.

 

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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 thereunder, shareholders entitled to participate and vote at general meetings are the shareholders of record on a date to be decided by the board of directors, which may be between four and 40 days prior to the date of the meeting, 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.”

 

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, if applicable, 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, if applicable, 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.

 

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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 (excluding the offeror, controlling shareholders, holders of 25% or more of the voting rights in the company or anyone on their behalf, or any person having a personal interest in the acceptance of the tender offer, including their relatives and entities controlled by them).

 

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.

 

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.

 

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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.” Pursuant to the Israeli Securities Law, 5728-1968, a company whose shares are traded on the TASE may not have more than one class of shares, except for one additional class of preferred shares which may have a dividend preference but may not have any voting rights.

 

C.Material Contracts

 

We have not been party to any material contracts within the two years prior to the date of this annual report, other than contracts entered into in the ordinary course of business, or as otherwise described in Item 6.B. regarding the 2007 Employee Share Option Plan and the 2010 Employee Share Option Plan and Item 10.B. regarding our agreement with Teleios Capital Partners GmbH.

 

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.

 

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General corporate tax structure in Israel

 

Israeli companies are generally subject to corporate tax at the rate of 24% in 2017 of their taxable income (to be reduced to 23% in 2018 and thereafter). The corporate tax rate for the tax years 2015 and 2016 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.

 

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 and Industry. 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.

 

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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 was changed to 12.5% and 7%, respectively, in 2013, 16% and 9%, respectively, in 2014, 2015 and 2016 and 16% and 7.5%, respectively, in 2017 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 received and 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. If we are found not to have met the required conditions, we may be required to refund the amount of grants received and the amount of any tax benefits, as adjusted by the Israeli consumer price index, and interest. In addition, in order to secure fulfillment of the conditions related to the receipt of grants, a floating lien was registered in favor of the State of Israel on substantially all of the assets of such Israeli subsidiary.

 

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.

 

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 relief is provided under 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 preceding 12 months, the applicable withholding tax rate is 30%. 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.

 

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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 Convention between the Government of the United States of America and the Government of the State of Israel with respect to Taxes on Income (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%, subject to certain conditions. 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.  In general, capital gains accrued by individuals on the sale of shares in an Israeli resident company will be taxed at the rate of 25%. However, if the individual shareholder is a “substantial shareholder” at the time of sale or at any time during the preceding 12-month period, such gain will be taxed at the rate of 30%. 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 (25% in 2016 and 24% in 2017) and the marginal tax rate of up to 48% and 47% for an individual in 2016 and in 2017 and thereafter, respectively).

 

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.

 

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.

 

In transactions involving a sale of all of the shares of an Israeli resident company, such as a merger or other transaction, the Israel Tax Authority may, among other things, require from shareholders who are not liable for Israeli tax to present a declaration in the form specified by that authority confirming their status as non-Israeli residents or an exemption from the Israeli Tax Authority, and, in the absence of such declaration or exemption, may require the purchaser of the shares to withhold taxes. In addition, with respect to mergers involving an exchange of shares, Israeli tax law allows for tax deferral in certain circumstances, but makes the deferral contingent on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions. Moreover, with respect to certain share swap transactions in which the sellers receive shares in the acquiring entity that are publicly traded on a stock exchange, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of such shares has occurred.

 

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Excess Tax

 

Individuals who are subject to tax in Israel, whether an Israeli resident or a non-Israeli resident, are also subject to an additional tax on annual income exceeding NIS 810,720 in 2016 and 640,000 in 2017 and thereafter (linked to the Israeli consumer price index) at a rate of 2% in 2016 and 3% in 2017 and thereafter, 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, 2016. 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 2017 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 close of the taxable year between the fair market value of your ordinary shares and your adjusted tax basis in your ordinary shares. Losses would be allowed only to the extent of net mark-to-market gain previously included by you under the election for prior taxable years. If the mark-to-market election were made, then the PFIC rules described above relating to excess distributions and realized gains would not apply for periods covered by the election. If you do not make a mark-to-market election for the first taxable year in which we are a PFIC during your holding period of our ordinary shares, you would be subject to interest charges with respect to the inclusion of ordinary income attributable to each taxable year in which we were a PFIC during your holding period before the effective date of such election.

 

If we were a PFIC, a holder of ordinary shares that is a U.S. Holder must file United States Internal Revenue Service Form 8621 with respect to the company for each tax year in which the U.S. Holder owns the ordinary shares, generally with such U.S. Holder’s federal income tax return for that year. If we were a PFIC for a given taxable year, then you should consult your tax adviser concerning your annual filing requirements.

 

Backup withholding tax and information reporting requirements

 

United States backup withholding tax and information reporting requirements generally apply to certain payments to certain non-corporate holders of stock. Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, our ordinary shares made within the United States, or by a United States payor or United States middleman, to a holder of our ordinary shares, other than an exempt recipient (including a corporation, a payee that is not a United States person that provides an appropriate certification and certain other persons). A payor will be required to withhold backup withholding tax from any payments of dividends on, or the proceeds from the sale or redemption of, ordinary shares within the United States, or by a United States payor or United States middleman, to a holder, other than an exempt recipient, if such holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from, such backup withholding tax requirements. Any amounts withheld under the backup withholding rules will be allowed as a refund or credit against the beneficial owner’s United States federal income tax liability, if any, provided that the required information is timely furnished to the IRS.

 

Certain U.S. Holders who are individuals (or certain specified entities) are required to report information relating to an interest in our common shares by attaching a complete United States Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, to their tax return for each year in which they hold our common shares, subject to certain exceptions (including an exception for our common shares held in accounts maintained by financial institutions in which case the account may be reportable if maintained by a foreign financial institution). U.S. Holders are urged to consult their tax advisers regarding the effect, if any, of this legislation on their ownership and disposition of our common shares.

 

3.8% Medicare Tax On “Net Investment Income”

 

Certain U.S. Holders who are individuals, estates or trusts are subject to the requirement to pay a 3.8% tax on, among other things, dividends and capital gains from the sale or other disposition of shares of common stock.

 

F.Dividends and Paying Agents

 

Not applicable.

 

G.Statement by Experts

 

Not applicable.

 

H.Documents on Display

 

We are currently subject to the informational requirements of the Exchange Act applicable to foreign private issuers and fulfill the obligations of these requirements by filing reports with the SEC. As a foreign private issuer, we are exempt from the rules under the Exchange Act relating to the furnishing and content of proxy statements, and our officers, directors and 10% shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we intend to file with the SEC, within 120 days after the end of each subsequent fiscal year, an annual report on Form 20-F containing financial statements which will be examined and reported on, with an opinion expressed, by an independent public accounting firm. We also intend to furnish with the SEC reports on Form 6-K containing quarterly unaudited financial information.

 

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You may read and copy any document we file with the SEC without charge at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference room. The SEC also maintains an internet site that contains reports and other information regarding issuers that file electronically with the SEC. Our filings with the SEC are also available to the public through this website at http://www.sec.gov and as of December 2015, they are also available on the Israeli Securities Authority’s website at http://www.magna.isa.gov.il and on the TASE’s website at http://maya.tase.co.il. As permitted under NASDAQ Stock Market Rule 5250(d)(1)(C), we will post our annual reports filed with the SEC on our investors website at http://sodastream.investorroom.com/. We will furnish hard copies of such reports to our shareholders free of charge upon a written request. The information contained on, or that can be accessed through, our website is not part of this or any other report filed with or furnished to the SEC.

 

I.Subsidiary Information

 

Not applicable.

 

Item 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to a variety of risks, including foreign currency exchange fluctuations, changes in interest rates, inflation and commodity prices. We regularly assess these risks to minimize any adverse effects on our business as a result of those factors. For sensitivity analysis of our exposure to foreign currency exchange fluctuations and changes in interest rates, see Note 23C.1.ii to our consolidated financial statements as of and for the year ended December 31, 2016 included elsewhere in this annual report.

 

Foreign currency exchange and foreign currency risk management and derivatives

 

We conduct business in multiple countries, which exposes us to fluctuations in currency exchange rates between the U.S. Dollar (our functional and reporting currency) and certain other currencies in which we conduct business (primarily the Euro and the NIS). As of December 31, 2016, our revenues are primarily denominated in U.S. Dollars and Euros. Significant material purchasing and production costs and operational expenses are denominated in the U.S. Dollar and NIS.

 

Based on our results in 2016, a 1.0% increase/decrease in the value of the Euro and the NIS against the U.S. Dollar would have increased (decreased) our revenues by $2.5 million. Based on our results in 2016, a 1.0% increase/decrease in the value of the Euro and the NIS against the U.S. Dollar would have increased (decreased) our cost of revenues and expenses by $2.7 million.

 

We engage in hedging transactions to minimize our currency risk. Total comprehensive income included the following amounts related to changes in foreign currency exchange rates and derivative foreign currency forward contracts and options:

 

   Year Ended December 31, 
(in thousands)  2014   2015   2016 
Unrealized foreign currency exchange rate gains (losses) of foreign operations  $(18,302)  $(15,085)  $(4,168)
Realized foreign currency exchange rate gains (losses)   1,698    4,245    (1,490)
Derivative gains   906    2,678    448 

 

Inflation

 

Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of revenues if the sell