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.
32,628,044 Ordinary Shares,
no par value, as of December 31, 2022.
Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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
Exchange Act of 1934.
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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.
Indicate by check mark whether
the registrant has submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition
of “large accelerated filer,” “accelerated filer,” and emerging growth company” in Rule 12b-2 of the Exchange
Act.
If an emerging growth company
that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the
extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section
13(a) of the Exchange Act. ☐
†The term “new
or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting
Standards Codification after April 5, 2012.
Indicate by check mark whether
the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. ☐
If securities are registered
pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing
reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether
any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the
registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which
basis of accounting the registrant has used to prepare the financial statements included in this filing.
U.S. GAAP ☐
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.
If this is an annual report,
indicate by check mark whether the registrant is a shell company.
We are a global internet access
provider for consumers and enterprises. We operate in two main distinct segments, providing solutions according to specific needs. The
segments include enterprise internet access solutions and consumer internet access solutions and services.
Our enterprise internet access
segment offers a global web data collection cloud service, based on our proprietary proxy traffic optimization and routing technology,
and built on partnership agreements with tens of Internet Service Providers, or ISPs.
Our service allows organizations
to collect vast amounts of web and internet data by simultaneously connecting to the internet from different IP addresses while maintaining
full anonymity and privacy. Our customers can choose from various types of Internet Protocol addresses, or IPs, from our IP pool which
contains millions of IPs, including ISP IPs, data center IPs and residential service provider IPs.
With our web data collection
service, organizations can collect accurate, transparent web data from public online sources. The solution also allows access to undiscovered
data from non-traditional data sources and allows customers to gain additional data-driven information that provides valuable insights
with respect to predictive capabilities or behaviors, thereby assisting ongoing business management operation and decision making. An
added benefit to our customer is the fact that utilizing our network completely hides enterprises from the internet by modifying IP addresses,
thus ensuring high levels of privacy for their online presence.
Our internet access solutions
for consumers provide security against ransomware, viruses, phishing, and other online threats as well as a powerful, secured and encrypted connection,
masking consumers’ online activity and keeping them safe from hackers. The solutions are designed for advanced and basic users,
ensuring complete protection for all personal and digital information.
On November 8, 2022, we effected
a change in the ratio of the ADSs to our Ordinary Shares from the previous ADS ratio of one (1) ADS to one (1) Ordinary Share, to a new
ADS ratio of one (1) ADS to ten (10) Ordinary Shares. All descriptions of our ADSs herein, including ADS amounts and per ADS amounts,
are presented after giving effect to the ratio change.
Unless otherwise indicated,
all references to the “Company,” “we,” “our” and “Alarum” refer to Alarum Technologies
Ltd. and its wholly owned Israeli subsidiaries NetNut Ltd., or NetNut, NetNut’s wholly owned subsidiary - NetNut Networks Inc.,
a Delaware corporation, or NetNut Networks, Safe-T Data A.R Ltd., or Safe-T Data, CyberKick Ltd., or CyberKick, CyberKick’s wholly
owned subsidiaries - iShield Inc., a Delaware corporation, RoboVPN Inc., a Delaware corporation, RoboVPN Technologies Ltd., a Cyprus corporation,
and Spell Me Ltd., a Seychelles corporation.
References to “U.S.
dollars” and “$” are to currency of the United States of America, and references to “NIS” are to New Israeli
Shekels. References to “Ordinary Shares” are to our Ordinary Shares, no par value per share that have been trading on the
Tel Aviv Stock Exchange, or TASE, under the symbol “ALAR”. References to ADSs are to our American Depository Shares, representing
our Ordinary Shares, that have been trading on the Nasdaq Capital Market, or Nasdaq, under the symbol “SFET” since August
17, 2018, and effective from January 25, 2023 under the symbol “ALAR” following the Company’s change of name. We report
financial information under International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards
Board, or IASB.
Certain information included
or incorporated by reference in this annual report on Form 20-F may be deemed to be “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws and the Israeli securities law. Forward-looking
statements are often characterized by the use of forward-looking terminology such as “may,” “will,” “expect,”
“plans,” “anticipate,” “estimate,” “continue,” “believe,” “should,”
“intend,” “project” or other similar words, but are not the only way these statements are identified.
These forward-looking statements
may include, but are not limited to, statements relating to our objectives, plans and strategies, statements that contain projections
of results of operations or of financial condition, expected capital needs and expenses, statements relating to the research, development,
completion and use of our products, and all statements (other than statements of historical facts) that address activities, events or
developments that we intend, expect, project, believe or anticipate will or may occur in the future.
Forward-looking statements
are not guarantees of future performance and are subject to risks and uncertainties. We have based these forward-looking statements on
assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions,
expected future developments and other factors they believe to be appropriate.
Important factors that could
cause actual results, developments and business decisions to differ materially from those anticipated in these forward-looking statements
include, among other things:
Readers are urged to carefully
review and consider the various disclosures made throughout this annual report on Form 20-F which are designed to advise interested parties
of the risks and factors that may affect our business, financial condition, results of operations and prospects.
You should not put undue reliance
on any forward-looking statements. Any forward-looking statements in this annual report on Form 20-F are made as of the date hereof, and
we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law.
In addition, the section of
this annual report on Form 20-F entitled “Item 4. Information on the Company” contains information obtained from independent
industry sources and other sources that we have not independently verified.
The risk factors described
below are a summary of the principal risk factors associated with an investment in us. These are not the only risks we
face. You should carefully consider these risk factors, together with the risk factors set forth in Item 3D. of this Report
and the other reports and documents filed by us with the SEC.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. [Reserved.]
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
You should carefully consider
the risks described below, together with all of the other information in this annual report on Form 20-F. The risks described below are
not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial
may also materially and adversely affect our business operations. If any of these risks actually occurs, our business and financial condition
could suffer and the price of our ADSs could decline.
Risks Related to Our Financial Condition and
Capital Requirements
Some of our business segments are in development
stages and have incurred losses due to required investments since the start of their operations. We anticipate that these segments will
continue to incur significant investments in sales and marketing channels as well as in products development until we are able to commercialize
products globally.
We have devoted substantial
financial resources to develop and commercialize our products and to extend our business by acquisitions. We have financed our operations
primarily through the issuance of equity securities, and recently also through credit facilities and bank loans. The amount of our future
net losses will depend, in part, on on-going development of our products, the rate of our future expenditures and our ability to obtain
funding through the issuance of our securities, strategic collaborations, credit facilities or bank loans. We expect to continue to incur
significant losses due to ongoing investments in sales and marketing channels as well as in product development until we are able to successfully
commercialize our products globally. We anticipate that our expenses will increase substantially if and as we:
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continue the development of our products; |
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establish, increase and reinforce a sales, marketing and distribution infrastructure to commercialize our products; |
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seek to identify, assess, acquire, license and/or develop other products and subsequent generations of our current products; |
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seek to maintain, protect and expand our intellectual property portfolio; |
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seek to attract and retain skilled personnel; and |
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continue to support our operations as a public company, our product development and planned future commercialization efforts. |
Our ability to generate future
revenue from product sales depends heavily on our success in many areas, including but not limited to:
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continuous improvement of our products; |
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addressing any competing technological and market developments; |
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negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter; |
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establishing and maintaining resale and distribution relationships with third parties that can provide adequate (in amount and quality) infrastructure to support market demand for our products; |
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launching and commercializing current and future products, either directly or with a collaborator or distributor; |
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maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets and know-how; and |
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identifying, assessing, acquiring and/or developing new products and activities. |
Given our lack of positive cash flow, we
expect that we may need to raise additional capital before we can expect to become profitable from sales of our products. This additional
financing may not be available on acceptable terms, or at all. Failure to obtain the necessary capital when needed may force us to delay,
limit or terminate our product development efforts or other operations.
According to our management’s
estimates, based on our current cash on hand and further based on our budget, we believe that we have sufficient resources to continue
our activities until December 31, 2023. Since we might be unable to generate sufficient revenue or cash flow to fund our operations
for the foreseeable future, we may need to seek additional equity or debt financing to provide the capital required to maintain or expand
our operations. We expect we will also need additional funding for developing products and services and other related activities, increasing
our sales and marketing capabilities, and promoting brand identity, as well as for working capital requirements and other operating and
general corporate purposes.
There can be no assurance
that we will be able to raise sufficient additional capital on acceptable terms, or at all. If such financing is not available on satisfactory
terms, or is not available at all, we may be required to delay, scale back or eliminate the development of business opportunities, research
or development programs and our operations and financial condition may be materially adversely affected. If we raise additional funds
through collaborations and licensing arrangements, we may be required to relinquish some rights to our technologies or candidate products,
or to grant licenses on terms that are not favorable to us.
The report of our independent registered
public accounting firm contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern,
which could prevent us from obtaining new financing on reasonable terms or at all.
The report of our independent
registered public accounting firm on our audited consolidated financial statements for the period ended December 31, 2022, contains
an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our consolidated financial
statements do not include any adjustments that might result from the outcome of the uncertainty regarding our ability to continue as a
going concern. This going concern opinion could materially limit our ability to raise additional funds through the issuance of equity
or debt securities or otherwise. Further reports on our consolidated financial statements may include an explanatory paragraph with respect
to our ability to continue as a going concern. Until we can generate significant recurring revenues, we expect to satisfy our future cash
needs through debt or equity financing. We cannot be certain that additional funding will be available to us on acceptable terms, if at
all. If funds are not available, we may be required to delay, reduce the scope of, or eliminate research or development plans for, or
commercialization efforts with respect to our products. This may raise substantial doubts about our ability to continue as a going concern.
We maintain our cash at financial institutions,
some in balances that exceed federally insured limits.
A small portion of our cash is held in accounts at U.S. banking institutions
that we believe are of high quality. Cash held in non-interest-bearing and interest-bearing operating accounts may exceed the Federal
Deposit Insurance Corporation, or FDIC, insurance limits. If such banking institutions were to fail, we could lose all or a portion of
those amounts held in excess of such insurance limitations.
The FDIC took control of one such banking institution, Silicon Valley
Bank, or SVB, on March 10, 2023. The FDIC also took control of Signature Bank on March 12, 2023. On March 13, 2023, the U.S. Federal Reserve
announced that account holders would not bear the loss of SVB’s collapse. We have used an SVB account for customer payments and
have been able to recover the cash deposits transferred through such an account. We did not hold any bank accounts at Signature Bank.
On March 27, 2023, First Citizen Bank announced the assumption of responsibility for Silicon Valley Bank. Thus, we do not view the risk
as material to our financial condition. However, as the FDIC continues to address the situation with SVB, Signature Bank and other similarly
situated banking institutions, the risk of loss in excess of insurance limitations has generally increased. Any material loss that we
may experience in the future could have an adverse effect on our ability to pay our operational expenses or make other payments and may
require us to move our accounts to other banks, which could cause a temporary delay in making payments to our vendors and employees and
cause other operational inconveniences.
Risks Related to Our Business and Industry
The internet access markets are rapidly
evolving within the increasingly challenging landscape. If the industry does not continue to develop as we anticipate, our sales will
not grow as quickly as expected and our share price could decline.
We operate in a rapidly evolving
industry focused on providing organizations and consumers with internet access solutions. Our solutions provide protective cyber tools
that identify, eliminate and help customers avoid security and data breach threats. On the consumers side, we experience intense competition
from well established companies as well as smaller new players, and need to constantly adapt our solutions to the new technologies and
growing and constantly changing challenges. It is therefore difficult to predict how large the markets will be for our solutions. If solutions
such as ours are not viewed by organizations as necessary, or if business or consumer customers do not recognize the benefit of our solution
as a critical layer of an effective security strategy, then our revenues may not grow as quickly as expected, or may decline, and our
share price could suffer.
We are engaged in on-going development of
our current and future products. Our research and development efforts may not produce successful products or enhancements to our solution
that result in significant revenue or other benefits in the near future, if at all.
We expect to continue to dedicate
significant financial and other resources to our research and development efforts in order to continuously evolve the development of our
products and maintain our competitive position. As a result, our business is significantly dependent on our ability to successfully complete
the development of our next generation products. Investing in research and development personnel, developing new products and enhancing
existing products is expensive and time consuming, and there is no assurance that such activities will result in successful development
of our products, significant new marketable products or enhancements to our products, design improvements, cost savings, revenues or other
expected benefits. If we spend significant time and effort on research and development and are unable to generate an adequate return on
our investment, our business and results of operations may be materially and adversely affected.
If we fail to effectively manage our growth,
our business and operations will be negatively affected, and as we invest in the growth of our business, we expect our operating and net
profit margins to decline in the near-term.
We have experienced a more
rapid growth in the last four years and intend to continue to grow our business. Our annual operating expenses may continue to increase
as we invest in sales, marketing, research and development. Our growth to date has placed significant demands on our management, sales,
operational and financial infrastructure, and our growth will continue to place significant demands on these resources. We may not be
able to successfully implement these improvements in a timely or efficient manner, and our failure to do so may materially impact our
projected growth rate. We may also not be able to effectively manage the expansion of our operations, which may result in weaknesses in
our infrastructure, operational mistakes, loss of business opportunities, failure to deliver and timely deliver our products to customers,
loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures
and may divert financial resources from other projects, such as the development of current and additional new products. If our management
is unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate and/or grow revenue
could be reduced, and we may not be able to implement our business strategy.
As we invest in the growth
of our business, we expect that these investments will result in increased costs and may impact our short and mid-term operating and net
profit margins. A failure to meet market expectations regarding our profitability and our position as a growth company have had and could
continue to have an adverse effect on the price of our Ordinary Shares and ADSs.
Our quarterly and annual results of operations
may fluctuate for a variety of reasons.
Our operating results and
financial condition may fluctuate from quarter to quarter and year to year and are likely to continue to vary due to a number of factors,
many of which will not be within our control. If our operating results do not meet the guidance that we provide to the market or the expectations
of securities analysts or investors, the market price of our Ordinary Shares and the ADSs will likely decline. Fluctuations in our operating
results and financial condition may be due to a number of factors:
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the degree of market acceptance of our products and services; |
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our ability to attract and retain new customers; |
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our ability to sell additional products to current customers; |
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changes in consumers’ and enterprises’ requirements and expectations or channel partner requirements; |
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changes in the growth rate of the internet access solutions markets; |
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the timing and success of new product and service introductions by us or our competitors or any other change in the competitive landscape of the internet access markets, including consolidation among our customers or competitors; |
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a disruption in, or termination of, our relationship with partners; |
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our ability to successfully expand our business globally; |
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changes in our pricing policies or those of our competitors and our responses to price competition; |
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general economic conditions in our markets; |
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unexpected changes in regulatory practices, laws, regulations and the court systems of certain jurisdictions; |
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future accounting pronouncements or changes in our accounting policies or practices; |
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the amount and timing of our operating costs; |
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a change in our mix of products and services; and |
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increases or decreases in our expenses caused by fluctuations in foreign currency exchange rates. |
Any of the above factors,
individually or in the aggregate, may result in significant fluctuations in our financial and other operating results from period to period.
These fluctuations could result in our failure to meet our operating plan or the expectations of investors or analysts for any period.
If we fail to meet such expectations for these or other reasons, the market price of our Ordinary Shares and the ADSs could fall substantially,
and we could face costly lawsuits, including securities class action suits.
Our reputation and business could be harmed
based on real or perceived shortcomings, defects or vulnerabilities in our solution or the failure of our solution to meet customers’
expectations.
Organizations and consumers
are facing increasingly sophisticated and targeted cyber threats, including the growing threat of cyber terrorism throughout the world.
If we fail to identify and respond to new and increasingly complex methods of attack and update our products to detect or prevent such
threats, our business and reputation will suffer. In particular, we may suffer significant adverse publicity and reputational harm if
a significant breach occurs generally or if any breach occurs at a high-profile customer. Moreover, if our solutions are adopted by an
increasing number of enterprises and consumers, it is possible that attackers will begin to focus on finding ways to defeat our solutions.
An actual or perceived security breach or theft of our customers’ sensitive business or personal data, regardless of whether the
breach or theft is attributable to the failure of our products, could adversely affect the market’s perception of the efficacy of
our solutions and current or potential customers may look to our competitors for alternatives to our solutions. The failure of our products
may also subject us to lawsuits and financial losses stemming from indemnification demands of our partners and other third parties, as
well as the expenditure of significant financial resources to analyze, correct or eliminate any vulnerabilities. Any claim brought against
us, regardless of its merit, could result in material expense, diversion of management time and attention, and damage to our reputation,
and could cause us to fail to retain or attract customers. Costs or payments made in connection with warranty and product liability claims
and product recalls or other claims could materially affect our financial condition and results of operations. It could also cause us
to suffer reputational harm, lose existing customers or deter them from purchasing additional products and services and prevent new customers
from purchasing our solutions.
False detection of threats,
while typical in our industry, may reduce perception of the reliability of our products and may therefore adversely impact market acceptance
of our products. If our solutions restrict legitimate privileged access by authorized personnel to IT systems and applications by falsely
identifying those users as an attack or otherwise unauthorized, or fail to provide privacy and security web browsing to consumers, our
customers’ businesses could be harmed. There can be no assurance that, despite testing by us, errors will not be found in existing
and new versions of our products, resulting in loss of or delay in market acceptance. In such an event, we may be required, or may choose,
for customer relations or other reasons, to expend additional resources in order to help correct the problem. In addition, the network
of enterprise internet access solutions is built on a mix of IPs, which we source from various providers and technologies. A significant
portion of our IP pool is sourced from third-party IP proxy providers and ISPs around the world from which we lease and then resell. We
have separate agreements with each provider. If such a provider will choose to terminate the agreement, we will be at a risk of reducing
the size of our IP pool, and might not be able to support the demands of our customer base.
If we are unable to acquire new customers,
our future revenues and operating results will be harmed.
Our success depends on our
ability to acquire new customers. The number of customers that we add in a given period impacts both our short-term and long-term revenues.
If we are unable to attract a sufficient number of new customers, we may be unable to generate revenue growth at desired rates. The markets
we operate in are competitive and many of our competitors have substantial financial, personnel, and other resources that they utilize
to develop products and attract customers. As a result, it may be difficult for us to add new customers to our customer base. Competition
in the marketplace may also lead us to win fewer new customers or result in us providing discounts and other commercial incentives. Additional
factors that impact our ability to acquire new customers include the perceived need for cyber security, the size of our prospective customers’
infrastructure budgets, the utility and efficacy of our existing and new offerings, whether proven or perceived, our ability to reach
a significant portion of the consumer market, and general economic conditions. These factors may have a meaningful negative impact on
future revenues and operating results. With respect to our enterprise access business, while many companies understand the problem of
doing competitive analysis, data collection, and other privacy-related use cases, widespread awareness of the need for access solutions
is still lacking. Proxy networks are well understood, and virtual private networks are commonly popular, but access solutions are still
in the early adoption phase among companies and individuals that stand to benefit from them. This restraint accounts for not all enterprise
access vendors having the marketing budgets to promote themselves.
If we lose a significant customer, or face
material reduction in sales to a significant customer, our operating margins, our profitability, our sales and our results of operations
could be affected.
One of our sale segments is
dependent on a major customer, and its loss and inability to substitute other similar customers for the lost one can have an adverse effect
on our business, financial situation or performance. For example, in 2022 this customer accounted for 37% of our total sales. There can
be no assurance that our major customers will continue to do business with us or that all significant customers will continue to purchase
our products in the same quantities that they have in the past. The loss of any one of our significant customers or a material reduction
in sales to a significant customer could have a material adverse effect on our sales and results of operations.
If we are unable to sell additional products
and services to our existing customers, our future revenues and operating results will be harmed.
Our revenues are also generated
from sales to existing customers. Our future success depends, in part, on our ability to obtain recurring sales to our existing customers.
We devote significant efforts to developing, marketing and selling additional products to existing customers and rely on these efforts
for a portion of our revenues. These efforts require a significant investment in building and maintaining customer relationships, as well
as significant research and development efforts in order to provide product upgrades and launch new products. The rate at which our existing
customers purchase additional products and services depends on a number of factors, including, but not limited to, the perceived need
for additional access services, the fit and efficacy of our solutions and the utility of our new offerings, whether proven or perceived,
our customers’ budgets, general economic conditions, our customers’ overall satisfaction with the maintenance and professional
services we provide and the continued growth and economic health of our customer base to require incremental users and servers to be covered.
If our efforts to sell additional products and services to our customers are not successful, our future revenues and operating results
will be harmed.
We face intense competition from access
vendors, some of which are larger and better known than we are, and we may lack sufficient financial or other resources to maintain or
improve our competitive position.
The markets in which we operate
are characterized by intense competition, constant innovation and evolving security threats. We compete with companies that offer a broad
array of internet access products. Our current and potential future competitors include providers of access solutions, such as Bright
Data Ltd. (formerly Luminati Networks Ltd.), or Bright Data, Oxylabs Networks Pvt. Ltd., BiScience Inc. and others in the enterprise access
segment, and Kape Technologies plc, McAfee Corp., Nord VPN, Norton LifeLock, Aura and others in the consumer segment. Some of our competitors
are large companies that have the technical and financial resources and broad customer bases needed to bring competitive solutions to
the market and already have existing relationships as a trusted vendor for other products. Such companies may use these advantages to
offer products and services that are perceived to be as effective as ours at a lower price or for free as part of a larger product package
or solely in consideration for maintenance and services fees. They may also develop different products to compete with our current solutions
and respond more quickly and effectively than we do to new or changing opportunities, technologies, standards or client requirements.
Additionally, from time to time we may compete with smaller regional vendors that offer products with a more limited range of capabilities
that purport to perform functions similar to our solution. Such companies may enjoy stronger sales and service capabilities in their particular
regions. With respect to the enterprise access and the consumer markets, we face the emergence of small competitors in this field due
to high profitability margins, which can result in pressure on prices to decline. Furthermore, these margins can lead also to competition
from bigger companies that can invest larger human, cash and technological resources into this industry. Such increased competition can
lead to lower margins and, consequently, impact our revenues, profitability and business.
Our competitors may enjoy
potential competitive advantages over us, such as:
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greater name recognition, a longer operating history and a larger customer base; |
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larger sales and marketing budgets and resources; |
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broader distribution and established relationships with channel and distribution partners and customers; |
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greater customer support resources; |
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greater resources to make acquisitions; |
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larger intellectual property portfolios; and |
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greater financial, technical and other resources. |
Our current and potential
competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their resources.
Current or potential competitors may be acquired by third parties with greater available resources. As a result of such acquisitions,
our current or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources
to the promotion or sale of their products and services, initiate or withstand substantial price competition, take advantage of other
opportunities more readily or develop and expand their product and service offerings more quickly than we do. Larger competitors with
more diverse product offerings may reduce the price of products that compete with ours in order to promote the sale of other products
or may bundle them with other products, which would lead to increased pricing pressure on our products and could cause the average sales
prices for our products to decline.
In addition, other cybersecurity
technologies exist or could be developed in the future by current or future competitors, and our business could be materially and adversely
affected if such technologies are widely adopted.
We may not be able to successfully
anticipate or adapt to changing technology or customer requirements on a timely basis, or at all. If we fail to keep up with technological
changes or to convince our customers and potential customers of the value of our solution even in light of new technologies, our business,
results of operations and financial condition could be materially and adversely affected.
If our internal network system is compromised
by cyber attackers or other data thieves, or if our hosting and infrastructure fails, public perception of our products and services will
be harmed.
We will not succeed unless
the marketplace is confident that we provide effective cybersecurity protection. Further, we may be targeted by cyber terrorists because
we are an Israeli company. If we experience an actual or perceived breach of our network and our internal systems, it could adversely
affect the market perception of our products and services. In addition, we may need to devote more resources to address security vulnerabilities
in our solution, and the cost of addressing these vulnerabilities could reduce our operating margins. If we do not address security vulnerabilities
or otherwise provide adequate security features in our products, certain customers, particularly government customers, may delay or stop
purchasing our products. Further, a security breach could impair our ability to operate our business, including our ability to provide
maintenance and support services to our customers. If this happens, our revenues could decline, and our business could suffer. With respect
to the enterprise access services and consumers services, if we will experience short period hosting/infrastructure failures, or longer
periods of disconnection blocking of our network of IPs to access certain websites, and do not offer our customers various immediate alternatives,
some customers may choose to delay or stop purchasing our products.
In the ordinary course of
our business, we rely on information technology systems, networks and services, including internet sites, data hosting and processing
tools, hardware (including laptops and mobile devices), software, and technical platforms and applications, to process, store and transmit
data and to help us manage our business and to collect and store the Company’s sensitive data, including intellectual property,
personal information and proprietary business information. The secure maintenance and transmission of this information is critical to
our operations and business strategy. We rely on commercially available systems, software, tools, and domestically available monitoring
to provide security for processing, transmitting and storing this sensitive data. As part of our implemented efficiency and cost-saving
measures, we are using cloud service providers. While benefits for using cloud computing services are well documented and are mostly related
to resources sharing, on-demand self-services, rapid scalability, improved economies of scale and collaboration, there are risks that
could outweigh the expected benefits, and require close attention and management. For example, there is no guarantee that the features
we use will be provided for the same price in the future, there is a risk in relying on a cloud service for business-related tasks because
no service can guarantee 100% uptime and there is always a risk of data leakage when a company’s data is held by a third-party vendor.
Information technology systems,
including those managed or hosted by third parties, could be subject to sophisticated cyber-attacks (including phishing and ransomware
attacks) and threats by external or internal parties’ intent on disrupting business processes or otherwise extracting or corrupting
information. In recent years, ransomware attacks against organizations have become more frequent and while we continue to implement additional
protective measures to reduce the risk of and detect cyber incidents, cyber-attacks are becoming more sophisticated and frequent and the
techniques used in such attacks change rapidly. We may also face increased cybersecurity risks due to the number of our employees and
our third-party providers’ who are (and may continue to be) working remotely, which creates additional opportunities for cybercriminals
to launch attacks and exploit vulnerabilities in non-corporate IT environments. Unauthorized access to our systems could disrupt our business,
and/or lead to theft, loss or misappropriation of critical assets or to outside parties having access to confidential information, including
privileged data, personal data or strategic information. Such information could also be made public in a manner that harms our reputation
and financial results and, particularly in the case of personal data, could lead to regulators imposing significant fines on us.
Also, our information technology
networks and infrastructure may still be vulnerable to damage, disruptions, or shutdowns due power outages, computer viruses, telecommunication
or utility failures, systems failures, natural disasters or other catastrophic events. Any such compromise could disrupt our operations,
damage our reputation, and subject us to additional costs and liabilities, any of which could adversely affect our business.
If we do not effectively expand, train and
retain our sales force, we may be unable to acquire new customers or sell additional products and services to existing customers, and
our business will suffer.
We depend significantly on
our sales force to attract new customers and expand sales to existing customers. As a result, our ability to grow our revenues depends
in part on our success in recruiting, training and retaining sufficient numbers of sales personnel to support our growth. We expect to
continue to expand our sales personnel and face a number of challenges in achieving our hiring and integration goals. There is intense
competition for individuals with sales training and experience. In addition, the training and integration of a large number of sales personnel
in a short time requires the allocation of internal resources. We invest significant time and resources in training new sales force personnel
to understand our solutions and growth strategy. Based on our past experience, it takes an average of approximately six to nine months
before a new sales force member operates at target performance levels. However, we may be unable to achieve or maintain our target performance
levels with large numbers of new sales personnel as quickly as we have done in the past. Our failure to hire a sufficient number of qualified
sales force members and train them to operate at target performance levels may materially and adversely impact our projected growth rate.
If our products fail to help our customers
achieve and maintain compliance with certain government regulations and industry standards, our business and results of operations could
be materially and adversely affected.
On the enterprise access side
of our business, we primarily engage directly with ISPs in order to gain access to their networks. The legality of scraping publicly available
web data was reaffirmed by the Ninth Circuit Court of Appeals (hiQ vs LinkedIn) in late 2019, but the way in which some of the automated
software programs are built is still questionable, and changes in regulations may impact the means or ability to provide such solutions.
International regulatory bodies
are increasingly focused on online privacy issues and user data protection. In particular, the General Data Protection Regulation, or
the GDPR, in the European Union, or EU, and the UK intends to strengthen and unify data protection for all individuals within the EU.
It also addresses the export of personal data outside the EU. The GDPR aims primarily to give control back to citizens and residents over
their personal data and to simplify the regulatory environment for international business by unifying the regulation within the EU. Additionally,
the uncertainty created by these laws and regulations can be compounded when services hosted in one jurisdiction are directed at users
in another jurisdiction. For instance, European data protection rules may apply to companies which are not established in the EU (this
is the so-called extraterritorial scope of the GDPR). Similarly, there have been laws and regulations adopted throughout the United States
and Israel that impose obligations in areas such as privacy, in particular protection of personal information and implementing adequate
cybersecurity measures to protect such information. The most prominent to which we are exposed is the California Consumer Privacy Act
of 2020, or the CCPA, which increases the privacy and security obligations companies have towards the consumer when handling personal
data. The CCPA allows civil penalties for violations as well as private right of action for data breaches. In addition, the California
Privacy Rights Act, or the CPRA, which became effective as of January 1, 2023, imposes additional obligations such as expanding the current
data privacy compliance requirements under the CCPA. As an Israeli company we are also subject to the Israeli Privacy Protection Law 1981
and its regulations, as well as the guidelines of the Israeli Privacy Protection Authority.
These industry standards may
change with little or no notice, including changes that could make them more or less onerous for businesses. Any inability to adequately
address privacy and security concerns or comply with applicable privacy and data security laws, rules and regulations could have an adverse
effect on our business prospects, results of operations and/or financial position. In addition, governments may also adopt new laws or
regulations, or make changes to existing laws or regulations, that could impact whether our solution enables our customers to maintain
compliance with such laws or regulations. If we are unable to adapt our solution to changing government regulations and industry standards
in a timely manner, or if our solution fails to expedite our customers’ compliance initiatives, our customers may lose confidence
in our products and could switch to products offered by our competitors. In addition, if government regulations and industry standards
related to the access sectors are changed in a manner that makes them less onerous, our customers may view compliance as less critical
to their businesses, and our customers may be less willing to purchase our products and services. In either case, our sales and financial
results would suffer.
Our model for long-term growth
depends upon the introduction of new products. If we are unable to develop new products or if these new products are not adopted by customers,
our growth will be adversely affected.
Our business depends on the
successful development and marketing of new products, including adding complementary offerings to our current products. Development and
marketing of new products require significant up-front research, development and other costs, and the failure of new products we develop
to gain market acceptance may result in a failure to achieve future sales and adversely affect our competitive position. There can be
no assurance that any of our new or future products will achieve market acceptance or generate revenues at forecasted rates or that the
margins generated from their sales will allow us to recoup the costs of our development efforts.
If we do not successfully anticipate market
needs and enhance our existing products or develop new products that meet those needs on a timely basis, we may not be able to compete
effectively and our ability to generate revenues will suffer.
Our customers operate in markets
characterized by rapidly changing technologies and business plans, which require them to adapt to increasingly complex IT infrastructures
that incorporate a variety of hardware, software applications, operating systems and networking protocols. As our customers’ technologies
and business plans grow more complex, we expect them to face new and increasingly sophisticated methods of attack. We face significant
challenges in ensuring that our solutions effectively identify and respond to these advanced and evolving attacks without disrupting the
performance of our customers’ IT systems. As a result, we must continually modify and improve our products in response to changes
in our customers’ IT and industrial control infrastructures.
We cannot guarantee that we
will be able to anticipate future market needs and opportunities or be able to develop product enhancements or new products to meet such
needs or opportunities in a timely manner, if at all. Even if we are able to anticipate, develop and commercially introduce enhancements
and new products, there can be no assurance that enhancements or new products will achieve widespread market acceptance.
Our product enhancements or
new products could fail to attain sufficient market acceptance for many reasons, including:
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failure to accurately predict market demand and to supply products that meet this demand in a timely fashion; |
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inability to interoperate effectively with the existing or newly introduced technologies, systems or applications of our existing and prospective customers; |
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inability to protect against new types of attacks or techniques used by cyber attackers or other data thieves; |
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defects in our products, errors or failures of our solutions to secure privileged accounts; |
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negative publicity about the performance or effectiveness of our products; |
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introduction or anticipated introduction of competing products by our competitors; |
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installation, configuration or usage errors by our customers; and |
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easing or changing of regulatory requirements related to IT / cybersecurity / privacy. |
If we fail to anticipate market
requirements or fail to develop and introduce product enhancements or new products to meet those needs in a timely manner, it could cause
us to lose existing customers and prevent us from gaining new customers, which would significantly harm our business, financial condition,
and results of operations.
Defects and bugs in products could give
rise to product returns, cancellation of orders or product liability, warranty or other claims that could result in material expenses,
diversion of management time and attention, and damage to our reputation.
Even if we are successful
in introducing our products to the market, our products may contain undetected defects or errors that, despite testing, are not discovered
until after a product has been used. Our software could have, or could be alleged to have, defects, bugs or other errors or failures.
This could result in cancellation of orders, difficulties in maintaining business relations with customers that use our software, delayed
market acceptance of those products, claims from distributors, end-users or others, increased end-user service and support costs and warranty
claims, damage to our reputation and business and the ability to attract new customers, or significant costs to correct the defect or
error. We may from time to time become subject to warranty or product liability claims that could lead to significant expenses as we need
to compensate affected end-users for costs incurred related to product quality issues.
Any claim brought against
us, regardless of its merit, could result in material expense, diversion of management time and attention, and damage to our reputation,
and could cause us to fail to retain or attract customers.
Our business is subject to risks arising
from the continuous effects of the COVID-19 pandemic - the risk that we may not be able to successfully execute our business or strategic
plans, as well as the risk that we will not be able to anticipate, identify and respond quickly to changing market trends and customer
preferences or changes in the consumer environment, including changing expectations of service, all of which could have a material adverse
effect on our business and results of operations.
Our business, operations and
financial condition could be materially affected by the outbreak of epidemics or pandemics or other health crises. For example, the COVID-19
pandemic has caused governments of most countries to take actions to reduce the spread of the virus. Such actions have included imposing
restrictions such as quarantines, school closures, restrictions on public gatherings, business closures and travel restrictions. These
measures have caused material disruption to businesses globally resulting in general economic slowdown. Our operations and business have
been impacted and may continue to be impacted by COVID-19 as we were forced to modify our day to day operation and adopt early and strict
prevention measures to protect the health of our employees (including employees’ travel, employees’ work locations and cancellation
of physical participation in meetings, events, and conferences). Also, NetNut Networks’ business, experienced a significant slowdown
due to ongoing disruption in supply chain resulting from COVID-19 implications.
Employers (including us) are
also required to prepare and increase as much as possible the capacity and arrangement for employees to work remotely. Although to date
these restrictions have not impacted our operations, the effect on our business, from the spread of COVID-19 and the actions implemented
by the governments of the State of Israel, the United States and elsewhere across the globe, may worsen over time and could have a material
adverse impact on our business.
Market events and conditions,
including disruptions in the financial markets and deteriorating global economic conditions, could increase the cost of capital or impede
our access to capital. Economic and geopolitical events, as well as global outbreaks of contagious diseases, such as COVID 19, may create
uncertainty in global financial and equity markets. Such disruptions could make it more difficult for us to obtain capital and financing
for our operations, or increase the cost of it, among other things. If we do not raise capital when we need it, or access it on reasonable
terms, it could have a material adverse effect on our business, results of operations, financial condition and the Company’s Ordinary
Shares or ADSs price. If the negative economic conditions persist or worsen, it could lead to increased political and financial uncertainty,
which could result in regime or regulatory changes in the jurisdictions in which we operate. High levels of volatility and market turmoil
could have an adverse effect on our business, results of operations, financial condition and the Company share price.
The extent to which COVID-19
or any other contagious disease impacts our results will depend on future developments, which are highly uncertain and cannot be predicted,
including new information which may emerge concerning the severity of this or any other outbreak and the actions to contain those outbreaks
or treat its impact, among others.
If we are unable to hire, retain and motivate
qualified personnel, our business will suffer.
Our future success depends,
in part, on our ability to continue to attract and retain highly skilled personnel. Our inability to attract or retain qualified personnel
or delays in hiring required personnel, particularly in sales and software engineering, may seriously harm our business, financial condition
and results of operations. Any of our employees may terminate their employment at any time. Competition for highly skilled personnel is
frequently intense, especially in Israel, where we are headquartered. Moreover, certain of our competitors or other technology businesses
may seek to hire our employees. There is no assurance that any equity or other incentives that we grant to our employees will be adequate
to attract, retain and motivate employees in the future. If we fail to attract, retain and motivate highly qualified personnel, our business
will suffer. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly
solicited or divulged proprietary or other confidential information.
We are exposed to fluctuations in currency
exchange rates, which could negatively affect our financial condition and results of operations.
Our functional and reporting
currency is the U.S. dollar and we generate a majority of our revenues in U.S. dollars. A material portion of our operating expenses is
incurred outside the United States, mainly in NIS and are subject to fluctuations due to changes in foreign currency exchange rates, particularly
changes in NIS. Our foreign currency-denominated expenses consist primarily of personnel, rent and other overhead costs. Since a significant
portion of our expenses is incurred in NIS and is substantially greater than our revenues in NIS, any appreciation of the NIS relative
to the U.S. dollar would adversely impact our net loss or net income, as relevant. During 2022, the NIS depreciated by more than 13% against
the dollar but has appreciated in prior years. We are therefore exposed to foreign currency risk due to fluctuations in exchange rates.
This may result in gains or losses with respect to movements in exchange rates which may be material and may also cause fluctuations in
reported financial information that are not necessarily related to its operating results. We expect that the majority of our revenues
will continue to be generated in U.S. dollars with the balance in NIS for the foreseeable future, and that a significant portion of our
expenses will continue to be denominated in NIS and partially in U.S. dollar. To date, foreign currency transaction gains and losses and
exchange rate fluctuations have not been material to our consolidated financial statements, and we have not engaged in any foreign currency
hedging transactions. See “Item 11. Quantitative and Qualitative Disclosure About Market Risk—Foreign Currency Exchange Risk.”
We may acquire other businesses, which could
require significant management attention, disrupt our business, dilute shareholder value, and adversely affect our results of operations.
As part of our business strategy
and in order to remain competitive, we are evaluating acquiring or making investments in complementary companies, products or technologies
on an on-going basis. We have completed two main acquisitions to date – the acquisition of NetNut Ltd. and CyberKick. Going forward,
we may not be able to find suitable acquisition candidates, and we may not be able to complete such acquisitions on favorable terms, if
at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions
we complete could be viewed negatively by our customers, analysts and investors. In addition, if we are unsuccessful at integrating such
acquisitions or the technologies associated with such acquisitions, our revenues and results of operations could be adversely affected.
Any integration process may require significant time and resources, and we may not be able to manage the process successfully. We may
not successfully evaluate or utilize the acquired technology or personnel, or accurately forecast the financial impact of an acquisition
transaction, including accounting charges. We may have to pay cash, incur debt or issue equity securities to pay for any such acquisition,
each of which could adversely affect our financial condition or the value of our Ordinary Shares. The sale of equity or issuance of debt
to finance any such acquisitions could result in dilution to our shareholders. The incurrence of indebtedness would result in increased
fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations.
We have identified material weaknesses in
our internal control over financial reporting, which could possibly result in a material misstatement of our annual financial statements
not being prevented or detected on a timely basis. We may also fail to comply with the rules that apply to public companies, including
Section 404 of the Sarbanes-Oxley Act. This may result in a further deficiency in our internal control over financial reporting, as well
as sanctions or other penalties that would harm our business.
We have identified material
weaknesses in our internal control over financial reporting as of December 31, 2022, 2021 and 2020. As defined in Rule 12b-2 under the
Securities Exchange Act of 1934, or the Exchange Act, a “material weakness” is a deficiency, or combination of deficiencies,
in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or
interim financial statements will not be prevented, or detected on a timely basis.
To address this issue, we
have implemented a remediation plan. As part of such remediation plan, we recruited additional personnel with a requisite level of qualification
and experience, including accounting and finance employees with the specific technical accounting and financial reporting experience necessary
for a public company, including a corporate controller and a controller and implemented additional control activities related to the period-end
financial reporting process, such as assigning clear roles and responsibilities for accounting and financial reporting staff, enhancing
internal controls related to accounting and financial reporting and hiring a qualified consultant to assess compliance of the Company’s
financial reporting processes, as well as the design and implementation of effective internal control over period end financial reporting
and in order to create adequate segregation of duties.
Based on the actions taken, we concluded
that the material weakness related to inadequate segregation of duties previously identified were remediated as of December 31, 2022.
However, as it relates to the Company's other material weakness, ineffective controls over period end financial reporting, while we believe
our remediation actions improved our internal control over financial reporting, we still require validation and testing of the design
and operating effectiveness of internal controls over a sustained period of financial reporting cycles, and therefore concluded that as
of December 31, 2022, our internal control over financial reporting was not effective.
Even if we develop effective
internal control over financial reporting, these controls may become inadequate because of changes in conditions or the degree of compliance
with these policies or procedures may deteriorate, and material weaknesses and deficiencies may be discovered in them. We may also fail
to complete our evaluation, testing and any required remediation needed to comply with Section 404 in a timely fashion.
Irrespective of compliance
with Section 404, any additional failure of our internal controls could have a material adverse effect on our stated results of operations
and harm our reputation. As a result, we may experience higher than anticipated operating expenses, as well as higher independent auditor
fees during and after the implementation of these changes. If we are unable to implement any of the required changes to our internal control
over financial reporting effectively or efficiently or are required to do so earlier than anticipated, it could adversely affect our operations,
financial reporting or results of operations and could result in an adverse opinion on internal controls from our independent auditors.
Pursuant to Section 404(a)
of the Sarbanes-Oxley Act, beginning with our annual report for the fiscal year ending December 31, 2023, we are required to furnish an
attestation report by our auditor regarding the effectiveness of our internal control over financial reporting. This may lead to further
material weaknesses based on the procedures performed by our auditor in testing our internal control over financial reporting. Additionally,
as part of management assessments of the effectiveness of our internal control over financial reporting required by Section 404(a), our
management could continue to conclude that our internal control over financial reporting is not effective due to our failure to cure any
identified material weakness or otherwise, which would require us to employ remedial actions to implement effective controls. If we are
unable to comply with the requirements of Section 404, as applicable, in a timely manner or to assert that our internal control over financial
reporting is effective, or if our independent registered public accounting firm is unable to express an opinion or issues an adverse opinion
in its attestation as to the effectiveness of our internal control over financial reporting required by Section 404, as applicable, investors
may lose confidence in the accuracy and completeness of our financial reports and the trading price of our ordinary shares could be negatively
affected.
We are subject to governmental export and
import controls that could subject us to liability in the event of non-compliance or impair our ability to compete in international
markets.
We are subject to U.S. and
Israeli export control and economic sanctions laws, which prohibit the delivery and sale of certain products to embargoed or sanctioned
countries, governments and persons. Our products could be exported to these sanctioned targets by our channel partners despite the contractual
undertakings they have given us and any such export could have negative consequences, including government investigations, penalties and
reputational harm. Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or
scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could require
export licenses or result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing
or potential customers with international operations or cessation of export or sale of our products in sanctioned countries or to sanctioned
persons. Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our
business, financial condition and results of operations.
We may be subject to geopolitical risks
resulting from Russia’s ongoing invasion of Ukraine.
Geopolitical risks and associated
military action may result in, among other things, global security issues that may adversely affect international business and economic
conditions, and economic sanctions which may impact the global economy. For example, the outbreak of hostilities between Russia and Ukraine
in February 2022 led to global sanctions that have impacted the international economy and given rise to potential global security
issues that may adversely affect international business and economic conditions. Additional geopolitical and macroeconomic consequences
of this invasion and associated sanctions cannot be predicted, and future geopolitical events, including further hostilities in Ukraine
or elsewhere, could negatively impact global financial markets our business as it may limit our ability to provide our services in those
and in neighboring countries and cause the price of our ordinary shares to decline.
Our use of third-party software
and other intellectual property may expose us to risks.
Some of our products and services
include software or other intellectual property licensed from third parties, and we otherwise use software and other intellectual property
licensed from third parties in our business. This exposes us to risks over which we may have little or no control. For example, a licensor
may have difficulties keeping up with technological changes or may stop supporting the software or other intellectual property that it
licenses to us. There can be no assurance that the licenses we use will be available on acceptable terms, if at all. In addition, a third
party may assert that we or our customers are in breach of the terms of a license, which could, among other things, give such third party
the right to terminate a license or seek damages from us, or both. Our inability to obtain or maintain certain licenses or other rights
or to obtain or maintain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could
result in delays in releases of new products, and could otherwise disrupt our business, until equivalent technology can be identified,
licensed or developed.
Our use of open-source software could negatively
affect our ability to sell our software and subject us to possible litigation.
We use open-source software
and expect to continue to use open-source software in the future. Some open-source software licenses require users who distribute or make
available as a service open-source software as part of their own software product to publicly disclose all or part of the source code
of the users’ software product or to make available any derivative works of the open-source code on unfavorable terms or at no cost.
We may face ownership claims of third parties over, or seeking to enforce the license terms applicable to, such open-source software,
including by demanding the release of the open-source software, derivative works or our proprietary source code that was developed using
such software. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional
research and development resources to change our software, any of which would have a negative effect on our business and results of operations.
In addition, if the license terms for the open-source code change, we may be forced to re-engineer our software or incur additional
costs.
Under applicable employment laws, we may
not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise
of some of our former employees.
We generally enter into non-disclosure
and non-competition agreements with our employees. These agreements prohibit our employees from competing directly with us or working
for our competitors or customers for a limited period after they cease working for us. We may be unable to enforce these agreements under
the laws of the jurisdictions in which our employees work, and it may be difficult for us to restrict our competitors from benefiting
from the expertise that our former employees or consultants developed while working for us. For example, Israeli courts have required
employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former
employee will harm one of a limited number of material interests of the employer that have been recognized by the courts, such as the
secrecy of a company’s confidential commercial information or the protection of its intellectual property. If we cannot demonstrate
that such interests will be harmed, we may be unable to prevent our competitors from benefiting from the expertise of our former employees
or consultants and our ability to remain competitive may be diminished.
Risks Related to Our Intellectual Property
If we are unable to obtain and maintain
effective patent rights for our products, we may not be able to compete effectively in our markets. If we are unable to protect the confidentiality
of our trade secrets or know-how, such proprietary information may be used by others to compete against us.
Our reverse access technology
is patent protected in several jurisdictions: United States, Europe (including Austria, Switzerland, Germany, Spain, France, United Kingdom
and Italy), Israel, China and Hong-Kong.
There is no guarantee that
pending or future patent applications will result in patent grants. Failure to file patent applications or obtain patent grants may allow
other entities to manufacture our products and compete with them.
Further, there is no assurance
that all potentially relevant prior art relating to our patent applications has been found, which can invalidate a patent or prevent a
patent from issuing from a pending patent application. Even if patents do successfully issue, and even if such patents cover our products,
third parties may challenge their validity, enforceability, or scope, which may result in such patents being narrowed, found unenforceable
or invalidated. Furthermore, even if they are unchallenged, our patent applications and any future patents may not adequately protect
our intellectual property, provide exclusivity for our new products, or prevent others from designing around our claims. Any of these
outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business.
If we cannot obtain and maintain
effective patent rights for our products, we may not be able to compete effectively, and our business and results of operations may be
harmed.
If our trademarks and trade names are not
adequately protected, we may not be able to build name recognition in our markets of interest and our business may be affected.
We have filed for trademark
registration of certain marks relating to our branding. If our unregistered trademarks and trade names are not adequately protected,
we may not be able to build name recognition in our markets of interest and our business may be affected. Our trademarks or trade names
may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. Competitors may adopt trade
names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In
addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks
that incorporate variations of our trademarks or trade names. In the long term, if we are unable to successfully register trademarks and
trade names and establish name recognition based on such trademarks and trade names, then we may not be able to compete effectively and
our business may be affected. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain names,
copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could
impact our financial condition or results of operations.
If we are unable to maintain effective proprietary
rights for our products, we may not be able to compete effectively in our markets.
Historically, we have relied
on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable or that we elect not
to patent; processes that are not easily known, knowable or easily ascertainable, and for which patent infringement is difficult to monitor
and enforce; and any other elements of our product candidate discovery and development processes that involve proprietary know-how, information
or technology that is not covered by patents. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology
and processes, in part, by entering into confidentiality agreements with our employees, consultants, advisors, and contractors. We also
seek to preserve the integrity and confidentiality of our data, trade secrets and intellectual property by maintaining physical security
of our premises and physical and electronic security of our IT systems. Agreements or security measures may be breached, and we may not
have adequate remedies for any breach. In addition, our trade secrets and intellectual property may otherwise become known or be independently
discovered by competitors.
We cannot provide any assurances
that our trade secrets and other confidential proprietary information will not be disclosed in violation of our confidentiality agreements
or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information
and techniques. Also, misappropriation or unauthorized and unavoidable disclosure of our trade secrets and intellectual property could
impair our competitive position and may have a material adverse effect on our business. Additionally, if the steps taken to maintain our
trade secrets and other confidential information are deemed inadequate, we may have insufficient recourse against third parties for misappropriating
any trade secret.
Intellectual property rights of third parties
could adversely affect our ability to commercialize our products, and we might be required to litigate or obtain licenses from third parties
in order to develop or market our product candidates. Such litigation or licenses could be costly or not available on commercially reasonable
terms.
It is inherently difficult
to conclusively assess our freedom to operate without infringing on third party rights. Our competitive position may be adversely affected
if existing patents or patents resulting from patent applications issued to third parties or other third-party intellectual property rights
are held to cover our products or elements thereof, or uses relevant to our development plans. In such cases, we may not be in a position
to develop or commercialize products or our product candidates unless we successfully pursue litigation to nullify or invalidate the third-party
intellectual property right concerned, or enter into a license agreement with the intellectual property right holder, if available on
commercially reasonable terms. There may also be pending patent applications that if they result in issued patents, could be alleged to
be infringed by our new products. If such an infringement claim should be brought and be successful, we may be required to pay substantial
damages, be forced to abandon our new products, or seek a license from any patent holders. No assurances can be given that a license will
be available on commercially reasonable terms, if at all.
It is also possible that we
have failed to identify relevant third-party patents or applications. For example, U.S. patent applications filed before November 29,
2000 and certain U.S. patent applications filed after that date that will not be filed outside the United States, remain confidential
until patents issue. Patent applications in the United States and elsewhere are published approximately 18 months after the earliest filing
for which priority is claimed, with such earliest filing date being commonly referred to as the priority date. Therefore, patent applications
covering our new products or technology could have been filed by others without our knowledge. Additionally, pending patent applications
which have been published can, subject to certain limitations, be later amended in a manner that could cover our technologies, our new
products, or the use of our new products. Third party intellectual property right holders may also actively bring infringement claims
against us. We cannot guarantee that we will be able to successfully settle or otherwise resolve such infringement claims. If we are unable
to successfully settle future claims on terms acceptable to us, we may be required to engage in or continue costly, unpredictable and
time-consuming litigation and may be prevented from or experience substantial delays in pursuing the development of and/or marketing our
new products. If we fail in any such dispute, in addition to being forced to pay damages, we may be temporarily or permanently prohibited
from commercializing our new products that are held to be infringing. We might, if possible, also be forced to redesign our new products
so that we no longer infringe the third-party intellectual property rights. Any of these events, even if we were ultimately to prevail,
could require us to divert substantial financial and management resources that we would otherwise be able to devote to our business.
Third-party claims of intellectual property
infringement may prevent or delay our development and commercialization efforts.
Our commercial success depends
in part on our avoiding infringement of the patents and proprietary rights of third parties. Numerous U.S. and foreign issued patents
and pending patent applications, which are owned by third parties, exist in the fields in which we are developing our products. As our
industries expand and more patents are issued, the risk increases that our products may be subject to claims of infringement of the patent
rights of third parties.
Third parties may assert that
we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims
to systems, apparatuses or methods related to the use of our products. There may be currently pending patent applications that may later
result in issued patents that our products may infringe. In addition, third parties may obtain patents in the future and claim that the
use of our technologies infringes upon these patents.
If any third-party patents
were held by a court of competent jurisdiction to cover aspects of our formulations, processes for designs, or methods of use, the holders
of any such patents may be able to block our ability to develop and commercialize the applicable product candidate unless we obtain a
license or until such patent expires or is finally determined to be invalid or unenforceable. In either case, such a license may not be
available on commercially reasonable terms or at all.
Parties making claims against
us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one
or more of our products. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be
a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may
have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign
our infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary
expenditure.
For example, on June 11, 2020,
Bright Data filed an action alleging infringement by NetNut Ltd. of U.S. Patent Nos. 10,484,511 and 10,637,968, as well as claims of alleged
trade secret misappropriation. The action was filed in the United States District Court for the Eastern District of Texas, Marshal Division.
On June 18, 2021, Bright Data filed an action alleging infringement by NetNut of U.S. Patent Nos. 10,257,319 and 10,484,510. The action
was also filed in the United States District Court for the Eastern District of Texas, Marshall Division. Bright Data amended its complaint
on October 11, 2021, to additionally assert infringement of U.S. Patents Nos. 10,491,713, 11,050,852 and 11,044,346, as well as a claim
for alleged false advertising. All cases filed by Bright Data were dismissed pursuant to respective settlement agreements between the
parties. Although these cases were dismissed, we may become subject to similar actions in the future with other parties.
Patent policy and rule changes could increase
the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of any issued patents.
Changes in either the patent
laws or interpretation of the patent laws in the United States and other countries may diminish the value of any patents that may issue
from our patent applications or narrow the scope of our patent protection. Publications of discoveries in the scientific literature often
lag the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18
months after filing, or in some cases not at all. We therefore cannot be certain that we were the first to file the inventions claimed
in our patents or pending applications, or that we were the first to file for patent protection of such inventions. Assuming all other
requirements for patentability are met, in the United States prior to 2013, the first patent applicant to invent the claimed invention
without undue delay in filing, is entitled to the patent, while for the most part outside the United States, the first inventor to file
a patent application is entitled to the patent. After 2013, the United States has moved to a first-inventor-to-file system. The United
States patent system is frequently changing, however, as are other international patent systems, and thus we may experience uncertainties
and costs surrounding the prosecution of our patent applications and the enforcement or defense of any issued patents, all of which could
have a material adverse effect on our business and financial condition.
We may be involved in lawsuits to protect
or enforce our intellectual property, which could be expensive, time consuming, and unsuccessful.
Competitors may infringe our
intellectual property. If we were to initiate legal proceedings against a third party to enforce a patent covering one of our products,
the defendant could counterclaim that the patent covering our product candidate is invalid and/or unenforceable. In patent litigation
in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge
could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement, among
others. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld
relevant information from the U.S. Patent and Trademark Office, or the USPTO, or made a misleading statement, during prosecution. The
validity of U.S. patents may also be challenged in post-grant proceedings before the USPTO. The outcome following legal assertions of
invalidity and unenforceability is unpredictable.
In 2014, the U.S. Supreme
Court addressed the question of whether patents related to software are patent eligible subject matter. The Supreme Court did not rule
that patents related to software were per se invalid or that software-related inventions were unpatentable. The Supreme Court outlined
a test that the courts and the USPTO must apply in determining whether software-related inventions qualify as patent eligible subject
matter. The decision and other decisions following that decision have resulted in many software patents having been found invalid as not
claiming patent eligible subject matter. Our U.S. patents, like all U.S. patents, are presumed valid, but that does not mean that
our issued patents cannot be challenged on grounds of patent eligibility, or other grounds.
Derivation proceedings initiated
by third parties or brought by us may be necessary to determine the priority of inventions and/or their scope with respect to our patents
or patent applications or those of our licensors. An unfavorable outcome could require us to cease using the related technology or to
attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license
on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in
substantial costs and distract our management and other employees. In addition, the uncertainties associated with litigation could have
a material adverse effect on our ability to raise the funds necessary to effectively market our products, continue our research programs,
license necessary technology from third parties, or enter into development partnerships that would help us bring our new products to market.
Furthermore, because of the substantial amount
of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could
be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions,
or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have
a material adverse effect on the price of our Ordinary Shares.
We may be subject to claims challenging
the inventorship of our intellectual property.
We may be subject to claims
that former employees, collaborators or other third parties have an interest in, or right to compensation, with respect to our current
patent and patent applications, future patents or other intellectual property as an inventor or co-inventor. For example, we may have
inventorship disputes arise from conflicting obligations of consultants or others who are involved in developing our products. Litigation
may be necessary to defend against these and other claims challenging inventorship or claiming the right to compensation. If we fail in
defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive
ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even
if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management
and other employees.
In addition, under the Israeli
Patent Law, 5727-1967, or the Patent Law, inventions conceived by an employee in the course and as a result of or arising from his or
her employment with a company are regarded as “service inventions,” which belong to the employer, absent a specific agreement
between the employee and employer giving the employee service invention rights. The Patent Law also provides that if there is no such
agreement between an employer and an employee, the Israeli Compensation and Royalties Committee, or the Committee, a body constituted
under the Patent Law, shall determine whether the employee is entitled to remuneration for his inventions. Recent case law clarifies that
the right to receive consideration for “service inventions” can be waived by the employee and that in certain circumstances,
such waiver does not necessarily have to be explicit. The Committee will examine, on a case-by-case basis, the general contractual framework
between the parties, using interpretation rules of the general Israeli contract laws. Further, the Committee has not yet determined one
specific formula for calculating this remuneration (but rather uses the criteria specified in the Patent Law). Although we generally enter
into assignment-of-invention agreements with our employees pursuant to which such individuals assign to us all rights to any inventions
created in the scope of their employment or engagement with us, we may face claims demanding remuneration in consideration for assigned
inventions. Because of such claims, we could be required to pay additional remuneration or royalties to our current and former employees,
or be forced to litigate such claims, which could negatively affect our business.
We may not be able to protect our intellectual
property rights.
Filing, prosecuting, and defending
patents on products, as well as monitoring their infringement in all countries throughout the world, would be prohibitively expensive,
and our intellectual property rights in some countries can be less extensive than those in the United States. In addition, the laws of
some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States.
Competitors may use our technologies
in jurisdictions where we have not obtained patent protection to develop their own products and may also export otherwise infringing products
to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete
with our products. Future patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered
significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries,
particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection,
which could make it difficult for us to stop the marketing of competing products in violation of our proprietary rights generally. Proceedings
to enforce our patent rights in foreign jurisdictions, whether successful, could result in substantial costs and divert our efforts and
attention from other aspects of our business, could put our future patents at risk of being invalidated or interpreted narrowly and our
patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits
that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to monitor
and enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the
intellectual property that we develop or license.
Because of the expense of
litigation, we may be unable to enforce our intellectual property rights, unless we obtain the agreement of a third party to provide funding
in support of our litigation. We cannot assure that we will be able to obtain third party funding, and the failure to obtain such funding
may impair our ability to monetize our intellectual property portfolio. Since we do not have funds to pursue litigation to enforce our
intellectual property rights, we are dependent upon the valuation which potential funding sources give to our intellectual property. In
determining whether to provide funding for intellectual property litigation, the funding sources need to make an evaluation of the strength
of our patents, the likelihood of success, the nature of the potential defendants and a determination as to whether there is a sufficient
potential recovery to justify a significant investment in intellectual property litigation. Typically, such funding sources receive a
percentage of the recovery after litigation expenses and seek to generate a sufficient return on investment to justify the investment.
Unless that funding source believes that it will generate a sufficient return on investment, it will not fund litigation. We cannot assure
that we will be able to negotiate funding agreements with third party funding sources on terms reasonably acceptable to us, if at all.
Because of our financial condition, we may only be able to obtain funding on terms which are less favorable to us than we would otherwise
be able to obtain. Furthermore, even if we enter into funding agreements, there is no assurance that we will generate revenue from the
funded litigation. Although the funding source makes its evaluation as to the likelihood of success, patent litigation is very uncertain,
and we cannot assure that, just because we obtain litigation funding, we will be successful or that any recovery we may obtain will be
significant. In addition, defending our intellectual property rights may depend upon our ability to retain the qualified legal counsel
to prosecute patent infringement litigation. It may be difficult to find the preferred choice for legal counsel to handle our cases because
many of these firms may have a conflict of interest that prevents their representation of us or because they are not willing to represent
us on a contingent or partial contingent fee basis. It is difficult to predict the outcome of patent enforcement litigation at a trial
level as it is often difficult for juries and trial judges to understand complex, patented technologies, and, as a result, there is a
higher rate of successful appeals in patent enforcement litigation than more standard business litigation. Regardless of whether we prevail
in the trial court, appeals are expensive and time consuming, resulting in increased costs and delayed revenue, and attorneys may be less
likely to represent us in an appeal on a contingency basis especially if we are seeking to appeal an adverse decision. Although we may
diligently pursue enforcement litigation, we cannot predict the decisions made by juries and trial courts. In connection with patent
enforcement actions, it is possible that a defendant may file counterclaims against us, or a court may rule that we have violated statutory
authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects
of such enforcement actions. In such event, a court may issue monetary sanctions against us or our operating subsidiaries or award attorney’s
fees and/or expenses to the counterclaiming defendant, which could be material, and if we or our operating subsidiaries are required to
pay such monetary sanctions, attorneys’ fees and/or expenses, such payment could materially harm our operating results, our financial
position and our ability to continue in business.
Risks Related to the Ownership of Our ADSs or
Ordinary Shares
We cannot guarantee
that we will continue to comply with the Nasdaq minimum bid requirement. If we fail to comply with the Nasdaq minimum bid requirement,
our ADSs could be delisted from Nasdaq, and as a result we and our shareholders could incur material adverse consequences, including a
negative impact on our liquidity, our shareholders’ ability to sell shares and our ability to raise capital.
Our
ADSs are currently listed on Nasdaq. On January 12, 2022, we were advised that we no longer comply with the Minimum Bid Requirement. Pursuant
to Nasdaq Listing Rule 5810(c)(3)(A), we were granted a 180-calendar day compliance period, or until July 11, 2022, to regain compliance
with the Minimum Bid Requirement. To regain compliance, the closing bid price of our ADSs had to meet or exceed $1.00 per share for at
least 10 consecutive business days during the 180-calendar day compliance period. On July 11, 2022, we were afforded a second 180-calendar
day compliance period. To qualify for this additional time, we were required to meet the continued listing requirement for market value
of publicly held shares and all other initial listing standards for Nasdaq with the exception of the Minimum Bid Requirement, and needed
to provide written notice of our intention to cure the deficiency during the second compliance period.
On October 24, 2022, we announced
our plans to change the ratio of the ADSs to our Ordinary Shares, from the ADS Ratio of one ADS to one Ordinary Share, to a new ADS ratio
of one ADS to ten Ordinary Shares. The ADS ratio change became effective on November 8, 2022. On November 3, 2022, we reported the receipt
of a formal notification from the Nasdaq that we have regained compliance with the Minimum Bid Requirement. The Nasdaq staff made this
determination of compliance after the closing bid price of the ADSs was at $1.00 per share or greater for the prior 10 consecutive business
days. Accordingly, Nasdaq considers the prior bid price deficiency matter now closed.
We
cannot guarantee that we will continue to comply with the Minimum Bid Requirement. If we fail to demonstrate compliance with the Minimum
Bid Requirement and satisfy Nasdaq’s conditions for continued listing, our Ordinary Shares could be delisted. Delisting from the
Nasdaq could have an adverse effect on our business and on the trading of our Ordinary Shares. If a delisting of our Ordinary Shares were
to occur, such shares may trade in the over-the-counter market such as on the OTC Bulletin Board or on the “pink sheets.”
The over-the-counter market is generally considered to be a less efficient market, and this could diminish investors’ interest in
our Ordinary Shares as well as significantly impact the price and liquidity of our Ordinary Shares. Any such delisting may also severely
complicate trading of our Ordinary Shares by our shareholders or prevent them from re-selling their Ordinary Shares at/or above the price
they paid.
Issuance of a significant amount of additional
Ordinary Shares on exercise or conversion of outstanding warrants and/or substantial future sales of our Ordinary Shares may depress our
share price.
As of March 24, 2023, we had
approximately 32.9 million Ordinary Shares issued and outstanding and approximately 16.1 million of additional Ordinary Shares which are
issuable upon exercise of outstanding warrants and employee options. The issuance of a significant amount of additional Ordinary Shares
on account of these outstanding securities will dilute our current shareholders’ holdings and may depress our share price. If
these or other shareholders sell substantial amounts of our Ordinary Shares and/or ADSs, including shares issuable upon the exercise or
conversion of outstanding warrants or employee options, or if the perception exists that our shareholders may sell a substantial number
of our Ordinary Shares and/or ADSs, we cannot foresee the impact of any potential sales on the market price of these additional Ordinary
Shares, but it is possible that the market price of our Ordinary Shares would be adversely affected. Any substantial sales of our shares
in the public market might also make it more difficult for us to sell equity or equity related securities in the future at a time and
on terms we deem appropriate. Even if a substantial number of sales do not occur, the mere existence of this “market overhang”
could have a negative impact on the market for, and the market price of, our Ordinary Shares.
Holders of ADSs may not receive the same
distributions or dividends as those we make to the holders of our Ordinary Shares, and, in some limited circumstances, holders of ADSs
may not receive dividends or other distributions on our Ordinary Shares and may not receive any value for them, if it is illegal or impractical
to make them available to holders of ADSs.
The depositary for the ADSs
has agreed to pay to ADS holders the cash dividends or other distributions it or the custodian receives on Ordinary Shares or other deposited
securities underlying the ADSs, after deducting its fees and expenses. Although, we do not currently anticipate paying any dividends,
if we do, the ADS holders will receive these distributions in proportion to the number of Ordinary Shares your ADSs represent. However,
the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of
ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration
under the Securities Act of 1933, as amended, or the Securities Act, but that are not properly registered or distributed under an applicable
exemption from registration. In addition, conversion into U.S. dollars from foreign currency that was part of a dividend made in respect
of deposited Ordinary Shares may require the approval or license of, or a filing with, any government or agency thereof, which may be
unobtainable. In these cases, the depositary may determine not to distribute such property and hold it as “deposited securities”
or may seek to effect a substitute dividend or distribution, including net cash proceeds from the sale of the dividends that the depositary
deems an equitable and practicable substitute. We have no obligation to register under U.S. securities laws any ADSs, Ordinary Shares,
rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution
of ADSs, Ordinary Shares, rights, or anything else to holders of ADSs. In addition, the depositary may withhold from such dividends or
distributions its fees and an amount on account of taxes or other governmental charges to the extent the depositary believes it is required
to make such withholding. This means that you may not receive the same distributions or dividends as those we make to the holders of our
Ordinary Shares, and, in some limited circumstances, you may not receive any value for such distributions or dividends if it is illegal
or impractical for us to make them available to you. These restrictions may cause a material decline in the value of the ADSs.
Our warrants are speculative in nature.
Our warrants do not confer
any rights of ownership of Ordinary Shares or ADSs on their holders, such as voting rights or the right to receive dividends, but only
represent the right to acquire ADSs at a fixed price and for a limited period. Specifically, commencing on the date of issuance, holders
of the warrants may exercise their right to acquire ADSs and pay an exercise price per ADS ranging between $6.75 and $2,870, subject to
adjustment upon certain events, prior to five years from the date of issuance, after which date any unexercised warrants will expire and
have no further value.
Holders of our warrants will have no rights
as shareholders until such holders exercise their warrants and acquire our ADSs.
Until holders of the warrants
acquire our ADSs upon exercise of the warrants, they will have no rights with respect to our ADSs or Ordinary Shares underlying such warrants.
Upon exercise of the warrants the holders thereof will be entitled to exercise the rights of a holder of ADSs only as to matters for which
the record date occurs after the exercise date.
We do not anticipate paying any cash dividends
in the foreseeable future.
We have never declared or
paid cash dividends, and we do not anticipate paying cash dividends in the foreseeable future. In addition, Israeli law limits our ability
to declare and pay dividends, and may subject our dividends to Israeli withholding taxes, and our payment of dividends (out of tax-exempt
income) may subject us to certain Israeli taxes, to which we would not otherwise be subject.
Holders of ADSs may not have the same voting
rights as the holders of our Ordinary Shares and may not receive voting materials in time to be able to exercise the right to vote.
Holders of the ADSs may not
be able to exercise voting rights attaching to the Ordinary Shares underlying the ADSs on an individual basis. Instead, holders of the
ADSs appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the Ordinary Shares in the
form of ADSs. Holders of ADSs may not receive voting materials in time to instruct the depositary to vote, and it is possible that they,
or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.
Furthermore, the depositary will not be liable for any failure to carry out any instructions to vote, for the manner in which any vote
is cast or for the effect of any such vote. As a result, you may not be able to exercise voting rights and may lack recourse if your ADSs
are not voted as requested.
Holders of ADSs must act through the depositary
to exercise their rights as shareholders of our company.
Holders of our ADSs do not
have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying Ordinary Shares in accordance
with the provisions of the deposit agreement for the ADSs. Under Israeli law and our articles of association, the minimum notice period
required to convene a shareholders meeting is generally no less than 35 calendar days, but in some instances, 21 or 14 calendar days,
depending on the proposals on the agenda for the shareholders meeting. When a shareholder meeting is convened, holders of our ADSs may
not receive sufficient notice of a shareholders’ meeting to permit them to withdraw their Ordinary Shares to allow them to cast
their vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions
to holders of our ADSs or carry out their voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary
to extend voting rights to holders of our ADSs in a timely manner, but we cannot assure holders that they will receive the voting materials
in time to ensure that they can instruct the depositary to vote their Ordinary Shares underlying the ADSs. Furthermore, the depositary
and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast
or for the effect of any such vote. As a result, holders of our ADSs may not be able to exercise their right to vote and they may lack
recourse if their ADSs are not voted as they requested. In addition, in the capacity as a holder of ADSs, they will not be able to call
a shareholders’ meeting.
The Jumpstart Our Business Startups Act
of 2012, or the JOBS Act, allows us to postpone the date by which we must comply with some of the laws and regulations intended to protect
investors and to reduce the amount of information we provide in our reports filed with the SEC, which could undermine investor confidence
in our company and adversely affect the market price of our ADSs or Ordinary Shares.
For so long as we remain an
“emerging growth company” as defined in the JOBS Act, which at the latest will be until December 31, 2023, we intend to take
advantage of certain exemptions from various requirements that are applicable to public companies that are not “emerging growth
companies” including:
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the provisions of the Sarbanes-Oxley Act requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting; and |
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any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report on the consolidated financial statements. |
We intend to take advantage
of these exemptions until we are no longer an “emerging growth company.” We will remain an emerging growth company until the
earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the date of our first sale of common equity securities
pursuant to an effective registration statement under the Securities Act, which is December 31, 2023, (b) in which we have total annual
gross revenue of at least $1.235 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value
of our Ordinary Shares that is held by non-affiliates exceeds $700 million as of the prior June 30, and (2) the date on which we have
issued more than $1.0 billion in non-convertible debt during the prior three-year period.
We cannot predict if investors
will find our ADSs or Ordinary Shares less attractive because we may rely on these exemptions. If some investors find our ADSs or Ordinary
Shares less attractive as a result, there may be a less active trading market for our ADSs or Ordinary Shares, and our market prices may
be more volatile and may decline.
As a “foreign private issuer”
we are permitted to follow certain home country corporate governance practices instead of otherwise applicable SEC and Nasdaq requirements,
which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.
Our status as a foreign private
issuer also exempts us from compliance with certain SEC laws and regulations and certain regulations of the Nasdaq Stock Market, including
the proxy rules, the short-swing profits recapture rules, and certain governance requirements such as independent director oversight of
the nomination of directors and executive compensation. In addition, we will not be required under the Exchange, to file current reports
and consolidated financial statements with the SEC as frequently or as promptly as U.S. domestic companies whose securities are registered
under the Exchange Act and we will generally be exempt from filing quarterly reports with the SEC. Also, although the Israeli Companies
Law 5759-1999, or the Israeli Companies Law, requires us to disclose the annual compensation of our five most highly compensated officers
on an individual basis, this disclosure is not as extensive as that required of a U.S. domestic issuer. For example, the disclosure required
under Israeli law would be limited to compensation paid in the immediately preceding year without any requirement to disclose option exercises
and vested stock options, pension benefits or potential payments upon termination or a change of control. Furthermore, as a foreign private
issuer, we are also not subject to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act.
These exemptions and leniencies
will reduce the frequency and scope of information and protections to which you are entitled as an investor.
We may be a “passive foreign investment
company”, or PFIC, for U.S. federal income tax purposes in the current taxable year or may become one in any subsequent taxable
year. There generally would be negative tax consequences for U.S. taxpayers that are holders of our ADSs or Ordinary Shares if we are
or were to become a PFIC.
Based on the projected composition
of our income and valuation of our assets, we do not expect to be a PFIC for 2022, and we do not expect to become a PFIC in the future,
although there can be no assurance in this regard. The determination of whether we are a PFIC is made on an annual basis and will depend
on the composition of our income and assets from time to time. We will be treated as a PFIC for U.S. federal income tax purposes in any
taxable year in which either (1) at least 75% of our gross income is “passive income” or (2) on average at least 50% of our
assets by value produce passive income or are held to produce passive income. Passive income for this purpose generally includes, among
other things, certain dividends, interest, royalties, rents and gains from commodities and securities transactions and from the sale or
exchange of property that gives rise to passive income. Passive income also includes amounts derived by reason of the temporary investment
of funds, including those raised in a public offering. In determining whether a non-U.S. corporation is a PFIC, a proportionate share
of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is considered.
The tests for determining PFIC status are applied annually, and it is difficult to make accurate projections of future income and assets
which are relevant to this determination. In addition, our PFIC status may depend in part on the market value of our ADSs or Ordinary
Shares. Accordingly, there can be no assurance that we currently are not or will not become a PFIC in the future. If we are a PFIC in
any taxable year during which a U.S. taxpayer holds our ADSs or Ordinary Shares, such U.S. taxpayer would be subject to certain adverse
U.S. federal income tax rules. In particular, if the U.S. taxpayer did not make an election to treat us as a “qualified electing
fund,” or QEF, or make a “mark-to-market” election, then “excess distributions” to the U.S. taxpayer, and
any gain realized on the sale or other disposition of our ADSs or Ordinary Shares by the U.S. taxpayer: (1) would be allocated ratably
over the U.S. taxpayer’s holding period for the ADSs or Ordinary Shares; (2) the amount allocated to the current taxable year and
any period prior to the first day of the first taxable year in which we were a PFIC would be taxed as ordinary income; and (3) the amount
allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of
taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable
to each such other taxable year. In addition, if the U.S. Internal Revenue Service, or the IRS, determines that we are a PFIC for a year
with respect to which we have determined that we were not a PFIC, it may be too late for a U.S. taxpayer to make a timely QEF or mark-to-market
election. U.S. taxpayers that have held our ADSs or Ordinary Shares during a period when we were a PFIC will be subject to the foregoing
rules, even if we cease to be a PFIC in subsequent years, subject to exceptions for U.S. taxpayer who made a timely QEF or mark-to-market
election. A U.S. taxpayer can make a QEF election by completing the relevant portions of and filing IRS Form 8621 in accordance with the
instructions thereto. We do not intend to notify U.S. taxpayers that hold our ADSs or Ordinary Shares if we believe we will be treated
as a PFIC for any taxable year to enable U.S. taxpayers to consider whether to make a QEF election. In addition, we do not intend to furnish
such U.S. taxpayers annually with information needed to complete IRS Form 8621 and to make and maintain a valid QEF election for any year
in which we or any of our subsidiaries are a PFIC. U.S. taxpayers that hold our ADSs or Ordinary Shares are strongly urged to consult
their tax advisors about the PFIC rules, including tax return filing requirements and the eligibility, manner, and consequences to them
of making a QEF or mark-to-market election with respect to our ADSs or Ordinary Shares if we are a PFIC. See “Item 10.E. Taxation—U.S.
Federal Income Tax Considerations—Passive Foreign Investment Companies” for additional information.
ADSs holders may not be entitled to a jury
trial with respect to claims arising under the deposit agreement, which could result in less favorable results to the plaintiff(s) in
any such action.
The deposit agreement governing
the ADSs representing our Ordinary Shares provides that holders and beneficial owners of ADSs irrevocably waive the right to a trial by
jury in any legal proceeding arising out of or relating to the deposit agreement or the ADSs, including claims under federal securities
laws, against us or the depositary to the fullest extent permitted by applicable law. If this jury trial waiver provision is prohibited
by applicable law, an action could nevertheless proceed under the terms of the deposit agreement with a jury trial. To our knowledge,
the enforceability of a jury trial waiver under the federal securities laws has not been finally adjudicated by a federal court. However,
we believe that a jury trial waiver provision is generally enforceable under the laws of the State of New York, which govern the deposit
agreement, by a court of the State of New York or a federal court, which have non-exclusive jurisdiction over matters arising under the
deposit agreement, applying such law. In determining whether to enforce a jury trial waiver provision, New York courts and federal courts
will consider whether the visibility of the jury trial waiver provision within the agreement is sufficiently prominent such that a party
has knowingly waived any right to trial by jury. We believe that this is the case with respect to the deposit agreement and the ADSs.
In addition, New York courts will not enforce a jury trial waiver provision in order to bar a viable setoff or counterclaim sounding in
fraud or one which is based upon a creditor’s negligence in failing to liquidate collateral upon a guarantor’s demand, or
in the case of an intentional tort claim (as opposed to a contract dispute), none of which we believe are applicable in the case of the
deposit agreement or the ADSs. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder
or beneficial owner of ADSs or by us or the depositary of compliance with any provision of the federal securities laws. If you or any
other holder or beneficial owner of ADSs brings a claim against us or the depositary in connection with matters arising under the deposit
agreement or the ADSs, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which
may have the effect of limiting and discouraging lawsuits against us and / or the depositary. If a lawsuit is brought against us and /
or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be
conducted according to different civil procedures and may result in different results than a trial by jury would have had, including results
that could be less favorable to the plaintiff(s) in any such action, depending on, among other things, the nature of the claims, the judge
or justice hearing such claims, and the venue of the hearing.
Risks Related to Israeli Law and Our Operations
in Israel
Provisions of Israeli law and our articles
of association may delay, prevent or otherwise impede a merger with, or an acquisition of, our company, which could prevent a change of
control, even when the terms of such a transaction are favorable to us and our shareholders.
As a company incorporated
under the law of the State of Israel, we are subject to Israeli law. Israeli corporate law regulates mergers, requires tender offers for
acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant
shareholders and regulates other matters that may be relevant to such types of transactions. For example, a merger may not be consummated
unless at least 50 days have passed from the date on which a merger proposal is filed by each merging company with the Israel Registrar
of Companies and at least 30 days have passed from the date on which the shareholders of both merging companies have approved the merger.
In addition, a majority of each class of securities of the target company must approve a merger. Moreover, a tender offer for all of a
company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at
least 95% of the issued share capital and a majority of the offerees that do not have a personal interest in the tender offer approves
the tender offer, unless, following consummation of the tender offer, the acquirer would hold at least 98% of the company’s outstanding
shares. Under the Israeli law, a potential bidder for the company’s shares, who would as a result of a purchase of shares hold either
25% of the voting rights in the company when no other party holds 25% or more, or 45% of the voting rights in the company where no other
shareholders holds 45% of the voting rights, would be required to make a special purchase offer as set out in the provisions of the Israeli
law. The Israeli law requires a special purchase offer to be submitted to shareholders for a pre-approval vote. A majority vote is required
to accept the offer. An offeror who is regarded as a ‘controlling shareholder’ under Israeli law, as well as those who control
the offeror, those who have a personal interest in the acceptance of the special purchase offer, or those who holds 25% of the voting
rights in the company, or those on behalf of those or the offeror, including their relatives or corporations under their control, cannot
vote on the resolution and the procedure includes a secondary vote of the non-voting shareholders and the shareholders who rejected the
offer at pre-approval level. A special purchase offer may not be accepted unless shares that carry 5% of the voting rights in the target
company are acquired. Furthermore, the shareholders may, at any time within six months following the completion of the tender offer, claim
that the consideration for the acquisition of the shares does not reflect their fair market value, and petition an Israeli court to alter
the consideration for the acquisition accordingly, other than those who indicated their acceptance of the tender offer in case the acquirer
stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal rights, and the acquirer or the company
published all required information with respect to the tender offer prior to the tender offer’s response date. In addition, our
articles of association provide for a staggered board of directors, which mechanism may delay, defer or prevent a change of control of
the Company. See “Item 10.B Memorandum and Articles of Association — Provisions Restricting Change in Control of Our Company”
for additional information.
Israeli tax considerations
also may make potential transactions unappealing to us or to 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 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 may be subject to certain restrictions and additional
terms. 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 disposition of the shares has occurred. See “Item 10.E. Taxation—Israeli Tax Considerations
and Government Programs” for additional information.
The rights and responsibilities of a holder
of our securities will be governed by Israeli law, which differs in some material respects from the rights and responsibilities of shareholders
of U.S. companies.
The rights and responsibilities
of the holders of our Ordinary Shares (and therefore indirectly, the ADSs and the warrants) are governed by our articles of association
and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders
in typical U.S.-based corporations. In particular, a shareholder of an Israeli company has certain duties to act in good faith in a customary
manner in exercising its rights and performing its obligations towards the company and other shareholders and to refrain from abusing
its power in the company including, among other things, in voting at the general meeting of shareholders on certain matters, such as an
amendment to the company’s articles of association, an increase of the company’s authorized share capital, a merger of the
company, and approval of related party transactions that require shareholder approval. A shareholder also has a general duty to refrain
from discriminating against other shareholders. In addition, a controlling shareholder or a shareholder who knows that it possesses the
power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of an officer of the company has a duty
to act in fairness towards the company with regard to such vote or appointment. However, Israeli law does not define the substance of
this duty of fairness. There is limited case law available to assist us in understanding the nature of this duty or the implications of
these provisions. These provisions may be interpreted to impose additional obligations on holders of our Ordinary Shares that are not
typically imposed on shareholders of U.S. corporations. See “Item 6.C. Board Practices—Duties of Shareholders” for additional
information.
It may be difficult to enforce a judgment
of a U.S. court against us and our officers and directors and the Israeli experts named in this annual report in Israel or the United
States, to assert U.S. securities laws claims in Israel or to serve process on our officers and directors and these experts.
We were incorporated in Israel
and our corporate headquarters are located in Israel. The vast majority of our executive officers and directors and the Israeli experts
named in this annual report on Form 20-F are located in Israel. All of our assets and most of the assets of these persons are located
in Israel. Therefore, a judgment obtained against us, or any of these persons, including a judgment based on the civil liability provisions
of the U.S. federal securities laws, may not be collectible in the United States and may not necessarily be enforced by an Israeli court.
It also may be difficult to affect service of process on these persons in the United States or to assert U.S. securities law claims in
original actions instituted in Israel. 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.
Our headquarters and other significant operations
are located in Israel, and, therefore, our results may be adversely affected by political, economic and military instability in Israel.
Our executive offices, corporate
headquarters and research and development facilities are located in Israel. In addition, all of our key employees, officers and directors
are residents of Israel. Accordingly, political, economic and military conditions in Israel and the surrounding region may directly affect
our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and
its neighboring Arab countries, the Hamas militant group (an Islamist militia and political group that controls the Gaza strip) and the
Hezbollah (an Islamist militia and political group based in Lebanon). Any hostilities involving Israel or the interruption or curtailment
of trade between Israel and its trading partners could adversely affect business conditions in Israel in general and our business in particular,
and adversely affect our product development, our operations and results of operations. Ongoing and revived hostilities or other Israeli
political or economic factors, such as, an interruption of operations at the Tel Aviv airport, could prevent or delay our regular operation,
product development and delivery of products.
Any armed conflicts, terrorist
activities or political instability in the region could adversely affect business conditions, could harm our results of operations and
could make it more difficult for us to raise capital. Parties with whom we do business may sometimes decline to travel to Israel during
periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary, in order to meet our business partners
face to face. Several countries, principally in the Middle East, still restrict doing business with Israel and Israeli companies, and
additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political
instability in the region continues or increases. Similarly, Israeli companies are limited in conducting business with entities from several
countries. For instance, Israeli law forbids any investments in entities that transact business with Iran. In addition, the political
and security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming that they
are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements.
Our employees and consultants
in Israel, including members of our senior management, may be obligated to perform one month, and in some cases longer periods, of military
reserve duty until they reach the age of 40 (or older, for citizens who hold certain positions in the Israeli armed forces reserves) and,
in the event of a military conflict or emergency circumstances, may be called to immediate and unlimited active duty. In the event of
severe unrest or other conflict, individuals could be required to serve in the military for extended periods of time. In response to increases
in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that there will be similar
large-scale military reserve duty call-ups in the future. Our operations could be disrupted by the absence of a significant number of
our officers, directors, employees and consultants related to military service. Such disruption could materially adversely affect our
business and operations. Additionally, the absence of a significant number of the employees of our Israeli suppliers and contractors related
to military service or the absence for extended periods of one or more of their key employees for military service may disrupt their operations.
Our insurance does not cover
losses that may occur as a result of an event associated with the security situation in the Middle East or for any resulting disruption
in our operations. Although the Israeli government has in the past covered the reinstatement value of direct damages that were caused
by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained or, if maintained, will be
sufficient to compensate us fully for damages incurred and the government may cease providing such coverage or the coverage might not
suffice to cover potential damages. Any losses or damages incurred by us could have a material adverse effect on our business. Any armed
conflicts or political instability in the region would likely negatively affect business conditions generally and could harm our results
of operations and product development.
Further, in the past, the
State of Israel and Israeli companies have been subjected to economic boycotts. Several countries still restrict business with the State
of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on our operating results, financial
conditions or the expansion of our business. Similarly, Israeli corporations are limited in conducting business with entities from several
countries.
Finally,
the Israeli government is currently pursuing extensive changes to Israel’s judicial system. In response to the foregoing developments,
individuals, organizations and institutions, both within and outside of Israel, have voiced concerns that the proposed changes may negatively
impact the business environment in Israel including due to reluctance of foreign investors to invest or conduct business in Israel, as
well as to increased currency fluctuations, downgrades in credit rating, increased interest rates, increased volatility in securities
markets, and other changes in macroeconomic conditions. Such proposed changes may also adversely affect the labor market in Israel or
lead to political instability or civil unrest. To the extent that any of these negative developments do occur, they may have an adverse
effect on our business, our results of operations and our ability to raise additional funds, if deemed necessary by our management and
board of directors.
General Risk Factors
Raising additional capital would cause dilution
to holders of our equity securities, and may affect the rights of existing holders of equity securities.
We may seek additional capital
through a combination of private and public equity offerings, debt financings and collaborations and strategic and licensing arrangements.
To the extent that we raise additional capital through the issuance of equity or convertible debt securities, your ownership interest
will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a holder of the ADSs.
We are subject to a number of risks associated
with global sales and operations.
Business practices in the
global markets that we serve may differ from those in the United States and may require us to include non-standard terms in
customer contracts, such as extended payment or warranty terms. To the extent that we enter into customer contracts that include non-standard terms
related to payment, warranties, or performance obligations, our results of operations may be adversely impacted.
Additionally, our global sales
and operations are subject to a number of risks, including the following:
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greater difficulty in enforcing contracts and managing collections, as well as longer collection periods; |
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higher costs of doing business globally, including costs incurred in maintaining office space, securing adequate staffing and localizing our contracts; |
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fluctuations in exchange rates between the NIS and foreign currencies in markets where we do business; |
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management communication and integration problems resulting from cultural and geographic dispersion; |
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risks associated with trade restrictions and foreign legal requirements, including any importation, certification, and localization of our platform that may be required in foreign countries; |
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greater risk of unexpected changes in regulatory practices, tariffs, and tax laws and treaties; |
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compliance with anti-bribery laws, including, without limitation, compliance with the U.S. Foreign Corrupt Practices Act and the U.K. Anti-Bribery Act; |
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heightened risk of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, or irregularities in, consolidated financial statements; |
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reduced or uncertain protection of intellectual property rights in some countries; |
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social, economic and political instability, terrorist attacks and security concerns in general; |
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an outbreak of a contagious disease, such as coronavirus, which may cause us, third party vendors and manufacturers and/or customers to temporarily suspend our or their respective operations in the affected city or country; |
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laws and business practices favoring local competition; |
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being subject to the laws, regulations and the court systems of many jurisdictions; and |
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These and other factors could
harm our ability to generate future global revenues and, consequently, materially impact our business, results of operations and financial
condition.
Weakened global economic conditions may affect our industry,
business and results of operations.
Our overall performance depends
on worldwide economic conditions. These conditions affect the rate of information technology spending and could adversely affect our customers’
ability or willingness to purchase our secure access solutions, delay prospective customers’ purchasing decisions, reduce the value
or duration of their subscription contracts, or affect renewal rates, all of which could adversely affect our operating results. In addition,
in a weakened economy, companies that have competing products may reduce prices which could also reduce our average selling prices and
harm our operating results.
The price of the ADSs may be volatile.
The market price of
the ADSs has fluctuated in the past. Consequently, the current market price of the ADSs may not be indicative of future market prices,
and we may be unable to sustain or increase the value of your investment in the ADSs. During the first quarter of 2023 and up to March
24, 2023, the market price of our ADSs has fluctuated from a low of $1.53 per ADS to a high of $2.88 per ADS, and our ADS price continues
to fluctuate, as does the daily volume of trading of our ADSs. The market price of our ADSs and volume of trading may continue to fluctuate
significantly in response to numerous factors, some of which are beyond our control, such as:
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our ability to grow our revenue and customer base; |
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the announcement of new products or product enhancements by us or our competitors; |
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variations in our and our competitors’ results of operations; |
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successes or challenges in our funding sources; |
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developments in the industries we operate; |
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future issuances of ADSs or other securities; |
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the addition or departure of key personnel; |
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announcements by us or our competitors of acquisitions, investments or strategic alliances; and |
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general market conditions and other factors, including factors unrelated to our operating performance. |
Further, the stock market
in general, and the market for technology companies in particular, has recently experienced extreme price and volume fluctuations. The
volatility of our ADSs is further exacerbated due to its low trading volume, which has only recently increased. Continued market fluctuations
could result in extreme volatility in the price of our ADSs which could cause a decline in the value of our ADSs and the loss of some
or all of your investment.
We may be subject to securities litigation,
which is expensive and could divert management attention.
In the past, companies that
have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the
target of this type of litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s
attention and resources, which could seriously hurt our business. Any adverse determination in litigation could also subject us to significant
liabilities. We may also not be able to maintain and effectively comply with the Minimum Bid Requirement.
If securities or industry analysts do not
publish or cease publishing research or reports about us, our business, or our market, or if they adversely change their recommendations
or publish negative reports regarding our business or our shares, the share price and trading volume of our Ordinary Shares and ADSs could
decline.
The trading market for our
ADSs or Ordinary Shares will be influenced by the research and reports that industry or securities analysts may publish about us, our
business, our market, or our competitors. We do not have any control over these analysts, and we cannot provide any assurance that analysts
will cover us or provide favorable coverage. If any of the analysts who may cover us adversely change their recommendation regarding our
ADSs or Ordinary Shares, or provide more favorable relative recommendations about our competitors, our share price would likely decline.
If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility
in the financial markets, which in turn could cause the share price or trading volume of our ADSs or Ordinary Shares to decline.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
Our legal and commercial
name is Alarum Technologies Ltd. We were incorporated as a legal entity in the State of Israel in December 1989, and are therefore subject
to the Israeli Companies Law. From June 2011 until June 2016, we did not have any active business operations, excluding administrative
management. On June 15, 2016, we completed a merger transaction, or the Merger Transaction, with Safe-T Data A.R Ltd., or Safe-T Data,
whereby we acquired 100% of the share capital of Safe-T Data. Since the date of the Merger Transaction, we have devoted substantially
all of our financial resources to develop and commercialize our products and to extend our business organically as well as by acquisitions.
Our Ordinary Shares have been trading on the Tel Aviv Stock Exchange, or TASE, since January 2000. As of July 7, 2016, and following the
change of our name in the course of the Merger Transaction, our symbol on the TASE was “SAFE.” ADSs representing our Ordinary
Shares have been trading on the Nasdaq Capital Market and TASE under the symbol “SFET” since August 17, 2018. On January 8,
2023, we changed our name to Alarum Technologies Ltd., and effective from January 25, 2023, our ADSs, representing our Ordinary Shares,
are traded on the Nasdaq Capital Market, and our Ordinary Shares are traded on TASE under the symbol “ALAR.”
Our principal executive offices
are located at 30 Haarba’a St, Tel Aviv, 6473926 Israel. Our telephone number in Israel is +972-9-8666110.
Our website address is www.alarum.io.
The information contained on our website or available through our website is not incorporated by reference into and should not be considered
a part of this annual report on Form 20-F, and the reference to our website in this annual report on Form 20-F is an inactive textual
reference only. NetNut Networks Inc. is our agent in the United States, and its address is 4607 Library Rd Ste 220 #1067 Bethel Park,
PA 15102.
We are an emerging growth
company, as defined in Section 2(a) of the Securities Act, as implemented under the JOBS Act. As such, we are eligible to, and intend
to, take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging
growth companies including but not limited to not being required to comply with the auditor attestation requirements of the SEC rules
under Section 404 of the Sarbanes-Oxley Act. We could remain an emerging growth company until the earlier of (1) the last day of the fiscal
year (a) following the fifth anniversary of the date of our first sale of common equity securities pursuant to an effective registration
statement under the Securities Act, (b) in which we have total annual gross revenue of at least $1.235 billion, or (c) in which we are
deemed to be a large accelerated filer, which means the market value of our Ordinary Shares that is held by non-affiliates exceeds $700
million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the
prior three-year period.
We are a foreign private issuer
as defined by the rules under the Securities Act and the Exchange Act. Our status as a foreign private issuer also exempts us from compliance
with certain laws and regulations of the SEC and certain regulations of the Nasdaq Stock Market, including the proxy rules, the short-swing
profits recapture rules, and certain governance requirements such as independent director oversight of the nomination of directors and
executive compensation. In addition, we will not be required to file annual, quarterly and current reports and consolidated financial
statements with the SEC as frequently or as promptly as U.S. domestic companies registered under the Exchange Act.
Our capital expenditures for
2022, 2021 and 2020 amounted to $49,000, $73,000 and $41,000, respectively. These expenditures were primarily for purchases of fixed assets
and development expenditures capitalized as intangible assets. Our purchases of fixed assets primarily include leasehold improvements,
computers, and equipment used for the development of our products, and we financed these expenditures primarily from cash on hand.
B. Business Overview
We are a global SaaS provider
for enterprises and consumers. Our company consists of two internet access segments:
| ● | Enterprise Internet Access - offering web data collection and private internet browsing platform |
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| ● | Consumer Internet Access – offering solutions for secure and private internet browsing |
In addition to the above-mentioned
two segments, we are engaged with TerraZone Ltd., an information security provider, as an exclusive reseller of our legacy enterprise
cyber security products.
Our Enterprise Internet Access
arm offers a global web data collection cloud service, based on a secured hybrid proxy network and comprising both exit points based on
our proprietary reflection technology, and hundreds of servers through partnership agreements with tens of ISPs around the world.
Our web data collection solution
allows organizations to collect vast amounts of web and internet data by simultaneously connecting to the Internet from different IP addresses,
while maintaining full anonymity and privacy. Our customers can choose from various types of IPs from our IP pool which contains millions
of IPs, including ISP IPs, data center IPs, and residential service provider IPs.
With our web data collection
service, organizations can collect accurate, transparent web data from public online sources. The solution also allows access to undiscovered
data from non-traditional data sources and allows customers to gain additional data-driven information that provides valuable insights
with respect to predictive capabilities or behaviors, thereby assisting ongoing business management operation and decision making. An
added benefit to our customer is the fact that utilizing our network completely hides enterprises from the internet by modifying IP addresses,
thus ensuring high levels of privacy for their online presence.
Our web data collection service
enables access to the Internet through millions of end points globally, thus ensuring multiple business use cases, including large-scale
data collection and analysis, cyber security, price comparison, ad verification, Search Engine Optimization (SEO) validations, web data
extraction, collection of data for financial analysis, and more.
Our Consumer Internet Access
offers privacy and cybersecurity solutions to consumers. These solutions are designed to protect consumers against attacks, such as phishing,
ransomware, identity theft, and more. These solutions are designed for basic and advanced use cases, ensuring complete protection of personal
and digital information, and are installed on the consumers’ computers or mobile phones and through various browser and mobile application
stores.
We offer the following solutions:
Enterprise Internet Access Service:
| ● | Static
residential proxy network: a proxy network, which is based on our unique technology and
deployment through tens of ISPs partners around the world. |
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| ● | Rotating
residential proxy network: a proxy network, which is based on routing traffic through
millions of residential ISP based end points in the United States, Europe, Asia, South America
and Canada. |
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| ● | Data
center proxy network: a proxy network, which is based on routing traffic, deployed through
servers located in data centers with leading carriers in the United States, the EU, Asia
Pacific, or APAC, and more. |
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| ● | Premium
dedicated static residential proxies: a solution that creates a dedicated static IP for
each user. The end result is a highly effective proxy, that remains stable during heavy traffic
and saves the customer additional bandwidth charges. |
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| ● | Data
collection API cloud service: a service which allows our customers to use our application
programming interface, or API, to request content from any public source on the internet. |
Consumer Internet Access Solutions and services:
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Privacy Solutions and services: a software solution that uses an encryption protocol which is defined upon the process being used in order to generate a secured encrypted path and keep the users’ data private and safe. Our Privacy solution is available for iOS, PC and Android users. Its most common use is to guard against hackers and snoops on public networks, and are also useful to hide IP addresses for anonymous browsing, and to protect personal data on any Wi-Fi network. We also provide advertising services to third party privacy products. |
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● |
iShield™: a cybersecurity cloud software, which proactively protects users from online threats including phishing, malware, ransomware and more. As cyber threats are becoming more complex and sophisticated, users must adopt a well-rounded approach to mitigating such risks. Contrary to a reactive approach, a proactive cybersecurity approach is about acting before an attack occurs and iShield provides exactly that, by sending an alert and blocking the very access of a potential attack. Our algorithm detects in real time if a website contains malicious elements or activity, in addition to a database that we constantly collect for potential threats. iShield is currently available for Chrome browser users only. |
In this segment, our engagements
include monthly or annually renewable contracts, upon the customer’s discretion, where we offer multiple plans.
Enterprise Internet Access Background
Today, data is the core and
essence of all companies, and decisions are made based on data analysis rather than gut feelings. As markets become more and more competitive,
so does the need for large amounts of data to be analyzed in real time in order to make business decisions. To achieve this, companies
of all sectors started collecting data from the internet websites - this can be consumer and customer related data, product prices, advertising
data, financial data, internet behavior data, or other information.
The challenge is that it has
become common for internet websites to change their displayed information based on user IP address, location and demographic attributes.
For example, flight prices to the United States may differ for a person browsing an American airline from New York rather than from London.
In addition, to conduct competitor analysis, price comparisons and data extraction, companies need to access websites as a “simulated
user” to capture the real and accurate information.
From these needs, the market
of web data collection services has emerged, allowing businesses to gather data over the Internet using different types of IP addresses
(ISP, residential, data center) from various locations around the world. Web data collection services support a wide variety of use cases
and provide several significant benefits to their business users. For example, cyber and web intelligence companies can collect data anonymously
and infinitely from any public online source, advertising or ad networks can view their advertisers’ landing pages anonymously to
ensure they do not contain malware or improper advertising, online retailers can gather comparative pricing information from competitors,
and businesses may utilize these IP addresses to test their websites from different cities in the world.
A proxy server provides a
gateway between users and the internet. It is a server, referred to as an “intermediary” because it goes between end-users
and the web pages they visit online. When a computer connects to the internet, it uses an IP address. This is similar to a home street
address, telling incoming data where to go and marking outgoing data with a return address for other devices to authenticate. A proxy
server is essentially a computer on the internet that has an IP address of its own and instead of getting data directly from a website,
a customer’s request first passes through the proxy server, before going to and receiving a response from the target website, and
places an extra IP address from a rotating pool of addresses between a customer and any website they visit on the public internet. Proxy
servers provide varying levels of functionality, security, and primarily privacy, depending on the use case, needs, or user policy. Proxy
servers have many purposes, such as anonymizing identities, filtering information, getting around filters, and improving information retrieval
performance.
From the target website’s
perspective, no information about the original machine is sent. Only the proxy device’s IP address gets transmitted. As many websites
place limits on the amount of information sent to any one IP address, gathering additional, openly available data from any one website,
often involves using proxy servers to make it appear as if the requests come from different users, thus requiring the need for a rotating
pool of IP addresses to be used by proxy servers.
The rotating pool of IP addresses
can be derived from proxy software installed on residential users’ computers and mobile devices, while data centers use dedicated
proxy servers. Based on the IP address it receives, a target website can distinguish whether a request comes from a residence, mobile
device or data center and display different information accordingly based on location and demographic attributes. Companies tailoring
information based on such attributes led to competitors needing proxy services to simulate being actual customers. Proxy servers are intermediaries
between devices requesting information from other servers.
Rotating proxy servers tend
to be used by companies to simulate actual customers in different locations and to collect data, also known as web scraping. Ever since
the commercialization of the web, companies have developed increasingly better ways to target consumers via advertising and marketing
to the point of adjusting pricing based on a location or even per customer basis. As companies put more of their product information online,
this customer targeting made it very difficult for competitors and customers to monitor and/or compare pricing and product availability
that can vary so much because of targeting. Websites today recognize customers to show different advertising, content and pricing based
on location and other identifiable information. Companies further evolved to prevent competitors from accessing their data via blocking
their company’s entire range of IP addresses. This prevents companies from comparing pricing, security companies from conducing
audits for or detecting malware on malicious sites, and even website owners themselves from verifying their advertising is safe and being
delivered properly from their ad vendors.
In the age of information technology,
data is arguably the world’s most precious resource and the way we use and consume data has evolved considerably. The publicly available
web data is one of the main driving forces behind digital transformation and helps corporations and brands to develop, improve and build
business strategies faster. The web data collection market includes a variety of vendors in addition to NetNut, including Bright Data
(formerly Luminati Networks Ltd., which was acquired in August 2017 by EMK Capital for $160 million according to their sources), Similarweb
Ltd., Oxylabs Networks Pvt. Ltd., BiScience Inc., SmartProxy, and others. According to a Frost and Sullivan report from July 2019, the
estimated revenue in the Service Obtainable Market, or SOM, was forecasted to grow from 2018 to 2025 at a compound annual growth rate
of 16.8%, reaching revenues of $259.7 million by 2025.
Consumer Internet Access Background
The global data privacy software
market is expected to grow to reach $25.85 billion by 2029.
During the COVID-19 pandemic,
various business and organizations experienced temporary to longer-term shutdowns, increasing the need for remote access and work-from-home
practices. Working outside the corporate infrastructures prompted major data breaches and cyber incidents during that time and had brought
forth a great increase in the demand for access solutions. The increasing adoption of remote working has created immense challenges for
organizations to protect and manage remote workers identities and devices and has prompted a whole new security perimeter.
According to a 2022 report
by Digital Information World:
- more than 52% of people
think the realm of online privacy doesn’t exist.
- 46% of respondents were
concerned that their personal information will be misused by cyber criminals.
The growing public awareness
of the value of personal data and demand for data privacy and transparency create significant opportunities for businesses to differentiate
themselves.
Our Solutions/Services
|
1. |
Enterprise Internet Access |
Following our acquisition
of NetNut in June 2019, as further detailed below, we launched our web data collection service. The service is based on partnership agreements
with tens of ISPs around the world, as well as our proprietary software deployed at data centers and devices which enable our customers
to access the internet through millions of end points globally, and collect valuable data for their needs. The service’s performance
and scalability are enhanced by our proprietary proxy traffic optimization and routing technology.
Customers in the web data
collection market use the proxy service for various needs and for a wide variety of use cases, as mentioned above. To address all these
use cases, different types of web data collection services are needed. For some of the use cases, the web data collection service needs
to be fast and stable, and allow customers to use the same IP address for long time periods, while for others, the most important factor
of a web data collection service is its ability to provide a different IP address for each request in order to be able to get a full picture
of the collected data. For these reasons, providers in the web data collection market are required to provide a wide selection and web
data collection services types. We have invested heavily in the last year in expanding our offering in order to become a leading provider
in this market.
The uniqueness of our web
data collection service is based on the fact that unlike our competitors that provide predominantly host-based solutions, which require
installation of software on third-party uncontrolled end user devices, we support not only running software on end user devices, but also
routing the customer’s traffic through residential routers of our ISP partners.
Our solutions’ main
advantages over competitors include:
| ● | NetNut's
web data collection service has been designed to handle massive amounts of traffic, with
the capacity to process hundreds of terabytes per second. |
| | |
| ● | Our
web data collection service has the widest set of IP options offered to our customers. |
| | |
| ● | Our
direct connections to top ISPs worldwide allow for fast and reliable access to any geo-targeted
web data. |
| | |
| ● | NetNut
has formed strategic partnerships with leading ISPs and technology providers to enhance its
network capabilities and offer customers the best possible solution. |
| ● | NetNut's
solution has been rigorously tested and validated by independent research firms and experts
in the field. |
| | |
| ● | Results
have shown that the company's solution outperforms its competitors in terms of speed, security,
and reliability. |
| | |
| ● | NetNut's
solution has received positive feedback from customers, with many praising its fast, secure,
and reliable performance. |
| | |
| ● | The
company has received recognition from industry experts for its innovative approach
to proxy solutions. |
|
2. |
Consumer Internet Access |
Following the acquisition
of CyberKick in July 2021, as further detailed below, we launched our consumer online access solutions.
We provide SaaS security and
privacy tools, designed to reduce users’ vulnerability to threats while making them more resilient in their online activity, to
prevent and defend against a wide spectrum of cyber threats as well as to provide users with control of their accounts and management
of access to sensitive data. The business is divided into two main activities:
Development and distribution of privacy and
cyber security SaaS products
The privacy solution in an
online privacy protection product that allows its users to take charge of their online privacy with a powerful, secured, and encrypted
connection.
The iShield™ product
is a protective cybersecurity product for consumers, that identifies, eliminates, and helps avoid security and data threats that occur
unbeknownst while browsing online. The solution provides powerful protection from online cyber-attacks like phishing, malware, ransomware,
identity theft, data scams and viruses, all on the internet gateway access level. iShield™ is based on four layers:
|
● |
Protecting personal data and identity including protection against phishing, identity theft, monitoring of personal information leak, microphone and camera external usage detection, email data breach compromise check, auto password strength validator and more. |
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● |
Keeping the computer safe including browser antivirus, browser malicious extensions check, malicious and suspicious site alerts, anti-malware and files scanner, harmful site blocking, disable malicious push notifications, operating system and browser security update alerts. |
|
● |
Controlling web footprint including automated history and cookie cleaner. |
Distribution of security and privacy products
of third-party developers in various digital properties
We also generate revenues
from the distribution of security and privacy products of third-party developers.
Strategy
Our main goal is to become
one of the leading vendors in the fields of secure and private internet access both enterprises and consumers. We operate in Israel, North,
Central and South America, Europe, Southeast Asia, the Middle East and Africa, and we are taking steps to expand our activities by entering
into engagements with new business partners in those markets. We intend to continue investing resources in research and development in
order to improve our existing products, and develop new and cutting-edge products and technologies to maintain our innovative position
in the market.
We also intend to continue
to:
|
● |
engage with additional resellers, distributors and ISPs; |
|
|
|
|
● |
invest materially in marketing and sales activities; and |
|
|
|
|
● |
establish partnerships with industry leaders. |
While we invest in further
developing and marketing of our current solutions, we maintain a strict control over our expenditures and budgets in order to reduce operating
costs, streamline operations and improve our efficiency. We intend to continue our burn rate reduction, so we are better poised to achieve
profitability.
Competition
The markets in which we operate
are characterized by intense competition, constant innovation and evolving security threats. Our current and potential future competitors
in the web data collection service segment include providers such as Similarweb, Bright Data, Oxylabs Networks Pvt. Ltd., BI Science
Ltd. and others; and in the consumer internet access, we compete with providers such as Kape Technologies, Nord VPN, McAfee, Norton LifeLock,
Aura and others.
Since we compete with well-established
companies, which have an existing customer base, we invest significant efforts to obtain technological advantages in combination with
the ability to offer more cost-effective solutions than the ones offered by our competitors, aiming to attract customers of established
companies that operate in our industry.
We are constantly working to improve our competitive
standing by using the following measures:
|
● |
Entering into engagements with large and leading customers, since such engagements establish our status and reputation in the field of information security and open up new opportunities to enter into engagements with other customers; |
|
|
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● |
Entering into engagements with resellers, marketing entities and technological partners in order to strengthen our position in existing markets and to penetrate new markets, in accordance with our business strategy; |
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● |
Providing high level support services to existing customers in order to retain and encourage them to consume other services offered by us, thereby increasing revenues and preventing customer attrition; and; |
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|
● |
Meeting with customers in order to maintain our relationships. |
Competitive Strengths
We believe that our strengths
include the following:
Enterprise
Internet Access
|
● |
Our web data collection service includes high levels of security, guarantees quality of service, and is fast because of its unique architecture; |
|
● |
Our web data collection service is offered in a variety of different internet access networks for our customers to choose from or combine; |
|
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|
● |
All of our servers are controlled internally; and |
|
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|
● |
We offer a best-in-class web data collection platform that leverages our sizable network along with our collective best practices for collecting data ethically and effectively with Artificial Intelligence Machine Learning algorithms, to make the data collection process as smooth and easy as possible, allowing the user to simply choose its target URL and country of localized content. |
Consumer Internet
Access
|
● |
Detects dangerous websites during user’s browser usage – alerting and blocking those threats; |
|
|
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|
● |
Prevents users from ever reaching malicious web sites; |
|
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|
● |
Vast customer acquisition expertise in the world of B2C (business to consumer); |
|
● |
Engages with large and leading domestic and foreign customers and partners. Engagements with large customers and partners establish our status as a prominent player in the information security market and give us recognition and a reputation for reliability, which open up opportunities to engagements with other customers; and |
|
|
|
|
● |
Business and technological collaboration agreements that provide access to more markets and customers. |
Our Unique IP
Our unique IP serves as the
foundation for our solutions, providing it the technology components required to create a true secure access solution.
Our IP is comprised of the
following modules:
|
● |
Reverse access; and |
|
|
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|
● |
Proprietary reflection technology. |
Reverse Access
Reverse access is our unique
dual server patented technology, which is designed to remove the need to open any ports within a firewall, while allowing secure access
between networks (through the firewall).
|
● |
Access Gateway – installed in the external network. |
|
|
|
|
● |
Access Controller – installed in the internal secured segment. |
Located in an organization’s
external network (on-premises or in the cloud), the role of the Access Gateway is to act as a front-end to all services and applications
published to the internet. It operates without the need to open any ports within the internal firewall and ensures that only legitimate
session data can pass through into the internal network. The Access Gateway performs Transmission Control Protocol (TCP), offloading,
allowing it to support any TCP based application without the need to perform secure sockets layer offloading and traffic processing.
Carrier grade routing
technology
Our unique carrier grade routing
technology system is based on software which is installed both on our global access servers’ network and on servers at the premises
of ISPs which are part of our global network platform. This software allows the ISPs to share the existing IP addresses with external
customers (our customers) without any effect on their current users and without the need to allocate these IPs specifically for our customers.
The software can handle the connectivity between hundreds of our global access servers and the ISPs’ networks and is able to manage
the routing on the TCP level of hundreds of thousands of concurrent connections without any degradation in the network performance.
Customers
In the last several years,
our customer base has steadily increased. As of December 31, 2022, we had more than 16,000 customers, primarily end users in the consumer
and enterprise access segments.
We initially addressed the
Israeli market, and accordingly the majority of our customers were Israeli based. However, in the past four years we have been operating
globally and our customer base has materially expanded, as mentioned above. Following the acquisition of NetNut in June 2019 and CyberKick
in July 2021, our mainstream of revenue is coming from the United States. We also have a significant customer in the consumer access business.
This customer generated approximately 63% of the consumer segment revenues in 2022, and 37% of our total revenues in 2022.
In the enterprise internet
access business, our customers include financial organizations, cyber security companies, industrial and commercial companies, online
companies, education institutions and others. Most of the customers are buying the services using periodic packages ranging between one
day to two months or per actual consumption. The packages can be either renewed automatically or by election, based on the customer’s
preferences.
In the consumer internet access
business, our end-users customers are individuals concerned with securing their internet connections and ensuring their personal information
remains private when they the browse the internet.
Marketing
Our internal marketing and
sales staff consist of approximately 20 persons as of March 24, 2023. We also work through marketing and distribution channels.
In the enterprise segment,
we enter into engagements with resellers for the purpose of reselling our services to their customers. We also partner with affiliates
which publish our solutions on their web sites for the purpose of lead and demand generation. The partners and marketing entities are
responsible, among other things, for the identification of potential customers, generating lead generation campaigns, etc. We have entered
into engagements with resellers for the purpose of distributing our products in North America, Israel, and a variety of countries in Europe,
Asia-Pacific, Africa and South America. We have tens of active ISPs and partners. The engagement with each partner/marketing entity is
limited to a specific territory and/or specific customers and is not exclusive. Normally, the term of engagement with partners/marketing
entities is one year and it is extended automatically, unless cancelled by one of the parties. The consideration in respect of those engagements
is paid to us from time to time when sales are made by the distributors.
In the consumer segment, our
team possesses more than ten years of experience in creating technologies for the paid advertising and brand marketing space, or the performance
marketing space, allowing us to leverage our technology stack (which is the combination of technologies a company uses to build and run
an application or project) on sophisticated prediction mechanisms for understanding the value of each user segment we acquire on various
parameters and enhance our customer acquisition strategy. In addition, our user acquisition technologies aggregate the customers acquisition
cost on a granular level while providing the predictive lifetime value on this segment, compared to a constantly changing user value model
we build from the concurrent data we gather. Based on the target margin goals, our teams are able to match the right acquisition
costs to each user value group.
Our product team adapts marketing
methods based on the user acquisition and retention results as we strongly believe that ongoing investment in product marketing is translated
into lower acquisition costs for the same user groups, resulting in optimal efficiency.
We participate from time to
time in web data and internet exhibitions and conferences.
We market our products through
our websites https://www.cyberkick.com/; https://netnut.io/; https://chiproxies.com/; and digital media.
Regulation
The trends described in the
field of information security and cyber protection are the underlying factors of the regulatory developments globally, which affect the
information security and cyber protection requirements applicable to our customers. In many instances, regulation started with making
information security obligatory for certain industries, such as critical infrastructures, and the health and finance sectors. In recent
years, information security regulation has been expanded to many types of organizations that hold information or run infrastructures that
have commercial or other value (including information of customers, employees and their internal systems). Regulations may impose on organizations
various requirements regarding integration of corporate procedures, enforcement plans, reporting duties, office holders’ duties
in connection with cyber security, etc. Regulation also requires organizations to integrate into their systems physical and technological
security measures in order to protect their information assets and computer systems.
The United States has a number
of information security regulatory schemes, in the fields of healthcare, finance, education, and government, such as the PCI-DSS, HIPAA,
the Sarbanes-Oxley Act and GLBA, and the international banking regulations of the Basel Committee on Bank Supervision, which are applicable
to the fields of credit cards, healthcare, securities and banking. Furthermore, many states in the United States have passed legislation
regarding reporting duties on information security breaches. Moreover, there is a clear trend of increased enforcement in organizations
and companies in order to increase information security.
Many organizations in the
United States and Europe are subject to information security standards set by industry sectors and other non-governmental entities. This
applies, for instance, to healthcare organizations, and organizations operating in the finance sector. We believe that our products will
assist organizations to comply with the information security requirements of the relevant laws, such as HIPAA (for healthcare organizations),
GLBA (for the finance sector) and the Sarbanes-Oxley Act (for publicly traded companies). Other countries around the world, including
Israel, have similar stringent regulations relating to information security.
Additionally, our solution
enables our customers to achieve and maintain compliance with certain laws and regulations addressing privacy and the collection, use,
storage, disclosure, transfer and protection of a variety of types of data, such as the GDPR and the Digital Economy Act 2017. These regimes
may, among other things, impose data security requirements, disclosure requirements, and restrictions on data collection, uses, and sharing
that could impact the way our solution enables our customers to maintain compliance with such laws or regulations. For further information,
see “Item 3.D. Risk Factors — Risks Related to Our Business and Industry — If our products fail to help our
customers achieve and maintain compliance with certain government regulations and industry standards, our business and results of operations
could be materially and adversely affected.”
Our Intellectual Property
We seek patent protection
as well as other effective intellectual property rights for our products and technologies in the United States and internationally. Our
policy is to pursue, maintain and defend intellectual property rights developed internally and to protect the technology, inventions and
improvements that are commercially important to the development of our business.
Our reverse access technology
is patent protected in several jurisdictions: United States (patent number US9935958 (in re-issue) and US10110606 titled “Reverse
Access Method for Securing Front-End Applications and Others”), Europe (patent number EP2815554A1, including Austria, Switzerland,
Germany, Spain, France, United Kingdom and Italy, titled “Reveres access method for securing front-end applications and others”),
Israel (patent number 218185 titled “Reverse Access System for Securing Front-End Applications”), China (patent number ZL2013800207104,
titled “Reverse Access Method for Securing Front-End Applications and Others”) and Hong-Kong (patent number HK1207766, titled
“Reverse Access Method for Securing Front-End Applications and Others”).. “SAFE-T”, “SAFE-T BOX”,
“IF YOU CAN’T BE SEEN, YOU CAN’T BE HACKED”, “ZoneZero”, “Zero+”, “NetNut”
and “iShield” are our registered and pending trademarks. Our logo, and the logos of our subsidiaries are our and our subsidiaries’
unregistered trademarks.
We generally enter into confidentiality
agreements with our employees, consultants, service providers, resellers and customers and generally limit internal and external access
to, and distribution of, our proprietary information and proprietary technology through certain procedural safeguards. These agreements
and measures may not effectively prevent unauthorized use or disclosure of our intellectual property or technology and may not provide
an adequate remedy in the event of unauthorized use or disclosure of our intellectual property or technology.
Grants from the Israeli Innovation Authority
Our research and development
efforts with respect to some of our past activities, including development of Secure Cloud Storage Access, were financed in part through
royalty-bearing grants from the Israel Innovation Authority, or IIA. As of March 25, 2022, we have completed the payment of royalties
derived from the aggregate amount of $146,000 we received from the IIA for the development of our abovementioned technologies.
Furthermore, pursuant to the
technology purchase agreement between Safe-T Data and CyKick Labs Ltd., approved by the IIA in July 2018, we were committed to pay royalties
from future sales on grants received from the IIA in connection with the technologies purchased under this agreement in the amount of
approximately $0.4 million from our income generated from products incorporating such technology.
On November 27, 2022pursuant
to our request, in light of our decision not to pursue further development of the CyKick technology, the IIA agreed to close the program
without any additional financial liabilities on the Company.
C. Organizational Structure
We have three wholly-owned
subsidiaries: NetNut Ltd., CyberKick Ltd. and Safe-T Data A.R Ltd. In addition, NetNut Ltd. has one wholly-owned subsidiary, NetNut Networks
Inc. CyberKick Ltd. owns four wholly owned subsidiaries - Spell Me Ltd., Robo VPN Inc., Robo VPN Technologies Ltd. and iShield Inc.
NetNut Ltd. is our
wholly-owned subsidiary incorporated in Israel. NetNut operates in the field of internet access services for enterprises, which enables
customers to collect data anonymously at any scale from any public sources over the web using a unique hybrid network.
CyberKick Ltd. is our
wholly-owned subsidiary incorporated in Israel. CyberKick operates in the field of internet access for consumers and provides a wide security
blanket against ransomware, viruses, phishing, and other online threats as well as a powerful, secured and encrypted connection,
masking the customers online activity and keeping them safe from hackers.
Safe-T Data A.R Ltd. is
our wholly-owned subsidiary incorporated in Israel. Safe-T Data operated in the field of enterprise cybersecurity, specifically in the
development and marketing of information security solutions for organizations that will allow secure and controlled sharing of information.
Currently, this subsidiary is inactive.
NetNut Networks Inc.
is a wholly-owned subsidiary of NetNut Ltd. NetNut Networks is incorporated in the State of Delaware, and the surviving legal entity following
a merger completed on December 31, 2022 between Safe-T USA Inc., a formerly wholly-owned subsidiary of Safe-T Data A.R Ltd., and its wholly-owned
subsidiary, NetNut Networks LLC. NetNut Networks is engaged in the field of enterprise access solutions.
Spell Me Ltd. is a
wholly-owned subsidiary of CyberKick. Spell Me Ltd. is incorporated in Seychelles and is engaged is the selling of our consumer access
solutions.
iShield Inc. is a wholly-owned
subsidiary of CyberKick. iShield is incorporated in the State of Delaware, and is engaged in the selling of our consumer cybersecurity
solution.
RoboVPN Inc. is a wholly-owned
subsidiary of CyberKick. RoboVPN Inc. is incorporated in the State of Delaware, and is engaged in the selling of our consumer cybersecurity
solution.
RoboVPN Technologies
Ltd. is a wholly-owned subsidiary of CyberKick. RoboVPN Technologies Ltd. is incorporated in Cyprus and is engaged is the selling of our
consumer access solutions.
D. Property, Plants and Equipment
Our headquarters is
located at 30 Haarba’a St., Tel Aviv, 6473926, Israel, where we occupy approximately 4,200 square feet. We lease our facilities
and our lease ends in October 2023. Our monthly rent payment is approximately NIS 58,000 (approximately $16,000). NetNut’s
offices are located at the same place. CyberKick’s offices are located at 121 Menahem Begin St., Tel Aviv, 6701203, Israel, where
it currently occupies 300 square feet. The current lease is on a renewable monthly basis, with a 3 months’ notice for mutual termination,
which amounts to approximately NIS 29,000 (approximately $8,000).
NetNut Networks’ registered address is 1 East Erie Street, Suite 525, Chicago, IL 60611.
We believe that our current
office spaces are sufficient to meet our anticipated needs for the foreseeable future and is suitable for the conduct of our business.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and
analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this annual
report on Form 20-F. This discussion and other parts of this annual report on Form 20-F contain forward-looking statements based upon
current expectations that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially
from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk
Factors” and elsewhere in this annual report in Form 20-F. We report financial information under IFRS as issued by the IASB. Our
discussion and analysis for the year ended December 31, 2021 can be found in our annual report on Form 20-F for the fiscal year ended
December 31, 2021, filed with the SEC on March 29, 2022.
Our Business Model
We generate primarily SaaS
revenues and advertising services revenues. We also generate immaterial software licenses revenues and software support services revenues
in the enterprise security segment through TerraZone, a third party provider (see also “Item 4B- Business Overview”).
The SaaS revenues are generated
when customers are subscribing to our enterprise and consumer access platforms and paying for the packages they choose. The packages are
usually for the earlier of one day to three months or maximum bandwidth usage in the enterprise privacy segment, and for a month or a
year in the consumers access segment. Our revenue is recognized on a straight-line basis over the package period.
We generate revenues on the
consumer access arena also from providing advertising services to enterprise customers, using marketing tools on various sites in order
to persuade the user to acquire the enterprise customers’ privacy products. Revenue is recognized at the point in time when a user
purchased an application or software of a customer.
Key Business Metric
We monitor the key business
metrics set forth below to help us evaluate and establish budgets, measure the effectiveness of our sales and marketing efforts, and assess
operational efficiencies. Our non-IFRS key business metrics are EBITDA loss and Adjusted EBITDA loss.
EBITDA loss. This is
a non-IFRS financial measure that we define as a loss which excludes: (i) amortization and impairment (if any) of intangible assets and
goodwill; (ii) share-based compensation expense; (iii) issuance costs in connection with our securities offerings (if any); and (iv) contingent
consideration measurement (if any).
Adjusted EBITDA loss.
This is a non-IFRS financial measure that we define as net loss before depreciation and amortization, interest and tax, as further adjusted
to remove the impact of (i) impairment of intangible assets and goodwill (if any); (ii) share-based compensation expense; (iii) contingent
consideration measurement (if any); and (iv) issuance costs in connection with our securities offerings (if any).
Due to accounting standards,
we are required to record non-cash expenses and non-core expenses, which have a material effect on our profitability. We believe that
these non-IFRS financial measures are useful in evaluating our business because of varying available valuation methodologies, subjective
assumptions and the variety of financial instruments that can impact a company’s non-cash expenses, and because they exclude non-core
cash expenditures such as the expenses mentioned above, that do not reflect the performance of our core business. By excluding non-cash
items that have been expensed in accordance with IFRS, we believe that the Company’s non-IFRS results provide information to both
management and investors that is useful in assessing the Company’s core operating performance and in evaluating and comparing the
Company’s results of ongoing operations on a consistent basis from period to period. Our management also uses both IFRS and non-IFRS
information in evaluating and operating our business internally. The following tables show the reconciled effect of the non-cash
expenses/income on our net loss for the years ended December 31, 2022, and 2021:
| |
December 31, | |
U.S. dollars in thousands | |
2022 | | |
2021 | |
Net loss for the year | |
| (13,151 | ) | |
| (13,125 | ) |
Adjustments: | |
| | | |
| | |
Assets depreciation, amortization and impairment | |
| 2,205 | | |
| 1,512 | |
Finance expense (income), net | |
| 54 | | |
| (942 | ) |
Tax benefit | |
| (327 | ) | |
| (945 | ) |
EBITDA loss | |
| (11,219 | ) | |
| (13,500 | ) |
Adjustments: | |
| | | |
| | |
Share-based compensation | |
| 1,679 | | |
| 2,356 | |
Contingent consideration measurement | |
| - | | |
| (684 | ) |
Impairment of goodwill | |
| 569 | | |
| 700 | |
Adjusted EBITDA loss | |
| (8,971 | ) | |
| (11,128 | ) |
Factors Affecting our Performance
We rely on market education
to raise awareness of today’s next-generation cyber-attacks, articulate the need for our solutions and, in particular, the reasons
to purchase our products. In addition, our enterprise access solutions rely on businesses requiring gathering data over the Internet using
residential and Data Center IP addresses from various localities around the world. Lastly, our revenues from consumers access tools rely
on consumers’ willingness to spend money in order to increase their safety and privacy while using the internet.
Our prospective customers
in the enterprise access segment often do not have a specific portion of their information technology budgets allocated for products
that address the next generation of advanced cyber-attacks or privacy solutions. We invest in sales and marketing efforts to increase
market awareness, educate prospective customers and drive the adoption of our solution. We believe that we will need to invest additional
resources in targeted international markets to drive awareness and market adoption. The degree to which prospective customers recognize
the mission critical need for next-generation protection solutions against threats, and subsequently allocate budgets for our platform,
will drive our ability to acquire new customers, increase renewals and follow-on sales opportunities, which, in turn, will affect our
future financial performance.
5.A Operating Results
Components of Operating Results
Revenue
We generate SaaS revenues
and advertising services revenues as detailed under “Our Business Model” above.
We believe that the comparison
of our year-over-year total revenue provides a more significant insight of our activity than a comparison of our quarterly results, predominately
due to seasonality in the sale of some of our products, subscriptions and services. Our fourth quarter has historically been our strongest
quarter for revenues as a result of large enterprises purchase patterns. Nevertheless, since the acquisition of NetNut in 2019 and the
consolidation of the SaaS revenues, and in a larger manner since the acquisition of CyberKick in July 2021, we believe that the effect
of these seasonal trends on our quarterly results may be reduced. Having said that, we are still tracking consumer access segment revenues
in order to determine the impacts of seasonality.
Overall, historical patterns
in our business may not be a reliable indicator of our future sales activity or performance due to the early stage of the businesses we
operate with and recent acquisitions.
Cost of Revenues
Our total cost of revenue
consists mainly of traffic acquisition costs required for generating advertising revenues in the consumer access segment. Also, we have
payments to ISPs and servers’ costs related to our enterprise access solutions, as well as amortization of technology purchased
in our acquisitions of NetNut in June 2019 and CyberKick in July 2021. We also have personnel costs associated with our operations and
global customer support, including salaries, benefits, bonuses and share-based compensation. The personnel consist of post-sales services
on-site, such as support teams that provide our customers with on-line support.
Other costs include mainly
clearing fees and overhead costs which consist of certain facilities, depreciation, benefits and IT costs.
Gross Margin
Gross margin, or gross profit
as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our
products and services, the mix of products sold including third parties’ products, the costs related to our enterprise access solutions,
the amortization of acquired technologies and the personnel costs involved in the generation of the revenue. We expect our gross margins
to increase over time as revenues continue to grow, subject to the factors described above.
Operating Expenses
Our operating expenses consist
of research and development, sales and marketing, and general and administrative expenses. Personnel costs are the most significant component
of our operating expenses and consist of salaries, benefits, bonuses, share-based compensation and, with regards to sales and marketing
expenses, also sales commissions. Operating expenses also include contractors, consultants and other professional services costs, overhead
costs for facilities, IT and depreciation.
|
● |
Research and development. Research and development expenses consist primarily of personnel costs and allocated overhead, as well as the costs of subcontractors assisting our research and development team. We expect research and development expenses to continue to increase in absolute dollars as we continue to invest in our research and product development efforts to enhance our product capabilities, address new threat vectors and access new customer markets. |
|
● |
Sales and marketing. Sales and marketing expenses consist primarily of media costs, required for customer acquisitions in the consumer access segment. We have also material personnel costs, incentive commission costs and allocated overhead. We expense commission costs as incurred. We spend money for market development programs, promotions and other marketing activities, outside consulting costs, and travel expense. We expect sales and marketing expenses to continue to increase in absolute dollars as we increase the size of our sales and marketing activities and expand our international sales and marketing operations. |
|
|
|
|
● |
General and administrative. General and administrative expenses consist mainly of personnel costs, professional services and allocated overhead. General and administrative personnel include our executive, finance, legal, human resources and administration. Professional services included in our general and administrative expenses consist primarily of legal, auditing, accounting and other consulting costs. We expect general and administrative expenses to decrease in absolute dollars in 2023 due to the settlement of legal proceedings in May 2022. Nevertheless, we expect to continue to incur additional general and administrative expenses as we grow our operations and comply with public company regulations, including higher legal, corporate insurance, and accounting expenses. |
Finance Expense/Income
Finance expense/income consists
primarily of interest payments derived from our bank loans and strategic funding (for more information, see “Item 5.B - Liquidity
and Capital Resources - Change in cash and cash equivalents”). We also have changes in financial liabilities at fair value through
profit or loss as well as exchange rate differences, which impact our finance expense/income. Our financial liabilities at fair value
through profit or loss in our consolidated statement of financial position consist of derivative financial instruments. We report our
financial results in dollars and most of our revenues are recorded in dollars, while substantially all of the research and development
expenses, as well as a portion of our cost of revenues, sales and marketing and general and administrative expenses are incurred in NIS.
As a result, we are exposed to fluctuations in exchange rates which affect our finance expense or finance income.
Comparison of the year ended December 31, 2022,
to the year ended December 31, 2021
Results of Operations
| |
Year ended
December 31, | |
U.S. dollars in thousands | |
2022 | | |
2021 | |
Consolidated Statements of Profit or Loss | |
| | |
| |
Revenues | |
| 18,779 | | |
| 10,281 | |
Cost of revenues | |
| 8,652 | | |
| 5,145 | |
Gross profit | |
| 10,127 | | |
| 5,136 | |
Research and development expenses | |
| 4,033 | | |
| 4,771 | |
Selling and marketing expenses | |
| 12,187 | | |
| 8,348 | |
General and administrative expenses | |
| 6,762 | | |
| 7,013 | |
Impairment of goodwill | |
| 569 | | |
| 700 | |
Contingent consideration measurement | |
| - | | |
| (684 | ) |
Operating loss | |
| (13,424 | ) | |
| (15,012 | ) |
Financial income (expense), net | |
| (54 | ) | |
| 942 | |
Loss before taxes on income | |
| (13,478 | ) | |
| (14,070 | ) |
Tax benefit | |
| 327 | | |
| 945 | |
Net loss for the year | |
| (13,151 | ) | |
| (13,125 | ) |
Revenues
The following table summarizes
our revenues through types for the periods presented. The period-to-period comparison of results is not necessarily indicative of results
for future periods.
| |
Year ended
December 31, | |
U.S. dollars in thousands | |
2022 | | |
2021 | |
SaaS | |
| 11,850 | | |
| 7,328 | |
Advertising services | |
| 6,699 | | |
| 2,325 | |
Software licenses | |
| 28 | | |
| 227 | |
Software support services | |
| 202 | | |
| 401 | |
| |
| | | |
| | |
Total Revenues | |
| 18,779 | | |
| 10,281 | |
Our revenues for the year
ended December 31, 2022 amounted to $18,779,000, representing an increase of $8,498,000, or 83%, compared to $10,281,000 for the year
ended December 31, 2021. The increase is mainly attributed to a $6,681,000 increase to $10,070,000 (197%) in the consumer access segment
revenues generated by CyberKick compared to 2021, where the revenues were consolidated only from its acquisition on July 4, 2021. Revenues
grew also due to an increase of $2,214,000 (35%) to $8,479,000 in SaaS revenue in the enterprise access segment, generated by NetNut and
NetNut Networks in 2022, compared to $6,265,000 of such revenue in 2021. These increases were partially offset by a $398,000 decrease
in the enterprise cybersecurity segment revenues, due to the outsourcing of this segment’s operations to TerraZone.
Cost of Revenues
The following table summarizes
our cost of revenues for the periods presented, as well as presenting the gross profit as a percentage of total revenues. The period-to-period
comparison of results is not necessarily indicative of results for future periods.
| |
Year ended
December 31, | |
U.S. dollars in thousands | |
2022 | | |
2021 | |
Internet services providers | |
| 2,135 | | |
| 1,747 | |
Depreciation, amortization and impairment of intangible assets | |
| 1,244 | | |
| 1,156 | |
Traffic acquisition costs | |
| 3,070 | | |
| 1,118 | |
Payroll, related expenses and share-based payment | |
| 399 | | |
| 518 | |
Networks and servers | |
| 570 | | |
| 341 | |
Clearing fees | |
| 1,113 | | |
| 213 | |
Other | |
| 121 | | |
| 52 | |
Total cost of revenues | |
| 8,652 | | |
| 5,145 | |
Gross profit | |
| 10,127 | | |
| 5,136 | |
Gross profit out of revenues % | |
| 54 | % | |
| 50 | % |
Our cost of revenues for the
year ended December 31, 2022 amounted to $8,652,000, representing an increase of $3,507,000 or 68%, compared to $5,145,000, for the year
ended December 31, 2021. The increase is primarily attributed to the full consolidation of CyberKick which included an increase of $1,952,000
and $900,000 in traffic acquisition costs and clearing fees, respectively, compared to 2021 where the consolidation took place only from
July 4, 2021 through year end. Also, ISPs and networks and servers’ costs increased by $617,000, or 30%, to $2,705,000, compared
to $2,088,000 in 2021 due to the increased operations and revenues in the enterprise access segment.
Gross Profit
As a result of a higher increase
in revenues compared to cost of revenues, gross profit grew by $4,991,000 to $10,127,000, representing a 97% increase during 2022, compared
to gross profit in 2021.
Research and Development Expenses, net
The following table summarizes
our research and development costs for the periods presented. The period-to-period comparison of results is not necessarily indicative
of results for future periods.
| |
Year ended
December 31, | |
U.S. dollars in thousands | |
2022 | | |
2021 | |
Payroll, related expenses and share-based payment | |
| 2,880 | | |
| 2,856 | |
Subcontractors | |
| 900 | | |
| 1,429 | |
Other | |
| 253 | | |
| 486 | |
Total Research and development expenses | |
| 4,033 | | |
| 4,771 | |
Our research and development
costs for the year ended December 31, 2022 amounted to $4,033,000, representing a decrease of $738,000, or 15%, compared to $4,771,000
for the year ended December 31, 2021. The research and development costs of the consumer access segment grew from $521,000 in 2021 to
$1,850,000 in 2022 due to the full consolidation of CyberKick, while costs related to the enterprise cybersecurity segment dropped from
$2,740,000 in 2021 to $209,000 due to the outsourcing of this segment’s operations to TerraZone, a global security provider (see
also “Item 4B- Business Overview” and “Item 5A. – Operating Results – Our Business Model”).
As a result of the above,
subcontractors costs dropped by $529,000 to $900,000, after an offset of $248,000 resulting from an increase in the enterprise internet
access segment compared to 2022.
Sales and Marketing Expenses
The following table summarizes
our sales and marketing costs for the periods presented. The period-to-period comparison of results is not necessarily indicative of results
for future periods.
| |
Year ended
December 31, | |
U.S. dollars in thousands | |
2022 | | |
2021 | |
Payroll, related expenses and share-based payment | |
| 4,235 | | |
| 4,414 | |
Media costs | |
| 5,572 | | |
| 2,067 | |
Professional fees | |
| 131 | | |
| 576 | |
Marketing | |
| 868 | | |
| 523 | |
Amortization and impairment of intangible assets and depreciation | |
| 1,001 | | |
| 416 | |
Other | |
| 380 | | |
| 352 | |
Total selling and marketing expenses | |
| 12,187 | | |
| 8,348 | |
Our sales and marketing expenses
totaled $12,187,000 for the year ended December 31, 2022, an increase of $3,839,000, or 46%, compared to $8,348,000 for the year ended
December 31, 2021. The sales and marketing costs of the consumer segment grew from $2,556,000 in 2021 to $7,611,000 in 2022 due to the
full consolidation of CyberKick, while costs related to the enterprise cybersecurity segment dropped from $3,354,000 in 2021 to $872,000
due to the outsourcing of this segment’s operations to TerraZone, a global security provider (see also “Item 4B- Business
Overview” and “Item 5A. – Operating Results – Our Business Model”).
General and Administrative Expenses
The following table summarizes
our general and administrative costs for the periods presented. The period-to-period comparison of results is not necessarily indicative
of results for future periods.
| |
Year ended
December 31, | |
U.S. dollars in thousands | |
2022 | | |
2021 | |
Payroll, related expenses and share-based payment | |
| 2,168 | | |
| 2,265 | |
Professional fees | |
| 4,009 | | |
| 4,320 | |
Other | |
| 585 | | |
| 428 | |
Total general and administration expenses | |
| 6,762 | | |
| 7,013 | |
Our
general and administrative expenses totaled $6,762,000 for the year ended December 31, 2022, a decrease of $251,000, or 4%, compared to
$7,013,000 for the year ended December 31, 2021. The decrease is primarily due to a $280,000 reduction in legal fees connected to intellectual
property protection activities (see also “Item 8.A. — Legal Proceedings”), with respect to patent related proceedings
that were resolved by a settlement on May 17, 2022.
Impairment of Goodwill and Contingent Consideration
Measurement
We recorded impairment of
goodwill of $569,000 related to the NetNut Networks cash-generating-unit in 2022, and impairment of goodwill of $700,000 related to the
same unit in 2021.
We recorded no contingent
consideration measurement income in 2022 compared to an income of $684,000 in 2021, which was related to the NetNut Networks acquisition.
Operating Loss
As a result of the foregoing,
our operating loss for the year ended December 31, 2022 was $13,424,000, compared to an operating loss of $15,012,000 in the year ended
December 31, 2021.
Financial Income, net
We had net financial expenses
of $54,000 for the year ended December 31, 2022, compared to net financial income of $942,000 for the year ended December 31, 2021. The
shifting from net income to net expenses is mainly related to a smaller reduction in the fair value of our derivative instruments in 2022
as a result of a lower share price as of December 31, 2022, $329,000 of interest expenses with respect to the short-term bank loan and
the long-term loan received during 2022 and a $167,000 loss from short-term investments.
Taxes on income
We had a tax benefit of $327,000
for the year ended December 31, 2022, compared to a tax benefit of $945,000 for the year ended December 31, 2021. The decrease is resulted
primarily from a recognition of smaller carryforward loss tax assets in the year ended December 31, 2022 compared to the year ended December
31, 2021.
Net loss for the year
As a result of the foregoing,
our net loss for the year ended December 31, 2022 was $13,151,000, compared to a loss of $13,125,000 during the year ended December 31,
2021.
5.B Liquidity and Capital Resources
Overview
As of March 24, 2023, our
cash and cash equivalents of approximately $3.1 million were held for working capital, capital expenditures, investment in technology
and business acquisition purposes. We believe that our current cash and cash equivalents will be sufficient to meet our anticipated cash
needs until at least December 31, 2023. Our future capital requirements will depend on many factors, including our growth rate, the timing
and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced
product and service offerings, and the continuing market acceptance of our products. In the event that additional financing is required
from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional
capital when desired, our business, operating results, and financial condition would be adversely affected, and there is substantial doubt
about our ability to continue as a going concern.
| |
December 31, | |
U.S. dollars in thousands | |
2022 | | |
2021 | |
Net cash used in operating activities | |
| (8,051 | ) | |
| (9,106 | ) |
| |
| | | |
| | |
Net cash provided by (used in) investing activities | |
| 5,037 | | |
| (9,796 | ) |
| |
| | | |
| | |
Net cash provided by financing activities | |
| 2,603 | | |
| 11,640 | |
| |
| | | |
| | |
Exchange rate differences | |
| (127 | ) | |
| 73 | |
| |
| | | |
| | |
Net decrease in cash and cash equivalents | |
| (538 | ) | |
| (7,189 | ) |
Cash Flows Used in Operating Activities
During the year ended December
31, 2022, net cash used in operating activities was $8,051,000, primarily attributed to operational costs which exceeded cash flows from
customers’ payments. The decrease of $1,055,000 compared to $9,106,000 used in operating activities during the year ended December
31, 2021, is attributed to the cost reduction in the enterprise security segment, slightly offset by increased loss from the consumer
access segment, due to the full consolidation of CyberKick’s operations in 2022, compared to half a year of consolidation in 2021.
During the year ended December
31, 2021, net cash used in operating activities was $9,106,000, primarily attributed to operational costs which exceeded cash flows from
customers’ payments. The increase of $2,579,000 compared to $6,527,000 used in operating activities during the year ended December
31, 2020, is attributed to increased costs, partially offset by increased sales, both resulting primarily from the consolidation of CyberKick’s
operations from the third quarter of 2021 and from increased legal fees due to intellectual property protection activities (See also “Item
8.A. — Legal Proceedings”).
Cash Flows Used in Investing Activities
During the year ended December
31, 2022, net cash provided by investing activities was $5,037,000, compared to net cash used in investing activities of $9,796,000 during
the year ended December 31, 2021. The switch to positive generated cash is attributed mainly to the sale of short-term investments in
the amount of $5,707,000.
During the year ended December
31, 2021, net cash used in investing activities was $9,796,000, compared to net cash used in investing activities of $1,189,000 during
the year ended December 31, 2020. The increase is attributed mainly to investment of $5,844,000 in short-term investments and the acquisition
cash payment of CyberKick (see below) in July 2021 in the amount of $3,700,000, compared to an amount of $1,070,000 that was invested
in the acquisition of NetNut Networks (formerly ChiCooked LLC) in 2020.
On July 1, 2021, we entered
into an Equity Purchase Agreement with CyberKick, Takoomi Ltd. and their founders, pursuant to which we acquired all of the outstanding
share capital of CyberKick. CyberKick is a private Israeli company, specializing in solutions for access tools developers and consumers.
The acquisition was completed on July 4, 2021, for which we paid a combination of cash in the amount of $3,700,000 and 4,062,045 shares
valued at $5,600,000. In addition, we committed to pay up to an additional $3,000,000, subject to achievement of certain future milestones.
During 2022, we paid an amount of $1,050,000 in share-based compensation, and an additional amount of $788,000 was accrued in our December
31, 2022 financial statements under Other equity reserves. See “Item 10.C. Material Contracts — CyberKick Acquisition”
for additional information.
Cash Flows Received from Financing Activities
During the year ended December
31, 2022, net cash provided by financing activities was $2,603,000, primarily attributed to short-term bank loans (net funding of $1,600,000)
and proceeds from long term loan, net after repayments ($1,420,000). The cash provided by the loans was partially offset by increased
lease payments of $384,000.
During the year ended December
31, 2021, net cash provided by financing activities was $11,640,000, primarily attributed to net proceeds from a registered direct offering
closed in February 2021, as well as proceeds from the exercise of warrants, in the aggregate amount of $12,932,000, which was slightly
offset by the contingent consideration payment of $915,000 related to the NetNut acquisition.
On February 16, 2021, pursuant
to a securities purchase agreement with respect to a registered direct offering pursuant to a shelf takedown under a registration statement
on Form F-3 (Registration No. 333-235367), we issued (a) 461,500 ADSs at a purchase price of $20.00 per ADS and (b) 26,000 pre-funded
warrants at a purchase price of $20.00 per warrant, including an exercise price of $0.01 per warrant. The net proceeds to us from the
sale of the securities were approximately $9,223,000. As of December 31, 2022, all pre-funded warrants were exercised.
During 2021, we also received
approximately $3,709,000 resulting from the exercise of the warrants issued under the April 23, 2020 public offering.
Change in cash and cash equivalents
As a result of the foregoing,
our cash and cash equivalents decreased in the amount of $538,000 during the year ended December 31, 2022, compared to a decrease in the
amount of $7,189,000 during the year ended December 31, 2021.
We
have drawn short-term bank loans out of a one-year credit line which was secured from United Mizrahi-Tefahot Bank on May 25, 2022, in
a total amount of $2 million. The credit facility is used predominantly to fund the operations and growth of our subsidiary, CyberKick,
and as a result will reduce the usage of our own cash. Amounts drawn under the credit line bear interest at the Secured Overnight Financing
Rate plus 5.5% per annum, and are paid quarterly for the actual withdrawn balance. The credit line offers three times multiple on eligible
revenues, is secured against all of the assets of CyberKick, is guaranteed by us and includes a refundable deposit by us of $500,000.
Until March 24, 2023, CyberKick borrowed an amount of $1.6 million out of the credit line.
On
August 8, 2022, we signed a strategic funding agreement with O.R.B. Spring Ltd., or O.R.B., of up to $4,000,000 to support the further
growth of our consumer access solutions. The funding is made through a series of cash installments through July 2024. Until March 24,
2023, the Company received aggregate funding of $2.22 million.
We
repay the funding using a revenue share model that is based on sales generated only from customers of the new consumer access solutions
acquired with each funding installment. Each such funding installment shall be repaid within two years and if the repayments do not cover
100% of the installments, then we will complete the remaining balances in cash or shares, at our sole discretion. Once the investment
amount has been repaid in full, we and O.R.B. shall share the attributed revenue in equal parts (50:50) until the lapse of five years
after the date on which each installment was received by us. Until March 24, 2023, the Company repaid to O.R.B. an amount of approximately
$0.54 million from the sales that were generated as a result of the funding.
In November 2022, we entered
into an ATM Sales Agreement, or the Sales Agreement, with ThinkEquity LLC, or the Sales Agent, pursuant to which we may offer and sell,
from time to time, through the Sales Agent ADSs, for an aggregate offering price of up to $5 million. The ADSs will be offered and sold
pursuant to our shelf Registration Statement on Form F-3 (File No. 333-253983), or the F-3, which became effective on March 15, 2021,
and the prospectus supplement relating to the Sales Agreement, dated November 25, 2022. In that regard, we registered up to $100,000,000
of the ADSs on such registration statement. Upon termination of the Sales Agreement, any portion of the $5 million included in the Sales
Agreement prospectus of the F-3 that is not sold pursuant to the Sales Agreement will be available for sale in other offerings pursuant
to the F-3, and if no ADSs are sold under the Sales Agreement, the full $5 million of securities may be sold in other offerings pursuant
to the F-3. As of March 24, 2023, we have sold 25,847 ADSs pursuant to the Sales Agreement for aggregate gross proceeds of approximately
$75 thousand.
Current Outlook
We have financed our operations
to date primarily through proceeds from sales of our Ordinary Shares, and recently also from long and short term loans. We have incurred
losses and generated negative cash flows from operations since Safe-T Data’s inception in February 2013.
As of March 24, 2023, our
cash and cash equivalents were approximately $3.1 million. We expect that our current resources will be sufficient to meet our anticipated
cash needs until December 31, 2023; however, we expect that we will require additional substantial capital to continue the development
of, and to commercialize, our products. In addition, our operating plans may change as a result of many factors that may currently be
unknown to us, and we may need to seek additional funds sooner than planned. Our future capital requirements will depend on many factors,
including:
|
● |
the progress and costs of our research and development activities; |
|
|
|
|
● |
the potential costs of contracting with third parties to provide marketing and distribution services for us or for building such capacities internally; |
|
|
|
|
● |
the scope of our general and administrative expenses; and |
|
● |
potential future acquisitions. |
Until we can generate significant
recurring revenues, we expect to satisfy our future cash needs through equity financings or credit facility loans.
Currently, we cannot be certain
that additional funding will be available to us on acceptable terms, if at all. If additional funds are not available, we may be required
to delay, reduce the scope of, or eliminate research or development plans for, or commercialization efforts with respect to our products.
This raises substantial doubts about our ability to continue as a going concern.
5.C Research and development, patents and licenses, etc.
For a description of our research
and development programs and the amounts that we have incurred over the last two years pursuant to those programs, please see “Item
5. Operating and Financial Review and Prospects — A. Operating Results — Operating Expenses” and “Item 5. Operating
and Financial Review and Prospects — A. Operating Results — Comparison of the year ended December 31, 2022 to the year ended
December 31, 2021 — Research and Development Expenses, net.”
5.D Trend Information
The trends impacting us are
described elsewhere in this annual report on Form 20-F, including in Items 3.D., 4.B., 5.A. and B. and 10.C. We are subject to potential
earn-out commitments in connection with our acquisition of CyberKick.
5.E Critical Accounting Estimates
We describe our significant
accounting policies more fully in Note 2 to our consolidated financial statements for the year ended December 31, 2022 included elsewhere
in this annual report in Form 20-F. We believe that the accounting policies below are critical in order to fully understand and evaluate
our financial condition and results of operations.
We prepare our consolidated
financial statements in accordance with IFRS, as issued by the IASB. At the time of the preparation of the consolidated financial statements,
our management is required to use estimates, evaluations, and assumptions which affect the application of the accounting policy and the
amounts reported for assets, obligations, income, and expenses. Any estimates and assumptions are continually reviewed. The changes to
the accounting estimates are credited during the period in which the change in the estimate is made.
Revenue Recognition
We determine whether revenue
should be reported on a gross or net basis.
Accounting for advertising
We evaluate if revenues should
be presented on a gross basis, which is the amount that a customer pays for the service, or on a net basis, which is the amount of the
customer payment less amounts the Company pays to digital property owners. The evaluation to present revenue on a gross versus net basis
requires significant judgment. We determined that we act as the principal and recognize revenue as it relates to these transactions
on a gross basis as the Company controls the service to the customer and it is the primary obligor in the transaction.
Goodwill impairment
Goodwill arising from a business
combination represents the excess of the overall amount of the consideration transferred, the amount of any non-controlling interests
in the acquired company over the net amount as of acquisition date of the identifiable assets acquired and the liabilities assumed.
Impairment reviews of the
cash-generating-unit, or CGU, to which goodwill was allocated are undertaken annually and whenever there is any indication of impairment
of a CGU. The carrying amount of our assets, including goodwill, is compared to the recoverable amount, which is the higher of value in
use and the fair value less costs to sell. Any impairment loss is allocated to reduce the carrying amount of the assets at the following
order: first to reduce the carrying amount of any goodwill allocated to a CGU and subsequently to the remaining assets we have, which
fall within the scope of the IAS 36, “Impairment of Assets,” on a proportionate basis based on the carrying amount of each
of our assets.
Any impairment loss is recognized
immediately in profit or loss and is not subsequently reversed.
Business combination
We account for business combinations
by applying the acquisition method.
The consideration transferred
in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair value of the assets transferred
by the acquirer, and the liabilities incurred by the acquirer to former owners of the acquiree, in exchange for control of the acquiree.
The consideration transferred also includes the fair value of any asset or liability arising from a contingent consideration arrangement.
Acquisition-related expenses
are recognized separately from the business combination and are expensed as incurred.
Identified assets acquired
and liabilities assumed as part of a business combination are initially measured at fair value at the acquisition date, except for certain
exceptions in accordance with IFRS 3, “Business Combinations” (Revised).
Contingent consideration incurred
as a part of a business combination is initially measured at fair value at the acquisition date. Subsequent changes in fair value of contingent
consideration are classified as assets or liabilities, and are recognized in accordance with the IFRS 9, “Measurement of financial
assets and liabilities,” in profit or loss.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth
information regarding our office holders4 as of the date of this on annual report in Form 20-F:
Name |
|
Age |
|
Position |
Chen Katz |
|
51 |
|
Chairman of the Board of Directors |
|
|
|
|
|
Shachar Daniel |
|
45 |
|
Chief Executive Officer, Director |
|
|
|
|
|
Shai Avnit |
|
57 |
|
Chief Financial Officer |
|
|
|
|
|
Avi Rubinstein |
|
56 |
|
Director |
|
|
|
|
|
Yehuda Halfon |
|
44 |
|
Director (1)(2)(3) |
|
|
|
|
|
Rakefet Remigolski |
|
51 |
|
Director (1)(2)(3) |
|
|
|
|
|
Moshe Tal |
|
61 |
|
Director (1)(2)(3) |
(1) |
Member of the Compensation Committee. |
|
|
(2) |
Member of the Audit Committee (and Financial Statements Examination Committee pursuant to regulations under the Israeli Companies Law). |
(3) |
Independent Director (pursuant to regulations under the Israeli Companies Law and Nasdaq Stock
Market rules). |
4 |
“office holder” as defined under the Israeli Companies Law: “general manager, chief business manager, deputy general manager, vice-general manager, any person filling any of these positions in the company even if he holds a different title, and a director or any other manager directly subordinate to the general manager”. |
Chen Katz, Chairman of the Board of Directors
Mr. Chen Katz has served
as Chairman of our board of directors since January 2019. Mr. Katz is also a director of Nanomedic Technologies Ltd., Coral Smart Pool
Inc. and Nicast Ltd., where he serves as the chairman of the board, Aminach Furniture and Mattresses Industry Ltd., Coral Smart Pool Ltd.,
Nanomedic Technologies Inc. NCK Capital Ltd. and Tripod Investments. Mr. Katz is also a Co-Founder and director of Connexa Capital Ltd.
since February 2022. Between 2006 and 2020, Mr. Katz served as the chief executive officer of TechnoPlus Ventures Ltd. (TASE: TNPV), an
Israeli investment firm. From 2012 until 2021, Mr. Katz served on the board of directors of Compulab Ltd. (TASE: CLAB) and from 2010 to
2018, he served on the board of directors of D-Led Illumination Technologies Ltd. Mr. Katz is a member of the Israel Bar Association.
Mr. Katz holds a European Master-in-Law and Economics (EMLE) from the Complutense University of Madrid and an LL.B. from the University
of Haifa.
Shachar Daniel, Chief Executive Officer and
Director
Mr. Shachar Daniel
is one of our co-founders and has served as our Chief Executive Officer and director since June 2016. Prior to serving as the Chief Executive
Officer of Safe-T Data, he served as Safe-T Data’s Chief Operating Officer from November 2013. Mr. Daniel has more than 10 years
of experience in various managerial roles in operations and project management. From 2012 to 2013, he served as head of program at PrimeSense
Ltd., which was acquired by Apple Inc. for $360 million on November 24, 2013. Prior to that, and from 2009 to 2012, he was head of operations
project managers at Logic Industries Ltd., and from 2004 to 2009, he was a project manager at Elbit Systems Ltd. (Nasdaq/TASE: ESLT).
Mr. Daniel holds a B.Sc. in Industrial Engineering from the Holon Institute of Technology, Israel and an M.B.A. from the College of Management
Academic Studies, Israel and an executive post M.B.A from the Hebrew University.
Shai Avnit, Chief Financial Officer
Mr. Shai Avnit has
served as our Chief Financial Officer since June 2016. Mr. Avnit has extensive experience in managing financial, operational, administrative
and legal affairs in companies within the software, medical device and consumer electronics, as well as vast experience in public and
private fund raising, mergers and acquisitions and structural reorganization. Mr. Avnit served as the chief financial officer and other
leading financial positions in several hi-tech companies, both public and private including as the chief financial officer during 2001-2002
in Valor Computerized Systems (then a public company traded on the German stock exchange Neuer Markt), a controller during 1996-2000 in
Card Guard Scientific Survival, a then public company then traded in the Six Swiss Exchange under the name LifeWatch (symbol LIFE), a
part time chief financial officer during 2007-2017 in EnzySurge Ltd., a part time chief financial officer during 2011-2017 in BioProtect
Ltd., a part time chief financial officer during 2008-2011 in BriefCam Ltd., a part time chief financial officer during 2006-2010 in Lumio
Inc. and a part time Finance Director in Primavera-Prosight Ltd. (acquired by Oracle) during 2002-2011. Mr. Avnit holds a B.A. in Accounting
& Economics as well as an M.B.A. with majors in Finance and Marketing, both from the Tel Aviv University.
Avi Rubinstein, Director
Mr.
Avi Rubinstein has served on our board of directors since October 2021. Mr. Rubinstein also serves as the President of Ilanor Ltd. Prior
to his appointment as a director, Mr. Rubinstein served as Chief Business Officer of our subsidiary, Safe-T Data A.R Ltd., from February
2020 until October 2021 and continues to provide advisory services to Safe-T Data on a consultancy basis. Prior to joining Safe-T Data,
from 2014 to 2015, Mr. Rubinstein served as Vice President, Product Marketing and Business Development of Nice Systems Ltd. (Nasdaq: NICE).
Mr. Rubinstein co-founded Inpedio BV, a provider of cyber solutions, and served as its chief executive officer between 2016 and 2019.
After serving as co-founder of Ectel Ltd., and general manager of Ectel US Inc. and was the co-founder of StorWiz in 2004, which was acquired
by IBM in 2010. He also was the co-founder and chief executive officer of VideoCodes in 2004, which was acquired by Thompson in 2008.
Mr. Rubinstein also served as a member of our advisory board between 2014 and 2019, and with CyberX Labs (cyber defense for critical infrastructure)
since 2014 and also provided management and/or consulting services on an hourly basis to different companies between 2008 to 2020.
Yehuda Halfon, Director
Mr. Yehuda Halfon has
served on our board of directors since March 2016. He was appointed for a first three-year term as an external director on March 27, 2016
and a second three-year term commencing in May 2019. Between 2009 and January 2022, Mr. Halfon served as the chief executive officer at
Cooperica Property Ltd., which owns and manages real estate properties in Israel. In addition, between 2010 and January 2022, Mr. Halfon
served as the chief financial officer of Local Developing Germany GmbH, which owns a large portfolio of residential assets in Germany.
Mr. Halfon holds a B.A. in Accounting and Economics from the Hebrew University in Jerusalem and an M.B.A from the Open University of Israel.
Mr. Halfon is a certified public accountant in Israel.
Rakefet Remigolski, Director
Ms. Rakefet Remigolski
has served on our board of directors since September 2020. Since 2018, Ms. Remigolski has served as Chief Finance Officer at Arazim
Investments Ltd., an Israeli real-estate company publicly traded on the Tel Aviv Stock Exchange. Since September 2021, Ms. Remigolski
has served as an external director at IDENTI Healthcare Ltd. Between 2015 and 2020, Ms. Remigolski served as a director and head of the
audit committee at the Israeli National Sport Center, Tel Aviv. Since 2008, Ms. Remigolski has taught advanced courses in financial accounting
at the Reichman University (IDC Herzliya) in Israel. Between 1995 and 2019, Ms. Remigolski taught advanced courses in financial accounting
at the College of Management Academic Studies in Israel. Ms. Remigolski holds a B.A. in Business and an M.B.A. (Cum Laude) with a major
in finance and accountancy, both from the College of Management Academic Studies in Israel. Ms. Remigolski is a certified public accountant
and is a member of the Institute of Certified Public Accountants in Israel.
Moshe Tal, Director
Mr. Moshe Tal has served
on our board of directors since May 2019. Since 2011, Mr. Tal serves as a partner with Shtainmetz Aminoach & Co. accounting, a CPA
(Isr.) Israeli Certified Public Accountant, Investment and Consulting. Mr. Tal is also a lecturer at the Department of Accounting at the
Reichman University (IDC Herzliya) in Israel. Mr. Tal served in the Israeli tax Authority for 13 years and has vast experience with tax
regulations and laws, both in Israel and outside of Israel. Between 2011 and 2013, Mr. Tal served as a director of Dash Ipax Holdings
Ltd. and from 2010 until 2018 as a director at Netz Group Ltd. Mr. Tal is a certified Israeli public accountant.
Family Relationships
There are no family relationships between any of
our office holders.
Arrangements for Election of Directors and Members of Management
There are no arrangements
or understandings with major shareholders, customers, suppliers or others pursuant to which any of our executive management or our directors
were selected. See “Item 7.B. Related Party Transactions” for additional information.
B. Compensation
Compensation
The following table presents
in the aggregate all compensation we paid to our office holders as a group for the year ended December 31, 2022. The table does not include
any amounts we paid to reimburse any of such persons for costs incurred in providing the Company with services during this period.
All amounts reported in the
tables below reflect the cost to the Company, in thousands of U.S. Dollars, for the year ended December 31, 2022. Amounts paid in NIS
are translated into U.S. dollars at the rate of NIS 3.3596 = $1.00, based on the average representative rate of exchange between the NIS
and the U.S. dollar as reported by the Bank of Israel in the year ended December 31, 2022.
| |
Salary, bonuses and Related Benefits(1) | | |
Pension, Retirement and Other Similar Benefits | | |
Share Based Compensation* | |
All office holders as a group, consisting of 8 persons | |
$ | 778 | | |
$ | 130 | | |
$ | 395 | |
(1) |
Represents the office holders’ gross salary plus payment of mandatory social benefits made by the company on behalf of such officer. Such benefits may include, to the extent applicable, payments, contributions and/or allocations for savings funds, education funds (referred to in Hebrew as “Keren Hishtalmut”), pension, severance, risk insurances (e.g., life or work disability insurance) and payments for social security. |
|
|
* |
Resulting from options to purchase an aggregate of 3,077,526 Ordinary Shares granted to all office holders as a group, at exercise prices between NIS 1.27 (approximately $0.38) and NIS 6.04 (approximately $1.80) per share with expiration dates between May 13, 2024, and November 28, 2032. The share-based compensation was calculated based on the binomial model. |
|
|
The table below reflects the
compensation granted to the five most highly compensated officers5 during or with respect to the year ended December 31, 2022.
Annual Compensation- in thousands of USD –
Office holders | |
Salary, Fees and Related Benefits | | |
Pension, Retirement and Other Similar Benefits | | |
Share Based Compensation | | |
Total | |
Roni Lev | |
| 570 | | |
| 73 | | |
| 43 | (1) | |
| 686 | |
| |
| | | |
| | | |
| | | |
| | |
Yotam Benattia | |
| 570 | | |
| 73 | | |
| 43 | (2) | |
| 686 | |
| |
| | | |
| | | |
| | | |
| | |
Moshe Kremer | |
| 653 | | |
| - | | |
| 21 | (3) | |
| 674 | |
| |
| | | |
| | | |
| | | |
| | |
Shachar Daniel | |
| 293 | | |
| 51 | | |
| 106 | (4) | |
| 450 | |
| |
| | | |
| | | |
| | | |
| | |
Tomer Cohen | |
| 309 | | |
| 40 | | |
| 29 | (5) | |
| 378 | |
|
5 |
“Senior officer” as defined under the Israeli Securities Law includes the definition of an officer, as defined in the Israeli Companies Law, and also the chairman of the board of directors, a substitute director, an individual who under section 236 of the Israeli Companies Law was appointed on behalf of a body corporate and who serves as director, accountant, internal auditor, independent signatory and every person who holds a said position, even if the title of his position is different, and also a senior officer in a body corporate controlled by the body corporate, who has substantive influence over the body corporate, and every individual who is employed by the body corporate in a different position and holds 5% or more of the nominal value of the issued share capital or of the voting power, as the case may be; for this purpose. We are providing this disclosure as good practice although we are not required to report or provide such disclosure pursuant to the Israeli Securities Law. |
(1) |
Resulting from options to purchase an aggregate of 135,000 Ordinary Shares, at an exercise price of NIS 4.00 (approximately $1.1) with expiration date of August 25, 2031. |
(2) |
Resulting from options to purchase an aggregate of 135,000 Ordinary Shares, at an exercise price of NIS 4.00 (approximately $1.1) with expiration date of August 25, 2031. |
(3) |
Resulting from options to purchase an aggregate of 200,004 Ordinary Shares, at exercise prices ranging between NIS 0 to NIS 4.00 (approximately $1.1) with expiration dates between August 2, 2030 and November 28, 2032. |
(4) |
Resulting from options to purchase an aggregate of 1,080,000 Ordinary Shares, at exercise prices ranging between NIS 1.51 (approximately $0.4) to NIS 6.04 (approximately $1.7) with expiration dates between September 15, 2030 and November 28, 2032. |
(5) |
Resulting from options to purchase an aggregate of 200,004 Ordinary Shares, at exercise prices ranging between NIS 0 to NIS 6.28 (approximately $1.7) with expiration dates between December 23, 2030 and November 28, 2032. |
Employment and Services Agreements with
Executive Officers
We have entered into written
employment or services agreements with each of our executive officers. All of these agreements contain customary provisions regarding
noncompetition, confidentiality of information and assignment of inventions. However, the enforceability of the noncompetition provisions
may be limited under applicable law. In addition, we have entered into agreements with each executive officer and director pursuant to
which we have agreed to indemnify each of them up to a certain amount and to the extent that these liabilities are not covered by directors
and officer’s insurance, subject to certain exclusions. Members of our senior management may be eligible for bonuses. Generally,
such bonuses are in accordance with our compensation policy and are payable upon meeting objectives and targets that are set by our Chief
Executive Officer and approved annually by our board of directors that also set the bonus targets for our Chief Executive Officer.
For a description of the terms
of our options and option plans, see “Item 6.E. Share Ownership” below.
Directors’ Service Contracts
Other than with respect to
our directors that are also executive officers, we do not have written agreements with any director providing for benefits upon the termination
of his directorship with our company.
C. Board Practices
Introduction
Our board of directors presently
consists of six members. Under the Israeli Companies Law, an Israeli company whose shares have been offered to the public or whose shares
are listed for trading on a stock exchange in or outside of Israel is required to appoint at least two external directors to serve on
its board of directors. However, pursuant to regulations under the Israeli Companies Law, a board of directors is not required to have
external directors if: (i) the company does not have a controlling shareholder (as such term is defined in the Israeli Companies Law);
(ii) a majority of the directors serving on the board of directors are “independent,” as defined under Nasdaq Rule 5605(a)(2);
and (iii) the company follows Nasdaq Rule 5605(e)(1), which requires that the nomination of directors be made, or recommended to the board
of directors, by a nominating committee of the board of directors consisting solely of independent directors, or by a majority of independent
directors. On July 22, 2021, our board of directors approved that the Company meets all of the above requirements and therefore has resolved
to adopt the corporate governance exemption set forth above, and accordingly as of July 22, 2021, we are not required to appoint external
directors as such are defined in the Israeli Companies Law. The directors, Mr. Yehuda Halfon and Mr. Moshe Tal, each of whom was previously
appointed as external directors, and Ms. Rakefet Remigolski, are “independent” for purposes of the Nasdaq Stock Market rules.
Our amended and restated articles of association provide that the number of board of directors’ members shall be set by our board
of directors provided that it will consist of not less than three and not more than twelve. Pursuant to the Israeli Companies Law, the
management of our business is vested in our board of directors. Our board of directors may exercise all powers and may take all actions
that are not specifically granted to our shareholders or to management. Our executive officers are responsible for our day-to-day management
and have individual responsibilities established by our board of directors. Our Chief Executive Officer and all other executive officers
are appointed by, and serve at the discretion of, our board of directors, subject to the employment or services agreement that we have
entered into with them. Their terms of employment are subject to the approval of the board of directors’ compensation committee
and of the board of directors, and are subject to the terms of any applicable employment agreements that we may enter into with them,
and are subject to the Company’s compensation policy.
Each director, will hold office
in accordance with our articles of association, or until he or she resigns or unless he or she is removed by a 65% majority vote of our
shareholders at an annual general meeting of our shareholders, provided that such majority constitutes more than 50% of the our then issued
and outstanding share capital, or upon the occurrence of certain events, in accordance with the Israeli Companies Law and our amended
and restated articles of association. Our articles of association provide for a split of the board of directors into three classes with
staggered three-year terms. 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.
Our directors are divided
among the three classes as follows:
|
(i) |
Class I directors are Ms. Rakefet Remigolski and Mr. Yehuda Halfon, whose current terms expire at the Company’s 2023 annual general meeting of shareholders and upon the election and qualification of their respective successors, |
|
(ii) |
Class II directors are Mr. Shachar Daniel and Mr. Moshe Tal, whose current terms expire at the Company’s 2024 annual general meeting of shareholders and upon the election and qualification of their respective successors; and |
|
(iii) |
Class III directors are Mr. Chen Katz and Mr. Avi Rubinstein, whose current terms expire at the Company’s 2025 annual general meeting of shareholders and upon the election and qualification of their respective successors. |
In addition, our amended and
restated articles of association allow our board of directors to appoint directors to fill vacancies on our board of directors or in addition
to the acting directors (subject to the limitation on the number of directors), to serve for the remaining period of time during which
the director whose service has ended would have held office, or in case of an addition to the board of directors, in accordance with the
class assigned to such appointed director, as determined by the board of directors at the time of such appointment.
Under the Israeli Companies
Law, any shareholder holding at least one percent of our outstanding voting power may nominate a director. However, any such shareholder
may make such a nomination only if a written notice of such shareholder’s intent to make such nomination has been given to our board
of directors. Any such notice must include certain information, including the consent of the proposed director nominee to serve as our
director if elected, and a declaration that the nominee signed declaring that he or she possesses the requisite skills and has the availability
to carry out his or her duties. Additionally, the nominee must provide details of such skills, and demonstrate an absence of any limitation
under the Israeli Companies Law that may prevent his or her election, and affirm that all of the required election-information is provided
to us, pursuant to the Israeli Companies Law.
Under the Israeli Companies
Law, our board of directors must determine the minimum number of directors who are required to have accounting and financial expertise.
In determining the number of directors required to have such expertise, our 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 the minimum number
of directors of our company who are required to have accounting and financial expertise is two – Mrs. Rakefet Remigolski, Mr. Moshe
Tal and Mr. Yehuda Halfon qualify and declared their respective accounting and financial expertise to that effect.
The board of directors must
elect one director to serve as the chairman of the board of directors to preside at the meetings of the board of directors, and may also
remove that director as chairman. Pursuant to the Israeli Companies Law, neither the chief executive officer nor any of his or her relatives
is permitted to serve as the chairman of the board of directors, and a company may not vest the chairman or any of his or her relatives
with the chief executive officer’s authorities. In addition, a person who reports, directly or indirectly, to the chief executive
officer may not serve as the chairman of the board of directors; the chairman may not be vested with authorities of a person who reports,
directly or indirectly, to the chief executive officer; and the chairman may not serve in any other position in the company or a controlled
company, but he or she may serve as a director or chairman of a controlled company. However, the Israeli Companies Law permits a company’s
shareholders to determine, for a period not exceeding three years from each such determination, that the chairman or his or her relative
may serve as chief executive officer or be vested with the chief executive officer’s authorities, and that the chief executive officer
or his or her relative may serve as chairman or be vested with the chairman’s authorities. Such determination of a company’s
shareholders requires either: (1) the approval of at least a majority of the shares of those shareholders present and voting on the matter
(other than controlling shareholders and those having a personal interest in the determination) (shares held by abstaining shareholders
shall not be considered); or (2) that the total number of shares opposing such determination does not exceed 2% of the total voting power
in the company. Currently, we have a separate chairman and chief executive officer.
The board of directors may,
subject to the provisions of the Israeli Companies Law, delegate any or all of its powers to committees of the board, and it may, from
time to time, revoke such delegation or alter the composition of any such committees, subject to certain limitations. Unless otherwise
expressly provided by the board of directors, the committees shall not be empowered to further delegate such powers. The composition and
duties of our audit committee, financial statement examination committee and compensation committee are described below.
The board of directors oversees
how management monitors compliance with our risk management policies and procedures, and reviews the adequacy of the risk management framework
in relation to the risks faced by us. The board of directors is assisted in its oversight role by an internal auditor. The internal auditor
undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to our audit
committee.
External Directors
Under the Israeli Companies
Law, except as provided below, companies incorporated under the laws of the State of Israel that are publicly traded, including Israeli
companies with shares listed on the Nasdaq, are required to appoint at least two external directors who meet the qualification requirements
set forth in the Israeli Companies Law. The definitions of an external director under the Israeli Companies Law and independent director
under Nasdaq Stock Market rules are similar such that it would generally be expected that the two external directors will also comply
with the independence requirement under Nasdaq Stock Market rules.
Pursuant to the regulations
under the Israeli Companies Law, the board of directors of a company such as ours is not required to have external directors if: (i) the
company does not have a controlling shareholder (as such term is defined in the Companies Law); (ii) a majority of the directors serving
on the board of directors are “independent,” as defined under Nasdaq Rule 5605(a)(2); and (iii) the company follows Nasdaq
Rule 5605(e)(1), which requires that the nomination of directors be made, or recommended to the board of directors, by a Nominating Committee
of the board of directors consisting solely of independent directors, or by a majority of independent directors. The Company meets all
of these requirements. On July 22, 2021, our board of directors resolved to adopt the corporate governance exemption set forth above,
and accordingly we no longer have external directors as members of our board of directors.
Independent Directors Under the Companies
Law
An “independent director”
is either an external director or a director who meets the same non-affiliation criteria as an external director (except for (i) the requirement
that the director be an Israeli resident (which does not apply to companies such as ours whose securities have been offered outside of
Israel or are listed outside of Israel) and (ii) the requirement for accounting and financial expertise or professional qualifications),
as determined by the audit committee, and who has not served as a director of the company for more than nine consecutive years. For these
purposes, ceasing to serve as a director for a period of two years or less would not be deemed to sever the consecutive nature of such
director’s service.
Regulations promulgated pursuant
to the Israeli Companies Law provide that a director in a public company whose shares are listed for trading on specified exchanges outside
of Israel, including the Nasdaq Capital Market, who qualifies as an independent director under the relevant non-Israeli rules and who
meets certain non-affiliation criteria, which are less stringent than those applicable to independent directors as set forth above, would
be deemed an “independent” director pursuant to the Companies Law provided: (i) he or she has not served as a director for
more than nine consecutive years; (ii) he or she has been approved as such by the audit committee; and (iii) his or her remuneration shall
be in accordance with the Companies Law and the regulations promulgated thereunder. For these purposes, ceasing to serve as a director
for a period of two years or less would not be deemed to sever the consecutive nature of such director’s service.
Furthermore, pursuant to these
regulations, such company may reappoint a person as an independent director for additional terms, beyond nine years, which do not exceed
three years each, if each of the audit committee and the board of directors determine, in that order, that in light of the independent
director’s expertise and special contribution to the board of directors and its committees, the reappointment for an additional
term is in the company’s best interest.
Mr. Yehuda Halfon, Mr. Moshe
Tal and Ms. Rakefet Remigolski, are deemed independent for purposes of the Israeli Companies Law as well as under Nasdaq Stock Market
rules.
Alternate Directors
Our amended and restated articles
of association provide, as allowed by the Israeli Companies Law, that any director may, subject to the conditions set thereto including
approval of the nominee by our board of directors, appoint a person as an alternate to act in his place, to remove the alternate and appoint
another in his place and to appoint an alternate in place of an alternate whose office is vacated for any reason whatsoever. Under the
Israeli Companies Law, a person who is not qualified to be appointed as a director, a person who is already serving as a director or a
person who is already serving as an alternate director for another director, may not be appointed as an alternate director. Nevertheless,
a director who is already serving as a director may be appointed as an alternate director for a member of a committee of the board of
directors so long as he or she is not already serving as a member of such committee, and if the alternate director is to replace an external
director, he or she is required to be an external director and to have either “financial and accounting expertise” or “professional
expertise,” depending on the qualifications of the external director he or she is replacing. A person who does not have the requisite
“financial and accounting experience” or the “professional expertise,” depending on the qualifications of the
external director he or she is replacing, may not be appointed as an alternate director for an external director. A person who is not
qualified to be appointed as an independent director, pursuant to the Israeli Companies Law, may not be appointed as an alternate director
of an independent director qualified as such under the Israeli Companies Law. Unless the appointing director limits the time or scope
of the appointment, the appointment is effective for all purposes until the appointing director ceases to be a director or terminates
the appointment. On October 26, 2021, our board of directors appointed Mr. Avi Rubinstein as a director and member of the board until
the conclusion of the next annual general meeting of shareholders of the Company.
Committees of the Board of Directors
Our board of directors has
established three standing committees, the audit committee, the compensation committee and the Financial Statements Examination Committee.
Audit Committee
Under the Israeli Companies
Law, we are required to appoint an audit committee. The audit committee must be comprised of at least three directors. The audit committee
may not include the chairman of the board; a controlling shareholder of the company or a relative of a controlling shareholder; a director
employed by or providing services on a regular basis to the company, to a controlling shareholder or to an entity controlled by a controlling
shareholder; or a director who derives most of his or her income from a controlling shareholder.
In addition, a majority of
the members of the audit committee of a publicly traded company must be independent directors under the Companies Law. Our audit committee
is comprised of Mr. Moshe Tal, Mr. Yehuda Halfon and Ms. Rakefet Remigolski.
Under the Companies Law, our
audit committee is responsible for:
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determining whether there are deficiencies in the business management practices of our company, and making recommendations to the board of directors to improve such practices; |
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determining whether to approve certain related party transactions (including transactions in which an office holder has a personal interest and whether such transaction is extraordinary or material under Companies Law) and establishing the approval process for certain transactions with a controlling shareholder or in which a controlling shareholder has a personal interest (see “—Approval of Related Party Transactions under Israeli Law”); |
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determining the approval process for transactions that are “non-negligible” (i.e., transactions with a controlling shareholder that are classified by the audit committee as non-negligible, even though they are not deemed extraordinary transactions), as well as determining which types of transactions would require the approval of the audit committee, optionally based on criteria which may be determined annually in advance by the audit committee; |
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examining our internal controls and internal auditor’s performance, including whether the internal auditor has sufficient resources and tools to dispose of its responsibilities; |
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examining the scope of our auditor’s work and compensation and submitting a recommendation with respect thereto to our board of directors or shareholders, depending on which of them is considering the appointment of our auditor; |
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establishing procedures for the handling of employees’ complaints as to deficiencies in the management of our business and the protection to be provided to such employees; and |
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where the board of directors approves the working plan of the internal auditor, examining such working plan before its submission to the board of directors and proposing amendments thereto. |
Our audit committee may not
conduct any discussions or approve any actions requiring its approval (see “—Approval of Related Party Transactions under
Israeli Law”), unless at the time of the approval a majority of the committee’s members are present, which majority consists
of independent directors under the Companies Law, including at least one external director.
Our audit committee is acting
pursuant to a written charter, which sets forth, among others, the responsibilities of the audit committee consistent with the rules of
the SEC and Nasdaq Listing Rules (in addition to the requirements for such committee under the Companies Law), including, among others,
the following:
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oversight of our independent registered public accounting firm and recommending the engagement, compensation or termination of engagement of our independent registered public accounting firm to the board of directors in accordance with Israeli law; |
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recommending the engagement or termination of the person filling the office of our internal auditor, reviewing the services provided by our internal auditor and reviewing effectiveness of our system of internal control over financial reporting; |
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recommending the terms of audit and non-audit services provided by the independent registered public accounting firm for pre-approval by our board of directors; and |
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reviewing and monitoring, if applicable, legal matters with significant impact, finding of regulatory authorities’ findings, receive reports regarding irregularities and legal compliance, acting according to “whistleblower policy” and recommend to our board of directors if so required. |
Nasdaq Stock Market Requirements for Audit
Committee
Under the Nasdaq Stock Market
rules, we are required to maintain an audit committee consisting of at least three members, all of whom are independent and are financially
literate and one of whom has accounting or related financial management expertise.
As noted above, the members
of our audit committee include Mr. Moshe Tal (the chairman), Mr. Yehuda Halfon and Ms. Rakefet Remigolski, each of whom is “independent,”
as such term is defined in under Nasdaq Stock Market rules. All members of our audit committee meet the requirements for financial literacy
under the Nasdaq Stock Market rules. Our board of directors has determined that each member of our audit committee is an audit committee
financial expert as defined by the SEC rules and has the requisite financial experience as defined by the Nasdaq Stock Market rules.
Financial Statements Examination Committee
Under the Israeli Companies
Law, the board of directors of a public company in Israel must appoint a financial statements examination committee, which consists of
members with accounting and financial expertise or the ability to read and understand financial statements. According to a resolution
of our board of directors, the audit committee has been assigned the responsibilities and duties of a financial statement examination
committee, as permitted under relevant regulations promulgated under the Israeli Companies Law. From time to time, as necessary and required
to approve our financial statements, the audit committee holds separate meetings, prior to the scheduled meetings of the entire board
of directors regarding financial statement approval. As detailed above, the members of our audit committee are Mr. Moshe Tal, Mr. Yehuda
Halfon and Ms. Rakefet Remigolski. The function of a financial statements examination committee is to discuss and provide recommendations
to its board of directors (including the report of any deficiency found) with respect to the following issues: (1) estimations and assessments
made in connection with the preparation of financial statements; (2) internal controls related to the financial statements; (3) completeness
and propriety of the disclosure in the financial statements; (4) the accounting policies adopted and the accounting treatments implemented
in material matters of the company; and (5) value evaluations, including the assumptions and assessments on which evaluations are based
and the supporting data in the financial statements. Our independent registered public accounting firm and our internal auditor are invited
to attend all meetings of the audit committee when it is acting in the role of the financial statements examination committee.
Compensation Committee
Under the Israeli Companies
Law, the board of directors of any public company must establish a compensation committee. Under the Nasdaq rules, we are required to
maintain a compensation committee consisting of at least two members, each of whom must be independent directors.
Our compensation committee
is acting pursuant to a written charter, and consists of Mr. Moshe Tal, Mr. Yehuda Halfon and Ms. Rakefet Remigolski, each of whom is
“independent,” as such term is defined under Nasdaq Stock Market rules. Our compensation committee complies with the provisions
of the Israeli Companies Law, the regulations promulgated thereunder, and our amended and restated articles of association. Our compensation
committee also complies with the committee membership and charter requirements prescribed under the Nasdaq Stock Market rules.
Our compensation committee
reviews and recommends to our board of directors: with respect to our executive officers’ and directors’: (1) annual base
compensation (2) annual incentive bonus, including the specific goals and amounts; (3) equity compensation; (4) employment agreements,
severance arrangements, and change in control agreements and provisions; (5) retirement grants and/or retirement bonuses; and (6) any
other benefits, compensation, compensation policies or arrangements.
The duties of the compensation
committee include the recommendation to the company’s board of directors of a policy regarding the terms of engagement of office
holders, to which we refer as a compensation policy. Such policy must be adopted by the company’s board of directors, after considering
the recommendations of the compensation committee. The compensation policy is then brought for approval by our shareholders, which requires
a Special Majority (see “—Approval of Related Party Transactions under Israeli Law”). Under the Israeli Companies Law,
the board of directors may adopt the compensation policy if it is not approved by the shareholders, provided that after the shareholders
oppose the approval of such policy, the compensation committee and the board of directors revisit the matter and determine that adopting
the compensation policy would be in the best interests of the company. Our compensation policy was approved by our shareholders on May
8, 2016, and amendments thereto were approved by our shareholders on August 8, 2017, September 26, 2019, and September 15, 2020.
The compensation policy must
serve as the basis for decisions concerning the financial terms of employment or engagement of executive officers and directors, including
exculpation, insurance, indemnification or any monetary payment or obligation of payment in respect of employment or engagement. The compensation
policy must relate to certain factors, including advancement of the company’s objectives, the company’s business and its long-term
strategy, and creation of appropriate incentives for executives. It must also consider, among other things, the company’s risk management,
size and the nature of its operations. The compensation policy must furthermore consider the following additional factors:
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the knowledge, skills, expertise and accomplishments of the relevant director or executive; |
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the director’s or executive’s roles and responsibilities and prior compensation agreements with him or her; |
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the relationship between terms offered and the average and median compensation of the other employees of the company; |
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the possibility of reducing variable compensation at the discretion of the board of directors; and the possibility of setting a limit on the exercise value of non-cash variable compensation; and |
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as to severance compensation, the period of service of the director or executive, the terms of his or her compensation during such service period, the company’s performance during that period of service, the person’s contribution towards the company’s achievement of its goals and the maximization of its profits, and the circumstances under which the person is leaving the company. |
The compensation policy must
also include the following principles:
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the link between variable compensation and long-term performance and measurable criteria; |
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the relationship between variable and fixed compensation, and the ceiling for the value of variable compensation at the time of its grant; |
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the conditions under which a director or executive would be required to repay compensation paid to him or her if it was later determined that the information upon which such compensation was based was inaccurate and required to be restated in the company’s consolidated financial statements; |
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the minimum holding or vesting period for variable, equity-based compensation; and |
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maximum limits for severance compensation. |
The compensation policy must
also consider appropriate incentives from a long-term perspective and maximum limits for severance compensation.
The compensation committee
is responsible for: (1) recommending the compensation policy to a company’s board of directors for its approval (and subsequent
approval by the shareholders); and (2) duties related to the compensation policy and to the compensation of a company’s office holders,
including:
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recommending whether a compensation policy should continue in effect, if the then-current policy has a term of greater than three years (approval of either a new compensation policy or the continuation of an existing compensation policy must in any case occur every three years); |
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recommending to the board of directors’ periodic updates to the compensation policy; |
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assessing implementation of the compensation policy; |
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determining whether the terms of compensation of certain office holders of the company need not be brought to approval of the shareholders; and |
Nasdaq Stock Market Requirements for Compensation
Committee
Under Nasdaq rules, we are
required to maintain a compensation committee consisting of at least two members, all of whom are independent. In addition, in affirmatively
determining the independence of any director who will serve on the compensation committee of a board of directors, the board of directors
must consider all factors specifically relevant to determining whether a director has a relationship to the company which is material
to that director’s ability to be independent from management in connection with the duties of a compensation committee member.
As noted above, the members
of our compensation committee include Mr. Moshe Tal, Mr. Yehuda Halfon and Ms. Rakefet Remigolski, each of whom is “independent,”
as such term is defined under Nasdaq rules. Mr. Moshe Tal serves as the chairman of our compensation committee.
Internal Auditor
Under the Israeli Companies
Law, the board of directors of an Israeli public company must appoint an internal auditor nominated by the audit committee. Our internal
auditor is Ms. Dana Gottesman CPA, CIA, MA and partner of Risk Advisory Services Group, BDO Consulting Group. The role of the internal
auditor is to examine, among other things, whether a company’s actions comply with the law and proper business procedure. The audit
committee is required to oversee the activities, and to assess the performance of the internal auditor as well as to review the internal
auditor’s work plan. An internal auditor may not be an interested party or office holder, or a relative of any interested party
or office holder, and may not be a member of the company’s independent accounting firm or its representative. The Companies Law
defines an interested party as a holder of 5% or more of the outstanding shares or voting rights of a company, any person or entity that
has the right to appoint at least one director or the general manager of the company or any person who serves as a director or as the
general manager of a company. Our internal auditor is not our employee, but partner of a firm which specializes in internal auditing.
Remuneration of Directors
Under the Israeli Companies
Law, remuneration of directors is subject to the approval of the compensation committee, thereafter by the board of directors and thereafter,
unless exempted under the regulations promulgated under the Israeli Companies Law or under our compensation policy, by the general meeting
of the shareholders. In case the remuneration of the directors is in accordance with regulations applicable to remuneration of the external
directors then such remuneration shall be exempt from the approval of the general meeting. Where the director is also a controlling shareholder,
the requirements for approval of transactions with controlling shareholders apply.
Fiduciary Duties of Office Holders
The Israeli Companies Law
imposes a duty of care and a duty of loyalty on all office holders of a company.
The duty of care requires
an office holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same
circumstances. The duty of care of an office holder includes a duty to use reasonable means to obtain:
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information on the advisability of a given action brought for his approval or performed by him by virtue of his position; and |
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all other important information pertaining to these actions. |
The duty of loyalty of an
office holder requires an office holder to act in good faith and for the benefit of the company, and includes a duty to:
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refrain from any conflict of interest between the performance of his duties in the company and his performance of his other duties or personal affairs; |
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refrain from any action that is competitive with the company’s business; |
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refrain from exploiting any business opportunity of the company to receive a personal gain for himself or others; and |
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disclose to the company any information or documents relating to the company’s affairs which the office holder has received due to his position as an office holder. |
Insurance
Under the Israeli Companies
Law, a company may obtain insurance for any of its office holders against the following liabilities incurred due to acts he or she performed
as an office holder, if and to the extent provided for in the company’s articles of association:
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breach of his or her duty of care to the company or to another person, to the extent such a breach arises out of the negligent conduct of the office holder; |
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a breach of his or her duty of loyalty to the company, provided that the office holder acted in good faith and had reasonable cause to assume that his or her act would not prejudice the company’s interests; and |
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a financial liability imposed upon him or her in favor of another person. |
We currently have directors’
and officers’ liability insurance, providing total coverage of $10 million for the benefit of all of our directors and officers,
in respect of which we paid a twelve-month premium of approximately $148,000, which expires on August 14, 2023, as well as Public Offering
of Securities Insurance (POSI) providing a total coverage of $10 million for the benefit of all of our directors and officers, and covering
a public offering of our securities on the Nasdaq Capital Market in August 2018, in respect of which we paid a seven-year premium of approximately
$120,000, which expires on August 21, 2025.
Indemnification
The Israeli Companies Law
and the Israeli Securities Law, 5728-1968, or the Securities Law, provide that a company may indemnify an office holder against the following
liabilities and expenses incurred for acts performed by him or her as an office holder, either pursuant to an undertaking made in advance
of an event or following an event, provided its articles of association include a provision authorizing such indemnification:
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a financial liability imposed on him or her in favor of another person by any judgment concerning an act performed in his or her capacity as an office holder, including a settlement or arbitrator’s award approved by a court; |
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reasonable litigation expenses, including attorneys’ fees, expended by the office holder (a) as a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (1) no indictment (as defined in the Companies Law) was filed against such office holder as a result of such investigation or proceeding; and (2) no financial liability as a substitute for the criminal proceeding (as defined in the Companies Law) was imposed upon him or her 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; or (b) in connection with a monetary sanction; |
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reasonable litigation expenses, including attorneys’ fees, expended by the office holder or imposed on him or her by a court: (1) in proceedings that the company institutes, or that another person institutes on the company’s behalf, against him or her; (2) in a criminal proceeding of which he or she was acquitted; or (3) as a result of a conviction for a crime that does not require proof of criminal intent; and |
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expenses incurred by an office holder in connection with an Administrative Procedure under the Securities Law, including reasonable litigation expenses and reasonable attorneys’ fees. An “Administrative Procedure” is defined as a procedure pursuant to chapters H3 (Monetary Sanction by the ISA), H4 (Administrative Enforcement Procedures of the Administrative Enforcement Committee) or I1 (Arrangement to prevent Procedures or Interruption of procedures subject to conditions) to the Securities Law. |
The Israeli Companies Law
also permits a company to undertake in advance to indemnify an office holder, provided that if such indemnification relates to financial
liability imposed on him or her, as described above, then the undertaking should be limited and shall detail the following foreseen events
and amount or criterion:
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to events that in the opinion of the board of directors can be foreseen based on the company’s activities at the time that the undertaking to indemnify is made; and |
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an amount or criterion determined by the board of directors, at the time of the giving of such undertaking to indemnify, to be reasonable under the circumstances. |
We have entered into indemnification
agreements with all of our directors and with all members of our senior management. Each such indemnification agreement provides the office
holder with indemnification permitted under applicable law and up to a certain amount, and to the extent that these liabilities are not
covered by directors and officer’s insurance.
Exculpation
Under the Israeli Companies
Law, an Israeli company may not exculpate an office holder from liability for a breach of his or her duty of loyalty, but may exculpate
in advance an office holder from his or her liability to the company, in whole or in part, for damages caused to the company as a result
of a breach of his or her duty of care (other than in relation to distributions), but only if a provision authorizing such exculpation
is included in its articles of association. Our amended and restated articles of association provide that we may exculpate, in whole or
in part, any office holder from liability to us for damages caused to the company as a result of a breach of his or her duty of care,
but prohibit an exculpation from liability arising from a company’s transaction in which our controlling shareholder or officer
has a personal interest. Subject to the aforesaid limitations, under the indemnification agreements, we exculpate and release our office
holders from any and all liability to us related to any breach by them of their duty of care to us to the fullest extent permitted by
law.
Limitations
The Israeli Companies Law
provides that we may not exculpate or indemnify an office holder nor enter into an insurance contract that would provide coverage for
any liability incurred as a result of any of the following: (1) a breach by the office holder of his or her duty of loyalty unless (in
the case of indemnity or insurance only, but not exculpation) the office holder acted in good faith and had a reasonable basis to believe
that the act would not prejudice us; (2) a breach by the office holder of his or her duty of care if the breach was carried out intentionally
or recklessly (as opposed to merely negligently); (3) any act or omission committed with the intent to derive an illegal personal benefit;
or (4) any fine, monetary sanction, penalty or forfeit levied against the office holder.
Under the Israeli Companies
Law, exculpation, indemnification and insurance of office holders in a public company 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.
Our amended and restated articles
of association permit us to exculpate (subject to the aforesaid limitation), indemnify and insure our office holders to the fullest extent
permitted or to be permitted by the Companies Law.
The foregoing descriptions
summarize the material aspects and practices of our board of directors. For additional details, we also refer you to the full text of
the Israeli Companies Law, as well as of our amended and restated articles of association, which articles are an exhibit to this annual
report on Form 20-F, and are incorporated herein by reference.
There are no service contracts
between the Company, on the one hand, and our directors in their capacity as directors, on the other hand, providing for benefits upon
termination of service.
Approval of Related Party Transactions under
Israeli Law
General
Under the Israeli Companies
Law, we may approve an action by an office holder from which the office holder would otherwise have to refrain, as described above, if:
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the office holder acts in good faith and the act or its approval does not cause harm to the company; and |
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the office holder disclosed the nature of his or her interest in the transaction (including any significant fact or document) to the company at a reasonable time before the company’s approval of such matter. |
Disclosure of Personal Interests of an Office
Holder
The Israeli Companies Law
requires that an office holder disclose to the company, promptly, and, in any event, not later than the board meeting at which the transaction
is first discussed, any direct or indirect personal interest that he or she may have and all related material information known to him
or her relating to any existing or proposed transaction by the company. If the transaction is an extraordinary transaction, the office
holder must also disclose any personal interest held by:
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the office holder’s relatives; or |
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any corporation in which the office holder or his or her relatives holds 5% or more of the shares or voting rights, serves as a director or general manager or has the right to appoint at least one director or the general manager. |
An office holder is not, however,
obliged to disclose a personal interest if it derives solely from the personal interest of his or her relative in a transaction that is
not considered an extraordinary transaction. Under the Companies Law, an extraordinary transaction is a transaction:
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not in the ordinary course of business; |
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not on market terms; or |
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that is likely to have a material effect on the company’s profitability, assets or liabilities. |
The Israeli Companies Law
does not specify to whom within us or the manner in which required disclosures are to be made. We require our office holders to make such
disclosures to our board of directors.
Under the Israeli Companies
Law, once an office holder complies with the above disclosure requirement, the board of directors may approve a transaction between the
company and an office holder, or a third party in which an office holder has a personal interest, unless the articles of association provide
otherwise and provided that the transaction is in the company’s interest. If the transaction is an extraordinary transaction in
which an office holder has a personal interest, first the audit committee and then the board of directors, in that order, must approve
the transaction. Under specific circumstances, shareholder approval may also be required. Generally, a person who has a personal interest
in a matter which is considered at a meeting of the board of directors or the audit committee may not be present at such a meeting unless
the chairman of the audit committee or board of directors (as applicable) determines that he or she should be present in order to present
the transaction that is subject to approval. A director who has a personal interest in a transaction, which is considered at a meeting
of the board of directors or the audit committee, may not be present at this meeting or vote on this matter, unless a majority of members
of the board of directors or the audit committee, as the case may be, has a personal interest. If a majority of the board of directors
has a personal interest, then shareholder approval is generally also required.
Disclosure of Personal Interests of a Controlling
Shareholder
Under the Israeli Companies
Law, the disclosure requirements that apply to an office holder also apply to a controlling shareholder of a public company. 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, as well as 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 and compensation 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 or the compensation committee, as the case may be, 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 that order. In addition, the shareholder approval must fulfill one of the following requirements:
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at least a majority of the shares held by shareholders who have no personal interest in the transaction and are voting at the meeting must be voted in favor of approving the transaction, excluding abstentions; or |
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the shares voted by shareholders who have no personal interest in the transaction who vote against the transaction represent no more than 2% of the voting rights in the company. |
In addition, any extraordinary
transaction with a controlling shareholder or in which a controlling shareholder has a personal interest with a term of more than three
years requires the abovementioned approval every three years; however, such transactions not involving the receipt of services or compensation
can be approved for a longer term, provided that the audit committee determines that such longer term is reasonable under the circumstances.
The Israeli Companies Law
requires that every shareholder that participates, in person, by proxy or by voting instrument, in a vote regarding a transaction with
a controlling shareholder, must indicate in advance or in the ballot whether or not that shareholder has a personal interest in the vote
in question. Failure to so indicate will result in the invalidation of that shareholder’s vote.
The term “controlling
shareholder” is defined in the Israeli Companies Law as a shareholder with the ability to direct the activities of the company,
other than by virtue of being an office holder. A shareholder is presumed to be a controlling shareholder if the shareholder holds 50%
or more of the voting rights in a company or has the right to appoint 50% or more of the directors of the company or its general manager.
In the context of a transaction involving a related party, a controlling shareholder also includes a shareholder who holds 25% or more
of the voting rights in the company if no other shareholder holds more than 50% of the voting rights in the company. For this purpose,
the holdings of all shareholders who have a personal interest in the same transaction will be aggregated.
Approval of the Compensation of Directors and
Executive Officers
The compensation of, or an
undertaking to indemnify, insure or exculpate, an office holder who is not a director requires the approval of the company’s compensation
committee, followed by the approval of the company’s board of directors, and, if such compensation arrangement or an undertaking
to indemnify, insure or exculpate is inconsistent with the company’s stated compensation policy, or if the said office holder is
the chief executive officer of the company (subject to a number of specific exceptions), then such arrangement is subject to the approval
of our shareholders, subject to a Special Majority .
Directors. Under the
Israeli Companies Law, the compensation of our directors requires the approval of our compensation committee, the subsequent approval
of the board of directors and, unless exempted under the regulations promulgated under the Israeli Companies Law or under our compensation
policy, the approval of the general meeting of our shareholders. If the compensation of our directors is inconsistent with our stated
compensation policy, then, provided that those provisions that must be included in the compensation policy according to the Israeli Companies
Law have been considered by the compensation committee and board of directors, shareholder approval by a Special Majority will be required.
Executive officers other
than the chief executive officer. The Companies Law requires the approval of the compensation of a public company’s executive
officers (other than the chief executive officer) in the following order: (i) the compensation committee, (ii) the company’s board
of directors, and (iii) only if such compensation arrangement is inconsistent with the company’s stated compensation policy, the
company’s shareholders by a Special Majority. However, if the shareholders of the company do not approve a compensation arrangement
with an executive officer that is inconsistent with the company’s stated compensation policy, the compensation committee and board
of directors may override the shareholders’ decision if each of the compensation committee and the board of directors provide detailed
reasons for their decision.
Chief executive officer. Under
the Israeli Companies Law, the compensation of a public company’s chief executive officer is required to be approved by: (i) the
company’s compensation committee; (ii) the company’s board of directors, and (iii) the company’s shareholders by a Special
Majority. However, if the shareholders of the company do not approve the compensation arrangement with the chief executive officer, the
compensation committee and board of directors may override the shareholders’ decision if each of the compensation committee and
the board of directors provide detailed reasons for their decision. In addition, the compensation committee may exempt the engagement
terms of a candidate to serve as the chief executive officer from shareholders’ approval, if the compensation committee determines
that the compensation arrangement is consistent with the company’s stated compensation policy, that the chief executive officer
did not have a prior business relationship with the company or a controlling shareholder of the company, and that subjecting the approval
to a shareholder vote would impede the company’s ability to attain the candidate to serve as the company’s chief executive
officer (and provide detailed reasons for the latter).
The approval of each of the
compensation committee and the board of directors, with regard to the office holders and directors above, must be in accordance with the
company’s stated compensation policy; however, under special circumstances, the compensation committee and the board of directors
may approve compensation terms of a chief executive officer that are inconsistent with the company’s compensation policy provided
that they have considered those provisions that must be included in the compensation policy according to the Companies Law and that shareholder
approval was obtained by a Special Majority requirement.
Duties of Shareholders
Under the Israeli Companies
Law, a shareholder has a duty to refrain from abusing his power in the company and to act in good faith and in an acceptable manner in
exercising his rights and performing his obligations toward the company and other shareholders, including, among other things, in voting
at general meetings of shareholders (and at shareholder class meetings) on the following matters:
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amendment of the articles of association; |
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increase in the company’s authorized share capital; |
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merger; and |
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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 oppressing 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 oppression of other shareholders, additional remedies are available to the injured
shareholder.
In addition, any controlling
shareholder, any shareholder that knows that its vote can determine the outcome of a shareholder vote and any shareholder that, under
a company’s articles of association, has the power to appoint or prevent the appointment of an office holder, or has another power
with respect to a company, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance
of this duty except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach
of the duty to act with fairness, taking the shareholder’s position in the company into account.
D. Employees.
As of December 31, 2022, we
had 2 senior management positions on a full-time basis and one executive on part-time basis. All are engaged as employees. In addition
to our senior management, we had approximately 50 employees, sub-contractor’s employees and consultants, on full and part time basis,
almost all of whom are located in Israel.
In sales and development/support
activities we employed approximately 20 employees/consultants in each activity, while 14 employees were occupied in general, administrative
and corporate activities. None of our employees is represented by labor unions or covered by collective bargaining agreements.
As of December 31, 2021, we
had approximately 60 employees, sub-contractor’s employees and dedicated consultants world-wide. The majority of our employees and
consultants were located in Israel, while 15 employees, sub-contractor’s employees and consultants were located in Ukraine, United
States, Spain, Germany and India.
On December 31, 2020, we had
63 full-time and part-time basis employees, sub-contractor’s employees and dedicated consultants, most are located in Israel, and
18 were located in Ukraine, United States, Spain, Germany and India.
E. Share Ownership.
The following table lists
as of March 24, 2023, the number of our shares beneficially owned by each of our office holders as a group:
| |
No. of Shares Beneficially Owned (1) | | |
Percentage Owned (2) | |
Chen Katz (3) | |
| 261,250 | | |
| * | |
Shachar Daniel (4) | |
| 493,210 | | |
| 1.5 | % |
Shai Avnit (5) | |
| 273,831 | | |
| * | |
Avi Rubinstein (6) | |
| 268,331 | | |
| * | |
Rakefet Remigolski (7) | |
| 39,375 | | |
| * | |
Yehuda Halfon (8) | |
| 39,375 | | |
| * | |
Moshe Tal (9) | |
| 39,375 | | |
| * | |
All office holders as a group (7 persons) | |
| | | |
| 4.3 | % |
(1) |
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Ordinary Shares relating to options currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them. |
(2) |
The percentages shown are based on 32,947,810 Ordinary Shares as issued and outstanding as of March 24, 2023. |
|
|
(3) |
Includes 7,000 ADSs (70,000 Ordinary Shares) acquired through open market stock purchases and stock options to purchase 191,250 Ordinary Shares at an exercise price range between NIS 4.60 and NIS 6.04 per share that are exercisable within 60 days. In addition, Mr. Katz holds options to purchase 348,750 Ordinary Shares at exercise prices range between NIS 1.51 to NIS 6.04 per share that are not exercisable within 60 days. Mr. Katz’s options have expiration dates ranging between September 15, 2030, to December 19, 2032. See also Item 7.A., with respect to certain Ordinary Shares over which the Chairman of the Company or another designee may exercise a proxy with respect to limited items. Such shares are not included in the table above, as they are based on the office of chairperson rather than Mr. Katz’s personal beneficial ownership. |
|
|
(4) |
Includes 11,071 ADS’s (110,710 Ordinary Shares) acquired through open market stock purchases, and stock options to purchase 382,500 Ordinary Shares at an exercise price range between NIS 4.60 and NIS 6.04 per share that are exercisable within 60 days. In addition, Mr. Daniel holds options to purchase 697,500 Ordinary Shares at exercise prices range between NIS 1.51 to NIS 6.04 per share that are not exercisable within 60 days. Mr. Daniel’s options have expiration dates ranging from September 15, 2030, to December 19, 2032. |
|
|
(5) |
Includes 13,000 Ordinary Shares acquired through open market stock purchases and stock options to purchase 260,831 Ordinary Shares at an exercise price range between NIS 4.00 and NIS 6.04 per share that are exercisable within 60 days. In addition, Mr. Avnit holds options to purchase 459,169 Ordinary Shares at exercise prices range between NIS 1.27 to NIS 6.04 per share that are not exercisable within 60 days. Mr. Avnit’s options have expiration dates ranging from August 2, 2030, to November 28, 2032. |
|
|
(6) |
Includes 750 ADSs (7,500 Ordinary Shares) acquired
through open market stock purchases and stock options to purchase 260,831 Ordinary Shares at an exercise price range between NIS 4.00
and NIS 6.04 per share that are exercisable within 60 days, held by Orit Rubinstein, Mr. Rubinstein’s wife. In addition, Mr. Rubinstein
holds, through his wholly owned affiliate, options to purchase 109,165 Ordinary Shares at exercise prices range between NIS 1.51 to NIS
6.04 per share that are not exercisable within 60 days. Mr. Rubinstein’s options have expiration dates ranging between August 2,
2030, to December 19, 2032.
|
(7) |
Includes stock options to purchase 39,375 Ordinary Shares at an exercise price range between NIS 4.60 and NIS 6.04 per share that are exercisable within 60 days. In addition, Ms. Remigolski holds options to purchase 65,625 Ordinary Shares at exercise prices range between NIS 1.51 to NIS 6.04 per share that are not exercisable within 60 days. Ms. Remigolski’s options have expiration dates ranging between September 15, 2030, to December 19, 2032. |
(8) |
Includes stock options to purchase 39,375 Ordinary Shares at an exercise price range between NIS 4.60 and NIS 6.04 per share that are exercisable within 60 days. In addition, Mr. Halfon holds options to purchase 65,625 Ordinary Shares at exercise prices range between NIS 1.51 to NIS 6.04 per share that are not exercisable within 60 days. Mr. Halfon’s options have expiration dates ranging between September 15, 2030, to December 19, 2032. |
(9) |
Includes stock options to purchase 39,375 Ordinary
Shares at an exercise price range between NIS 4.60 and NIS 6.04 per share that are exercisable within 60 days. In addition, Mr. Tal holds
options to purchase 65,625 Ordinary Shares at exercise prices range between NIS 1.51 to NIS 6.04 per share that are not exercisable within
60 days. Mr. Tal’s options have expiration dates ranging between September 15, 2030, to December 19, 2032. |
Stock Option Plan – Global Equity
Plan
We maintain one equity incentive
plan – the Amended and Restated Global Incentive Plan, or the Global Incentive Plan. As of March 24, 2023, the number of Ordinary
Shares reserved for the grant of options or restricted stock units under the plan was 620,829. In addition, options to purchase 6,640,425 Ordinary
Shares were issued and outstanding, with exercise prices ranging between NIS 0.00 and NIS 6.28 (approximately $1.75) per share.
Our Global Incentive Plan
was adopted by our board of directors in July 2016, and expires in July 2026. Our employees, directors, officers, and services providers,
including those who are our controlling shareholders, as well as those of our affiliated companies, are eligible to participate in this
plan.
Our Global Incentive Plan
is administered by our board of directors, regarding the granting of options, restricted shares or restricted share units and the terms
of such grants, including exercise price, method of payment, vesting schedule, acceleration of vesting and the other matters necessary
in the administration of this plan. Eligible Israeli employees, officers and directors, would qualify for provisions of Section 102(b)(2)
of the Israeli Income Tax Ordinance of 1961 (New Version), or the Tax Ordinance. Pursuant to such Section 102(b)(2), qualifying options
and shares issued upon exercise of such options are held in trust and registered in the name of a trustee selected by the board of directors.
The trustee may not release these options or shares to the holders thereof for two years from the date of the registration of the options
in the name of the trustee. Under Section 102, any tax payable by an employee from the grant or exercise of the options is deferred until
the transfer of the options or ordinary shares by the trustee to the employee or upon the sale of the options or ordinary shares, and
gains may qualify to be taxed as capital gains at a rate equal to 25%, subject to compliance with specified conditions. Our Israeli non-employee
service providers and controlling shareholders may only be granted options under Section 3(9) of the Tax Ordinance, which does not provide
for similar tax benefits. The Global Equity Plan also permits granting options to Israeli grantees who do not qualify under Section 102(b)(2).
As a default, our Global Incentive
Plan provides that upon termination of employment for any reason, other than in the event of death, retirement, disability or cause, all
unvested options will expire and all vested options will generally be exercisable for 90 days following such termination, subject to the
terms of the Global Incentive Plan and the governing option agreement. Notwithstanding the foregoing, in the event the employment is terminated
for cause (including, inter alia, due to dishonesty toward the Company or its affiliate, substantial malfeasance or nonfeasance of duty,
unauthorized disclosure of confidential information, and conduct substantially prejudicial to the business of the Company or affiliate;
or any substantial breach by the optionee of his or her employment or service agreement) all options granted to such employee, whether
vested or unvested, will not be exercisable and will terminate on the date of the termination of his employment.
Upon termination of employment
due to death or disability, all the options vested at the time of termination and within 60 days after the date of such termination, will
generally be exercisable for 12 months, or such other period as determined by the plan administrator, subject to the terms of the Global
Incentive Plan and the governing option agreement.
On January 20, 2019, our board
of directors adopted an appendix to the Global Incentive Plan for U.S. residents, which was thereafter amended by the board of directors,
with effect from September 22, 2022. Under this appendix, the Global Incentive Plan will provide for the granting of options to U.S. residents.
The U.S. Global Incentive Plan and appendix have been approved by our shareholders on May 23, 2019.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS
A. Major Shareholders
The following table presents
as of March 24, 2023 (unless otherwise noted below), the beneficial ownership of our Ordinary Shares by each person who is known to us
to be the beneficial owner of 5% or more of our outstanding Ordinary Shares (to whom we refer as our Major Shareholders).
Except where otherwise indicated,
and except pursuant to community property laws, we believe, based on information furnished by such owners, that the beneficial owners
of the shares listed below have sole investment and voting power with respect to, and the sole right to receive the economic benefit of
ownership of, such shares. The shareholders listed below do not have any different voting rights from any of our other shareholders. We
know of no arrangements that would, at a subsequent date, result in a change of control of our Company.
Name | |
Number of Ordinary Shares Beneficially Owned (1) | | |
Percent of Class (2) | |
| |
| | |
| |
Roni Lev (3) | |
| 2,784,740 | | |
| 8.5 | % |
Yotam Benattia (4) | |
| 2,784,740 | | |
| 8.5 | % |
(1) |
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Ordinary Shares relating to options currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. |
|
|
(2) |
The percentage of outstanding ordinary shares is based on 32,628,044 Ordinary Shares outstanding as of November 23, 2022, the date on which the individuals in the table based their beneficial ownership in their Schedules 13G/A filed with the SEC as described in the following footnotes. |
|
|
(3) |
The beneficial ownership is based on a Schedule 13G/A filed by Mr. Lev with the SEC on February 8, 2023. The amounts set forth in the Schedule 13G/A are presented after giving effect to a change of ratio between the ADSs and the Company’s Ordinary Shares, from a ratio of one (1) ADS to one (1) Ordinary Share to a new ratio of one (1) ADS to ten (10) Ordinary Shares that took place in November 2022. Mr. Lev also owns options to purchase 135,000 Ordinary Shares, of which 67,500 options are beneficially owned and the remainder of which vest equally over seven quarters beginning on May 25, 2023. Mr. Lev also received 192,866 Ordinary Shares in January 2023 pursuant to the Share Purchase Agreement, dated July 1, 2021, among Takoomi Ltd., Safe-T Group Ltd., CyberKick Ltd., Mr. Roni Lev and Mr. Yotam Benattia, which Ordinary Shares were not beneficially owned as of December 31, 2022. |
|
(4) |
The beneficial ownership is based on a Schedule 13G/A filed by Mr. Benattia with the SEC on February 8, 2023. The amounts set forth in the Schedule 13G/A are presented after giving effect to a change of ratio between the ADSs and the Company’s Ordinary Shares, from a ratio of one (1) ADS to one (1) Ordinary Share to a new ratio of one (1) ADS to ten (10) Ordinary Shares that took place in November 2022. Mr. Benattia also owns options to purchase 135,000 Ordinary Shares, of which 67,500 options are beneficially owned and the remainder of which vest equally over seven quarters beginning on May 25, 2023. Mr. Benattia also received 192,866 Ordinary Shares in January 2023 pursuant to the Share Purchase Agreement, dated July 1, 2021, among Takoomi Ltd., Safe-T Group Ltd., CyberKick Ltd., Mr. Roni Lev and Mr. Yotam Benattia, which Ordinary Shares were not beneficially owned as of December 31, 2022. |
Changes in Percentage Ownership by Major
Shareholders
Over the course of 2022 and
until March 24, 2023, there were no decreases in the percentage ownership of major shareholders. On the other hand, there were increases
in the percentage ownership of some of our former major shareholders: (i) Mr. Roni Lev (from 6.4% to 8.5%), and (ii) Mr. Yotam Benattia
(from 6.4% to 8.5%).
Over
the course of 2021, there were decreases in the percentage ownership of some of our former major shareholders: (i) the entities affiliated
with Alpha Capital Anstalt, or Alpha (from 9.9% to 4.99%), and (ii) the entities affiliated with Anson Funds Management LP, or Anson (from
5.2% to 0%). In addition, Mr. Lev and Mr. Benattia became major shareholders of the Company during 2021.
Over the course of 2020, there
were decreases in the percentage ownership of some of our former major shareholders: the entities affiliated with Morgan Stanley (from
5.7% to 4.0%).
Record Holders
The number of record holders
is not representative of the number of beneficial holders of our Ordinary Shares, as the shares of all shareholders for a publicly traded
company such as ours which is listed on the Tel Aviv Stock Exchange are recorded in the name of our Israeli share registrar, The Tel Aviv
Stock Exchange Nominee Company Ltd. Accordingly, as of March 24, 2023, there was one shareholder of record of our Ordinary Shares, which
is located in Israel. Based upon a review of the information provided to us by The Bank of New York Mellon, the depository of the ADSs,
as of March 22, 2023, there were 68 holders of record of the ADSs on record with the Depository Trust Company.
These numbers are not representative
of the number of beneficial holders of our shares nor is it representative of where such beneficial holders reside, since many of these
shares were held of record by brokers or other nominees.
The Company is not controlled
by another corporation, by any foreign government or by any natural or legal persons except as set forth herein, and there are no arrangements
known to the Company which would result in a change in control of the Company at a subsequent date.
B. Related Party Transactions
Employment and Services Agreements
We have entered into written
employment or services agreements with each of our executive officers. All of these agreements contain customary provisions regarding
noncompetition, confidentiality of information and assignment of inventions. However, the enforceability of the noncompetition provisions
may be limited under applicable law. In addition, we have entered into agreements with each executive officer and director pursuant to
which we have agreed to indemnify each of them up to a certain amount and to the extent that these liabilities are not covered by directors’
and officers’ insurance. Members of our senior management are eligible for bonuses each year. The bonuses are payable upon meeting
objectives and targets that are set by our Chief Executive Officer and approved annually by our board of directors that also set the bonus
targets for our Chairman and Chief Executive Officer, all in accordance with our compensation policy.
Options
Since our inception, we have
granted options to purchase our Ordinary Shares to our officers and directors. Such option agreements may contain acceleration provisions
upon certain merger, acquisition, or change of control transactions. We describe our option plans under “Share Ownership—Stock
Option Plans.” If the relationship between us and an executive officer or a director is terminated, except for cause (as defined
in the various option plan agreements), options that are vested will generally remain exercisable for three months after such termination.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION.
A. Consolidated Statements and Other Financial
Information.
See “Item 18. Financial
Statements.”
Legal Proceedings
On June 11, 2020, Bright Data
filed an action alleging infringement by our wholly owned subsidiary, NetNut Ltd., of U.S. Patent Nos. 10,484,511 and 10,637,968, as well
as claims of trade secret misappropriation. On June 18, 2021, Bright Data filed an action alleging infringement by NetNut of U.S. Patent
Nos. 10,257,319 and 10,484,510. The action was also filed in the United States District Court for the Eastern District of Texas, Marshall
Division. Bright Data amended its complaint on October 11, 2021, to additionally assert infringement of the U.S. Patents Nos. 10,491,713,
11,050,852 and 11,044,346, as well as a claim for alleged false advertising. These actions were filed in the United States District Court
for the Eastern District of Texas, Marshal Division. Pursuant to separate settlement agreements between the parties, these cases were
dismissed in December 2021 (without prejudice) and May 2022 (with prejudice), respectively.
Dividends
We have never declared or
paid any cash dividends on our Ordinary Shares and do not anticipate paying any cash dividends in the foreseeable future. Payment of cash
dividends, if any, in the future will be at the discretion of our board of directors and will depend on then-existing conditions, including
our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board
of directors may deem relevant.
Payment of dividends may be
subject to Israeli withholding taxes. See “Item 10.E. Taxation”, for additional information.
B. Significant Changes
No significant change, other
than as otherwise described in this annual report on Form 20-F, has occurred in our operations since the date of our consolidated financial
statements included in this annual report on Form 20-F.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Our ADSs are traded on the
Nasdaq Capital Market and TASE under the symbol “ALAR”.
B. Plan of Distribution
Not applicable.
C. Markets
Our Ordinary Shares are listed
on the TASE. Our ADSs are listed on the Nasdaq Capital Market.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
A copy of our amended and
restated articles of association is attached as Exhibit 1.1 to this annual report on Form 20-F. The information called for by this Item
is set forth in Exhibit 2(d) to this annual report on Form 20-F and is incorporated by reference into this annual report on Form 20-F.
C. Material Contracts
Except as set forth below,
we have not entered into any material contract within the two years prior to the date of this annual report on Form 20-F, other than contracts
entered into in the ordinary course of business, or as otherwise described herein in “Item 4.A. History and Development of the Company”
above, “Item 4.B. Business Overview” above, see “Item 5.B - Liquidity and Capital Resources - Change in cash and cash
equivalents” above or “Item 7.A. Major Shareholders” above.
CyberKick Ltd. Acquisition
On July 1, 2021, we entered
into a share and asset purchase agreement with CyberKick, pursuant to which on July 4, 2021 the Company acquired all of the outstanding
share capital of CyberKick, a private Israeli company, which provides access tools and services for consumers. CyberKick is the legal
holder of certain intangible assets which were transferred to it on the acquisition date. The initial consideration for the transaction
was paid for in cash and with our Ordinary Shares, as set forth below.
In consideration for the purchased
shares, we paid and agreed to pay to CyberKick’s shareholders:
|
● |
Initial consideration paid on the closing of the transaction - a combination of cash ($3.7 million) and 4,062,045 Ordinary Shares ($5.6 million); and |
|
● |
A potential earn-out payment of up to $3 million in total, subject to certain revenue targets of CyberKick during the first and second year following the closing of the transaction. We may decide, at our sole discretion, to pay the earn-out consideration in whole or in part in equity. On July 17, 2022, we paid the earn-out consideration with respect to the first year following the closing of the transaction with the issuance by the Company of a total of 2,181,009 Ordinary Shares in lieu of a cash payment entitlement in the amount of $1.05 million. |
As part of the terms of the
share and asset purchase agreement, we have committed to support and accelerate CyberKick’s growth by providing financing of $2.5
million in the twenty-four (24) months following the acquisition.
United Mizrahi-Tefahot Bank Credit Line
We
have drawn short-term bank loans out of a one-year credit line which was secured from United Mizrahi-Tefahot Bank on May 25, 2022, in
a total amount of $2 million. The credit facility is used predominantly to fund the operations and growth of our subsidiary, CyberKick,
and as a result will reduce the usage of our own cash. Amounts drawn under the credit line bear interest at the Secured Overnight Financing
Rate plus 5.5% per annum, and are paid quarterly for the actual withdrawn balance. The credit line offers a three times multiple on eligible
revenues, is secured against all of the assets of CyberKick., is guaranteed by us and includes a refundable deposit by us of $500,000.
Until March 24, 2023, CyberKick borrowed an amount of $1.6 million out of the credit line.
Funding agreement
with O.R.B. Spring Ltd.
On
August 8, 2022, we signed a strategic funding agreement with O.R.B. of up to $4,000,000 to support the further growth of our consumer
access solutions. The funding is made through a series of cash installments through July 2024. Until March 24, 2023, the Company received
aggregate funding of $2.22 million.
We
repay the funding using a revenue share model that is based on sales generated only from customers of the new consumer access solution
acquired with each funding installment. Each such funding installment shall be repaid within two years and if the repayments do not cover
100% of the installments, then we will complete the remaining balances in cash or shares, at our sole discretion. Once the investment
amount has been repaid in full, we and O.R.B shall share the attributed revenue in equal parts (50:50) until the lapse of five years after
the date on which each installment was received by us. Until March 24, 2023, the Company repaid to O.R.B. an amount of approximately $0.54
million from the sales that were generated as a result of the funding.
At the Market Offering
In November 2022, we entered
into the Sales Agreement, pursuant to which we may offer and sell, from time to time, through the Sales Agent ADSs, for an aggregate offering
price of up to $5 million. The ADSs will be offered and sold pursuant to the F-3, which became effective on March 15, 2021, and the prospectus
supplement relating to the Sales Agreement, dated November 25, 2022. In that regard, we registered up to $100,000,000 of the ADSs on such
registration statement. Upon termination of the Sales Agreement, any portion of the $5 million included in the Sales Agreement prospectus
of the F-3 that is not sold pursuant to the Sales Agreement will be available for sale in other offerings pursuant to the F-3, and if
no ADSs are sold under the Sales Agreement, the full $5 million of securities may be sold in other offerings pursuant to the F-3. As of
March 24, 2023, we have sold 25,847 ADSs pursuant to the Sales Agreement, for aggregate gross proceeds of approximately $75 thousand.
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.
The ownership or voting of
our Ordinary Shares by non-residents of Israel, except with respect to citizens of countries that are in a state of war with Israel, is
not restricted in any way by our memorandum of association or amended and restated articles of association or by the laws of the State
of Israel.
E. Taxation.
ISRAELI TAX CONSIDERATIONS AND GOVERNMENT PROGRAMS
The following is a summary
of the material Israeli income tax consequences of the ownership of our Ordinary Shares. The following also contains a description of
material relevant provisions of the current Israeli income tax aspects applicable to companies in Israel, with reference to its effect
on us. To the extent that the discussion is based on new tax legislation, which has not been subject to judicial or administrative interpretation,
there can be no assurance that the tax authorities will accept the views expressed in the discussion in question. This summary is based
on laws and regulations in effect as of the date hereof, and should not be taken, as legal or professional tax advice and is not exhaustive
of all possible tax considerations.
The following description
is not intended to constitute a complete analysis of all tax consequences relating to the ownership or disposition of our Ordinary Shares
and ADSs. Shareholders should consult their own tax advisors concerning the tax consequences of the purchase, ownership and disposition
of Ordinary Shares, as well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.
General Corporate Tax Structure in Israel
Israeli resident companies
are generally subject to corporate tax, currently at the rate of 23%. 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 resident company” are subject to tax at the regular corporate tax rate. Under Israeli tax legislation, a corporation
will be considered as an “Israeli resident company” if it meets one of the following: (i) it was incorporated in Israel; or
(ii) the control and management of its business are exercised in Israel.
Tax Benefits under the Law for the Encouragement
of Capital Investments, 1959
The Law for the Encouragement
of Capital Investments, 1959, generally referred to as the Investment Law, provides certain incentives for capital investments in production
facilities (or other eligible assets).
The Investment Law was significantly
amended several times over the recent years, with the three most significant changes effective as of April 1, 2005, or “the 2005
Amendment”, as of January 1, 2011, or “the 2011 Amendment”, and as of January 1, 2017, or “the 2017 Amendment”.
Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by
the 2005 Amendment remain in force but any benefits granted subsequently are subject to the provisions of the amended Investment Law.
Similarly, 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. The 2017 Amendment introduces a new tax incentives regime mainly
for Technological Enterprises. According to a transitional provision stipulated by the Investment Law, the new tax incentives regime that
will apply alongside the existing tax benefits under the 2011 Amendment for a transition period ending on June 30, 2021, after which the
new tax regime shall apply exclusively.
Tax Benefits under the 2011 Amendment
On December 29, 2010, the
Israeli Parliament approved the 2011 Amendment. The 2011 Amendment significantly revised the tax incentive regime in Israel and commenced
on January 1, 2011.
The 2011 Amendment canceled
the availability of the tax benefits granted under the Investment Law prior to 2011 and, instead, introduced new tax 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, or “the Preferred Enterprise Regime”. The definition of a Preferred Company includes, inter alia,
a company incorporated in Israel that (i) is not wholly owned by a governmental entity (ii) owns a Preferred Enterprise, and (iii) is
controlled and managed from Israel.
A Preferred Company is entitled
to a reduced corporate tax rate of 16% with respect to its income derived from its Preferred Enterprise, unless the Preferred Enterprise
is located in development area A, in which case the rate will be 7.5% (our operations are currently not located in development area A).
Dividends paid out of income
attributed to a Preferred Enterprise are generally subject to withholding tax at the source at the rate of 20%, or such lower rate as
may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority, or
the ITA, allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld
(although, if the funds are subsequently distributed to individuals or to non-Israeli residents (individuals and corporations), the withholding
tax would apply).
If in the future we generate
taxable income, to the extent that we qualify as a “Preferred Company,” the benefits provided under the Investment Law could
potentially reduce our corporate tax liabilities.
Tax Benefits under the 2017 Amendment
The 2017 Amendment was enacted
as part of the Economic Efficiency Law that was published on December 9, 2016, and is effective as of January 1, 2017. The 2017 Amendment
provides new tax benefit to Preferred companies for two types of “Technological Enterprises” – “Preferred Technological
Enterprises,” or PTEs and “Special Preferred Technological Enterprises,” or SPTEs, as described below.
According to the new incentives
regime, a company that complies with the terms under the PTE or SPTE regime may be entitled to certain tax benefits with respect to its
preferred technological income, which is income that is generated during the company’s regular course of business and derived from
a benefitted intangible asset (as determined in the Investments Law), excluding income derived from intangible assets used for marketing
and income attributed to production activity.
In order to calculate the
preferred technological income, the PTE or the SPTE is required to take into account the income and the research and development expenses
that are attributed to each single preferred intangible asset, product or group of products (as defined in the Investment Law). Nevertheless,
it should be noted that the transitional provisions allow companies to take into account the income and research and development expenses
attributed to all of the benefitted intangible assets they have, until December 31, 2021.
A PTE is a Preferred Technological
Enterprise that meets certain conditions, including the following: (i) the company’s average research and development expenses in
the three years prior to the current tax year must be greater than or equal to 7% of its total revenue or exceed NIS 75 million per year;
and (ii) the company must also satisfy at least one of the following conditions: (a) at least 20% of the workforce (or at least 200 employees)
are employed in research and development; (b) a venture capital investment of an amount equivalent to at least NIS 8 million (approximately
$2.3 million) was previously made in the company and the company has not changed its field of business since this investment was made;
(c) during the three years prior to the tax year, the number of employees or the company’s revenue grew on average by 25% in relation
to the preceding year and the company had at least 50 employees in each tax year or the company’s revenue was equivalent to at least
NIS 10 million (approximately $2.9 million) in each year, respectively; (d) conditions sets by the IIA; (e) the company is part of a group
of companies having aggregate annual revenues of equivalent to less than NIS 10 billion (approximately$2.9 billion); and (f) the enterprise
is a Competitive Enterprise according to the Investment Law.
An SPTE is an enterprise that
meets the qualification terms of PTE (as stated above), except as provided in paragraph (e) of the above definition, i.e. is part of a
group of companies having aggregate annual revenues equivalent to at least NIS 10 billion (approximately $ 2.9 billion).
Preferred Technological income
of a PTE, which is the portion of technological income derived from the benefitted intangible asset developed in Israel, satisfying the
required conditions, will be subject to a corporate tax rate of 12% unless the PTE is located in certain peripheral parts of Israel in
which case the rate will be 7.5%. Preferred Technological income of an SPTE, satisfying the required conditions, will be subject to a
corporate tax rate of 6% with respect to the portion of technological income derived from benefitted intangible asset developed in Israel,
regardless of the company’s geographical location within Israel.
In addition, a PTE will enjoy
a reduced corporate tax rate of 12% on capital gain derived from the sale of certain benefitted intangible assets (as defined in the Investment
Law) to a related foreign company if the benefitted intangible asset was acquired from a foreign company on or after January 1, 2017 for
at least NIS 200 million, and the sale received prior approval from the IIA. An SPTE will enjoy a reduced corporate tax rate of 6% on
capital gain derived from the sale of certain benefitted intangible asset (as defined in the Investment Law) to a related foreign company
if the benefitted intangible asset was created by the SPTE or acquired from a foreign company on or after January 1, 2017, and the sale
received prior approval from the IIA. An SPTE that acquires Benefited Intangible assets from a foreign company for more than NIS 500 million
will be eligible for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.
The withholding tax on dividends
distributed by PTE or SPTE will be 4% for dividends paid to a foreign parent company holding at least 90% of the shares of the distributing
company and other conditions are met. For other dividend distributions, the withholding tax rate will be 20% (or a lower rate under a
tax treaty, if applicable, subject to receiving an approval from the ITA). However, if such dividends are paid to an Israeli company,
no tax is required to be withheld (although, if the funds are subsequently distributed to individuals or to non-Israeli residents –
i.e. individuals and corporations, the withholding tax would apply).
The Regulations for the Encouragement
of Capital Investments (Preferred Technology Income and Capital Profits for a Technological Enterprise), 5717 – 2017, or Regulations,
describe, inter alia, the mechanism used to determine the calculation of the benefits under the PTE and under the SPTE Regime. According
to the Regulations, a company that complies with the terms under the PTE/SPTE regime may be entitled to certain tax benefits with respect
to income generated during the company’s regular course of business and derived from the preferred benefitted intangible asset (as
determined in the Investments Law), excluding income derived from intangible assets used for marketing and income attributed to production
activity.
In the event that intangible
assets used for marketing purposes generate income, which exceeds 10% of the technological income from the benefitted intangible asset,
the relevant portion, calculated using a transfer pricing study, would be subject to regular corporate income tax. If such income does
not exceed 10%, the PTE or SPTE will not be required to attribute income to the marketing intangible asset.
The Regulations set a presumption
of direct production expenses plus 10% with respect to income related to production, which can be countered by the results of a supporting
transfer pricing study. Tax rates applicable to such production income expenses will be similar to the tax rates under the Preferred Enterprise
regime, to the extent such income would be considered as eligible (as discussed above).
We are continuously examining
the impact of the 2017 Amendment and the degree to which we will qualify as a Preferred Technology Enterprise, and the amount of Preferred
Technology Income that we may have, or other benefits that we may receive from the 2017 Amendment, upon becoming an entity that generates
a taxable income.
Law for the Encouragement of Industry (Taxes),
1969
The Law for the Encouragement
of Industry (Taxes), 1969, generally referred to as the Industry Encouragement Law, provides several tax benefits for “Industrial
Companies.” The Industry Encouragement Law defines an “Industrial Company” as an Israeli resident-company that was incorporated
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” that it owns and located in Israel or in the “Area”, in accordance with the definition under section 3A
of the Ordinance. An “Industrial Enterprise” is defined as an enterprise whose principal activity in a given tax year is industrial
production. The following corporate tax-related benefits, among others, are available to Industrial Companies:
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amortization of the cost of purchased a patent, rights to use a patent, and know-how, which are used for the development or promotion of the Industrial Enterprise, over an eight-year period; |
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the right to elect, under limited conditions, to file consolidated tax returns with related Israeli Industrial Companies; |
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A straight-line deduction of expenses related to a public offering over a three-year period commencing in the year of the offering; and |
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Accelerated depreciation rates on certain equipment and buildings. |
Eligibility for benefits under
the Industry Encouragement Law is not contingent upon approval of any governmental authority. There is no assurance that we qualify as
an Industrial Company or that the benefits described above will be available in the future.
The Encouragement of Research, Development
and Technological Innovations in the Industry Law, 5722-1984
We have in the past received
royalty-bearing grants from the IIA for research and development programs that meet specified criteria pursuant to the Innovation Law.
We were eligible for grants of 50% of the project’s expenditure, as determined by the research committee, in exchange for the payment
of royalties from the revenues generated from the sale of products and related services developed, in whole or in part pursuant to, or
as a result of, a research and development program funded by the IIA. Due to the grant we are subject to certain conditions and limitations
as set in the IIA’s approval and the Innovation Law, and among others, we are obligated to pay royalties to the IIA from the revenues
generated from the sale of products and related services developed, in whole or in part, pursuant to, or as a result of, a research and
development program funded by the IIA, until 100% of the U.S dollar-linked grants we received from the IIA plus annual LIBOR interest
is repaid. Nonetheless, the sum of royalties that we may be required to pay, may be higher in certain circumstances, such as when the
manufacturing activity/ know-how is transferred outside of Israel.
Nonetheless, the restrictions
under the Innovation Law (as generally specified below) will continue to apply even after our company has repaid the grants, including
accrued interest, in full.
The main obligations under the Innovation Law which
are applicable to us as a grant recipient are:
Local manufacturing obligation:
The terms of the Innovation Law require that the manufacture of products developed with IIA grants be performed in Israel correspondingly
to the original manufacture percentage in Israel in the approved grant application. Manufacturing activity may not be transferred outside
of Israel, unless the prior approval of the IIA is received. However, this does not restrict the export of products that incorporate the
funded technology. Ordinarily, as a condition to obtaining approval to manufacture outside Israel, we would be required to pay royalties
at an increased rate and increased royalties cap between 120% and 300% of the grants, depending on the manufacturing volume that is performed
outside Israel. The transfer of no more than 10% of the manufacturing capacity in the aggregate outside of Israel requires submission
of a notification to the IIA and is exempt under the Innovation Law from obtaining the prior approval of the IIA. A company requesting
funds from the IIA also has the option of declaring in its IIA grant application its intention to perform part of its manufacturing outside
Israel, thus avoiding the need to obtain additional approval.
Transfer of know-how outside
of Israel: The know-how developed with support of the IIA grants may not be transferred to third parties outside Israel without the
prior approval of the IIA. The approval, however, is not required for the export of any products developed using grants received from
the IIA. The IIA approval to transfer know-how created, in whole or in part, in connection with an IIA-funded project, to a third party
outside Israel is subject to payment of a redemption fee to the IIA calculated according to a formula provided under the Innovation Law
that is based, in general, on the ratio between the aggregate IIA grants received by the grant recipient (including the accrued interest)
and the aggregate investments by the grant recipient in the project that was funded by these IIA grants, multiplied by the value of the
funded know how (taking into account any depreciation in accordance with a formula set forth in the Innovation Law) less any royalties
already paid to IIA. The regulations promulgated under the Innovation Law establish a cap of the redemption fee payable to the IIA under
the above mentioned formulas and differentiate between two situations: (i) in the event that the funded company sells its IIA funded know-how,
in whole or in part, or is sold as part of a merger and acquisition transaction, and subsequently ceases to conduct business in Israel,
the maximum redemption fee under the above mentioned formulas will be no more than six times the total grants received from the IIA, plus
accrued interest; and (ii) in the event that following the transactions described above the company undertakes to continue its research
and development activity in Israel for at least three years following such transfer and maintain at least 75% of its research and development
staff employees it had for the six months before the know-how was transferred, while keeping the same scope of employment for such research
and development staff, then the company is eligible for a reduced cap of the redemption fee of no more than three times the amounts received
(plus accrued interest) for the applicable know-how being transferred, or the entire amount received from the IIA, as applicable. Upon
payment of such redemption fee, the know-how and the production rights for the products supported by such funding cease to be subject
to the Innovation Law.
Transfer of such funded know-how
to an Israeli entity is subject to the IIA approval and to an undertaking of the recipient Israeli entity to comply with the provisions
of the Innovation Law and related regulations, including the restrictions on the transfer of know-how and the obligation to pay royalties,
as further described in the Innovation Law and related regulations.
A recipient of grants under
the Innovation Law is allowed to enter into licensing arrangements or grant other rights in know-how developed under IIA programs outside
of Israel, subject to the prior consent of IIA and payment of license fees, calculated in accordance with the relevant rules, of not more
than six times the amount of the grants received by the grant’s recipient (plus accrued interest) for the applicable know-how being
transferred. In cases where the payment for the license to use the intellectual property is made in instalments, a portion of each instalment
will be paid as a license fee in accordance with relevant rules. The payment of the license fees will not discharge the grant recipient
from the obligations to pay royalties or other payments to the IIA.
Certain reporting obligations:
A recipient of grants under the Innovation Law is required to notify to IIA of certain events enumerated in the Innovation Law. In addition,
the IIA may from time to time audit sales of products by companies which received funding from the IIA and this may lead to additional
royalties being payable on additional product candidates.
Tax Benefits for Research and Development
under Income Tax Ordinance of 1961 (New Version)
The Tax Ordinance allows,
under certain conditions, a tax deduction for expenditures, including capital expenditures, for the year in which they are incurred. Expenditures
are deemed related to scientific research and development projects, if:
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The research was approved by the relevant Israeli government ministry, determined by the field of research; |
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The research and development must be for the promotion of the company; and |
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The research and development is carried out by or on behalf of the company seeking such tax deduction. |
The amount of such deductible
expenses is reduced by the sum of any funds received through government grants for the finance of such scientific research and development
projects. No deduction under these research and development deduction rules is allowed if such deduction is related to an expense invested
in an asset depreciable under the general depreciation rules of the Ordinance. Expenditures not so approved are deductible in equal amounts
over three years.
Taxation of our Shareholders
The following is a summary
of the material Israeli tax consequences concerning the ownership and disposition of our Ordinary Shares by our shareholders. 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 such investors include residents
of Israel or traders in securities who are subject to special tax regimes not covered in this discussion. Because 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.
Capital Gains
Capital gain tax is imposed
on the disposal of capital assets by an Israeli resident, and on the disposal of such assets by a non-Israeli resident if those assets
are either (i) located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation, or (iii) represent, directly
or indirectly, rights to assets located in Israel. The Israeli Income Tax Ordinance, distinguishes between “Real Capital Gain”
and the “Inflationary Surplus” Real Capital Gain is the excess of the total capital gain over Inflationary Surplus, which
is computed generally on the basis of the increase in the Israeli Consumer Price Index or the foreign exchange rate differences in certain
cases, between the date of purchase and the date of disposal. Inflationary Surplus generally is not subject to tax in Israel.
Capital Gains Taxes Applicable to Israeli
Resident Shareholders
Real Capital Gain accrued
by Israeli individuals on the sale of our Ordinary Shares will be taxed at the rate of 25%, unless the individual shareholder is a “Substantial
Shareholder” (i.e., a person who holds, directly or indirectly, alone or together with such person’s relative or another person
who collaborates with such person on a permanent basis, 10% or more of one of the Israeli resident company’s means of control (including,
among other things, the right to receive profits of the company, voting rights, the right to receive the company’s liquidation proceeds
and the right to appoint a director)) at the time of sale or at any time during the preceding 12 months period, such real capital gain
will be taxed at the rate of 30%.
Furthermore, where an individual
claimed real interest expenses and linkage differences on securities, the capital gain on the sale of the securities will be liable to
a rate of 30%, this, until the determination of provisions and conditions for the deduction of real interest expenses and linkage differences
under section 101A(a)(9) and 101A(b) of the Tax Ordinance.
Real Capital Gain derived
by corporations will be generally subject to the regular corporate tax rate (23% in 2018 and thereafter).
Individual shareholders whose
income from the sale of securities considered as business income are taxed at the marginal tax rates applicable to business income –
up to 47% in 2018 (not including the excess tax).
Either the purchaser, the
Israeli stockbrokers or financial institution through which the shares are held, is obliged to withhold tax in the amount of consideration
paid upon the sale of securities (or the Real Capital Gain realized on the sale, if known) at the Israeli corporate tax rate (23% in 2018
and thereafter) or 25% in case the seller is an individual. The individual or the company may provide an approval from the ITA for a reduced
tax withholding rate, according to the applicable rate.
At the sale of securities
traded on a stock exchange, a detailed return, including a computation of the tax due, must be filed and an advance payment must be made
on January 31 and July 31 of every tax year in respect of sales of securities made within the previous six months. However, if all tax
due was withheld at source according to applicable provisions of the Ordinance and regulations promulgated thereunder, the aforementioned
return need not be filed and no advance payment must be paid. Capital gain is also reportable on the annual income tax return.
Capital Gains Taxes Applicable to Non-Israeli
Resident Shareholders.
Non-Israeli resident shareholders
are generally exempt from Israeli capital gains tax on any capital gains from the sale, exchange or disposition of our Ordinary Shares,
provided that the following cumulative conditions are met: (i) the shares were purchased upon or after the registration of the securities
on the stock exchange in Israel, and (ii) the seller does not have a permanent establishment in Israel to which the derived capital gain
is attributed. However, non-Israeli corporations will not be entitled to the foregoing exemption if Israeli residents: (i) have, directly
or indirectly, along or together with another, a controlling interest of more than 25% of any of the means of control in such non-Israeli
corporation or (ii) are the beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli corporation,
whether directly or indirectly.
In addition, such exemption
would not be available to a person whose gains from selling or otherwise disposing of the securities are deemed to be business income.
Additionally, a sale of shares
by a non-Israeli resident may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty (subject to the
receipt in advance of a valid certificate from the ITA). For example, under Convention Between the Government of the United States of
America and the Government of the State of Israel with respect to Taxes on Income, as amended, or the United States-Israel Tax Treaty,
the sale, exchange or other disposition of shares by a shareholder who is (i) a United States resident (for purposes of the treaty); (ii)
holding the shares as a capital asset and (iii) is entitled to claim the benefits afforded to such a resident by the U.S.-Israel Tax Treaty,
or a Treaty U.S. Resident, is generally exempt from Israeli capital gains tax unless either: (i) the capital gain arising from the such
sale, exchange or disposition is attributed to a permanent establishment of the Treaty U.S. Resident maintained in Israel, under certain
terms; (ii) such Treaty U.S. Resident holds, directly or indirectly, shares representing 10% or more of the voting capital during any
part of the 12-month period preceding the sale, exchange or disposition, subject to certain conditions; (iii) such Treaty U.S. Resident
is an individual and was present in Israel for 183 days or more during the relevant taxable year; or (iv) the capital gain arising from
such sale, exchange or disposition is attributed to real estate located in Israel. In any of these cases, the sale, exchange or disposition
of our Ordinary Shares would be subject to Israeli tax, to the extent applicable. However, under the U.S.-Israel Tax Treaty, such Treaty
U.S. Resident would be permitted to claim a credit for the tax against the U.S. federal income tax imposed with respect to the sale, exchange
or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits.
In some instances where our
shareholders may be liable for Israeli tax on the sale of their Ordinary Shares or ADSs, the payment of the consideration may be subject
to the withholding of Israeli tax at source. Specifically, in transactions involving a sale of all of the shares of an Israeli resident
company, in the form of a merger or otherwise, the ITA may require from shareholders who are not liable for Israeli tax to sign declarations
in forms specified by this authority or obtain a specific exemption from the ITA to confirm their status as non-Israeli resident, and,
in the absence of such declarations or exemptions, may require the purchaser of the shares to withhold taxes 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.
Dividends
A distribution of dividends
from income, which is not attributed to a Preferred Enterprise, to an Israeli resident individual, will generally be subject to income
tax at a rate of 25%. However, a 30% tax rate will apply if the dividend recipient is a “Substantial Shareholder” (as defined
above) at the time of distribution or at any time during the preceding 12 months period. If the recipient of the dividend is an Israeli
resident corporation, such dividend will be exempt from income tax provided the income from which such dividend is distributed was derived
or accrued within Israel.
Non-Israeli residents are
generally subject to Israeli income tax on the receipt of dividends paid on our Ordinary Shares or ADSs at the rate of 25%, which tax
will be withheld at source, unless relief is provided in a treaty between Israel and the shareholder’s country of residence.
With respect to a person who
is a Substantial Shareholder at the time of receiving the dividend or on any time during the preceding 12 months, the applicable tax rate
is 30%, unless a reduced tax rate is provided under an applicable tax treaty.
For example, under the United
States-Israel Tax Treaty, the maximum rate of tax withheld at source in Israel on dividends paid to a holder of our Ordinary Shares or
ADSs who is a Treaty U.S. Resident is 25%. However, generally, the maximum rate of withholding tax on dividends, not generated by a Preferred
Enterprise, that are paid to a U.S. corporation holding 10% or more of the outstanding voting capital throughout the tax year in which
the dividend is distributed as well as during the previous tax year, is 12.5%, provided that not more than 25% of the gross income for
such preceding year consists of certain types of dividends and interest and if a certificate for a reduced withholding tax rate is obtained
in advance from the ITA. We cannot assure you that we will designate the profits that we may distribute in a way that will reduce shareholders’
tax liability.
A non-Israeli resident who
receives dividend income derived from or accrued in Israel, from which the full amount of tax was withheld at source is generally exempt
from the obligation to file tax returns in Israel with respect to such income, provided that (i) such income was not generated from business
conducted in Israel by the taxpayer, (ii) the taxpayer has no other taxable sources of income in Israel with respect to which a tax return
is required to be filed, and (iii) the taxpayer is not obliged to pay excess tax (as further explained below).
Payers of dividends on our
common shares, including the Israeli stockbroker effectuating the transaction, or the financial institution through which the securities
are held, are generally required, subject to any of the foregoing exemptions, reduced tax rates and the demonstration of a shareholder
regarding his, her or its foreign residency, and subject to a certificate for a reduced withholding tax rate from the ITA, to withhold
tax upon the distribution of dividend at the rate of 25%, so long as the shares are registered with a Nominee Company (for corporations
and individuals).
Excess Tax
Individuals who are subject
to tax in Israel are also subject to an additional tax at a rate of 3% on annual income exceeding a certain threshold (NIS 651,600 for
2020) which amount is linked to the annual change in the Israeli CPI), including, but not limited to income derived from dividends, interest
and capital gains.
Estate and Gift Tax
Israeli law presently does
not impose estate or gift taxes.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING SUMMARY IS INCLUDED
HEREIN FOR GENERAL INFORMATION AND IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSIDERED TO BE, LEGAL OR TAX ADVICE. EACH U.S. HOLDER SHOULD
CONSULT WITH HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND SALE
OF ORDINARY SHARES AND AMERICAN DEPOSITARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL, FOREIGN OR OTHER TAX LAWS AND POSSIBLE
CHANGES IN THE TAX LAWS.
Subject to the limitations
described in the next paragraph, the following discussion summarizes the material U.S. federal income tax consequences to a “U.S.
Holder” arising from the purchase, ownership and sale of the Ordinary Shares and ADSs. For this purpose, a “U.S. Holder”
is a holder of Ordinary Shares or ADSs that is: (1) an individual citizen or resident of the United States, including an alien individual
who is a lawful permanent resident of the United States or meets the substantial presence residency test under U.S. federal income tax
laws; (2) a corporation (or entity treated as a corporation for U.S. federal income tax purposes) or a partnership (other than a partnership
that is not treated as a U.S. person under any applicable U.S. Treasury regulations) created or organized under the laws of the United
States or the District of Columbia or any political subdivision thereof; (3) an estate, the income of which is includable in gross income
for U.S. federal income tax purposes regardless of source; (4) a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the
trust; or (5) a trust that has a valid election in effect to be treated as a U.S. person to the extent provided in U.S. Treasury regulations.
This summary is for general
information purposes only and does not purport to be a comprehensive description of all of the U.S. federal income tax considerations
that may be relevant to a decision to purchase our Ordinary Shares or ADSs. This summary generally considers only U.S. Holders that will
own our Ordinary Shares or ADSs as capital assets. Except to the limited extent discussed below, this summary does not consider the U.S.
federal tax consequences to a person that is not a U.S. Holder, nor does it describe the rules applicable to determine a taxpayer’s
status as a U.S. Holder. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended, or the Code, final,
temporary and proposed U.S. Treasury regulations promulgated thereunder, administrative and judicial interpretations thereof, and the
U.S./Israel Income Tax Treaty, all as in effect as of the date hereof and all of which are subject to change, possibly on a retroactive
basis, and all of which are open to differing interpretations. We will not seek a ruling from the IRS with regard to the U.S. federal
income tax treatment of an investment in our Ordinary Shares or ADSs by U.S. Holders and, therefore, can provide no assurances that the
IRS will agree with the conclusions set forth below.
This discussion does not address
all of the aspects of U.S. federal income taxation that may be relevant to a particular U.S. holder based on such holder’s particular
circumstances and in particular does not discuss any estate, gift, generation-skipping, transfer, state, local, excise or foreign tax
considerations. In addition, this discussion does not address the U.S. federal income tax treatment of a U.S. Holder who is: (1) a bank,
life insurance company, regulated investment company, or other financial institution or “financial services entity;” (2) a
broker or dealer in securities or foreign currency; (3) a person who acquired our Ordinary Shares or ADSs in connection with employment
or other performance of services; (4) a U.S. Holder that is subject to the U.S. alternative minimum tax; (5) a U.S. Holder that holds
our Ordinary Shares or ADSs as a hedge or as part of a hedging, straddle, conversion or constructive sale transaction or other risk-reduction
transaction for U.S. federal income tax purposes; (6) a tax-exempt entity; (7) real estate investment trusts or grantor trusts; (8) a
U.S. Holder that expatriates out of the United States or a former long-term resident of the United States; or (9) a person having a functional
currency other than the U.S. dollar. This discussion does not address the U.S. federal income tax treatment of a U.S. Holder that owns,
directly or constructively, at any time, Ordinary Shares or ADSs representing 10% or more of our voting power. Additionally, the U.S.
federal income tax treatment of partnerships (or other pass-through entities) or persons who hold Ordinary Shares or ADSs through a partnership
or other pass-through entity are not addressed.
Each prospective investor
is advised to consult his or her own tax adviser for the specific tax consequences to that investor of purchasing, holding or disposing
of our Ordinary Shares or ADSs, including the effects of applicable state, local, foreign or other tax laws and possible changes in the
tax laws.
Taxation of Dividends Paid on Ordinary Shares or
ADSs
We do not intend to pay dividends
in the foreseeable future. In the event that we do pay dividends, and subject to the discussion under the heading “Passive Foreign
Investment Companies” below and the discussion of “qualified dividend income” below, a U.S. Holder, other than certain
U.S. Holder’s that are U.S. corporations, will be required to include in gross income as ordinary income the amount of any distribution
paid on Ordinary Shares or ADSs (including the amount of any Israeli tax withheld on the date of the distribution), to the extent that
such distribution does not exceed our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes.
The amount of a distribution which exceeds our earnings and profits will be treated first as a non-taxable return of capital, reducing
the U.S. Holder’s tax basis for the Ordinary Shares to the extent thereof, and then capital gain. We do not expect to maintain calculations
of our earnings and profits under U.S. federal income tax principles and, therefore, U.S. Holders should expect that the entire amount
of any distribution generally will be reported as dividend income.
In general, preferential tax
rates for “qualified dividend income” and long-term capital gains are applicable for U.S. Holders that are individuals, estates
or trusts. For this purpose, “qualified dividend income” means, inter alia, dividends received from a “qualified foreign
corporation.” A “qualified foreign corporation” is a corporation that is entitled to the benefits of a comprehensive
tax treaty with the United States which includes an exchange of information program. The IRS has stated that the Israel/U.S. Tax Treaty
satisfies this requirement, and we believe we are eligible for the benefits of that treaty.
In addition, our dividends
will be qualified dividend income if our Ordinary Shares or ADSs are readily tradable on the Nasdaq Capital Market or another established
securities market in the United States. Dividends will not qualify for the preferential rate if we are treated, in the year the dividend
is paid or in the prior year, as a PFIC, as described below under “Passive Foreign Investment Companies.” A U.S. Holder will
not be entitled to the preferential rate: (1) if the U.S. Holder has not held our Ordinary Shares or ADSs for at least 61 days of the
121 day period beginning on the date which is 60 days before the ex-dividend date, or (2) to the extent the U.S. Holder is under an obligation
to make related payments on substantially similar property. Any days during which the U.S. Holder has diminished its risk of loss on our
Ordinary Shares or ADSs are not counted towards meeting the 61-day holding period. Finally, U.S. Holders who elect to treat the dividend
income as “investment income” pursuant to Code section 163(d)(4) will not be eligible for the preferential rate of taxation.
The amount of a distribution
with respect to our Ordinary Shares or ADSs will be measured by the amount of the fair market value of any property distributed, and for
U.S. federal income tax purposes, the amount of any Israeli taxes withheld therefrom. Cash distributions paid by us in NIS will be included
in the income of U.S. Holders at a U.S. dollar amount based upon the spot rate of exchange in effect on the date the dividend is includible
in the income of the U.S. Holder, and U.S. Holders will have a tax basis in such NIS for U.S. federal income tax purposes equal to such
U.S. dollar value. If the U.S. Holder subsequently converts the NIS into U.S. dollars or otherwise disposes of it, any subsequent gain
or loss in respect of such NIS arising from exchange rate fluctuations will be U.S. source ordinary exchange gain or loss.
Taxation of the Disposition of Ordinary
Shares or ADSs
Except as provided under the
PFIC rules described below under “Passive Foreign Investment Companies,” upon the sale, exchange or other disposition of our
Ordinary Shares or ADSs, a U.S. Holder will recognize capital gain or loss in an amount equal to the difference between such U.S. Holder’s
tax basis for the Ordinary Shares or ADSs in U.S. dollars and the amount realized on the disposition in U.S. dollar (or its U.S. dollar
equivalent determined by reference to the spot rate of exchange on the date of disposition, if the amount realized is denominated in a
foreign currency). The gain or loss realized on the sale, exchange or other disposition of Ordinary Shares or ADSs will be long-term capital
gain or loss if the U.S. Holder has a holding period of more than one year at the time of the disposition. Individuals who recognize long-term
capital gains may be taxed on such gains at reduced rates of tax. The deduction of capital losses is subject to various limitations.
Passive Foreign Investment Companies
Special U.S. federal income
tax laws apply to U.S. taxpayers who own shares of a corporation that is a PFIC. We will be treated as a PFIC for U.S. federal income
tax purposes for any taxable year that either:
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75% or more of our gross income (including our pro rata share of gross income for any company, in which we are considered to own 25% or more of the shares by value), in a taxable year is passive; or |
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At least 50% of our assets, averaged over the year and generally determined based upon fair market value (including our pro rata share of the assets of any company in which we are considered to own 25% or more of the shares by value) are held for the production of, or produce, passive income. |
For this purpose, passive
income generally consists of dividends, interest, rents, royalties, annuities and income from certain commodities transactions and from
notional principal contracts. Cash is treated as generating passive income.
We believe that we will not
be a PFIC for the current taxable year and do not expect to become a PFIC in the foreseeable future. The tests for determining PFIC status
are applied annually, and it is difficult to make accurate projections of future income and assets which are relevant to this determination.
In addition, our PFIC status may depend in part on the market value of our Ordinary Shares. Accordingly, there can be no assurance that
we currently are not or will not become a PFIC.
If we currently are or become
a PFIC, each U.S. Holder who has not elected to mark the shares to market (as discussed below), would, upon receipt of certain distributions
by us and upon disposition of our Ordinary Shares or ADSs at a gain: (1) have such distribution or gain allocated ratably over the
U.S. Holder’s holding period for the Ordinary Shares or ADSs, as the case may be; (2) the amount allocated to the current taxable
year and any period prior to the first day of the first taxable year in which we were a PFIC would be taxed as ordinary income; and (3)
the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable
class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting
tax attributable to each such other taxable year. In addition, when shares of a PFIC are acquired by reason of death from a decedent that
was a U.S. Holder, the tax basis of such shares would not receive a step-up to fair market value as of the date of the decedent’s
death, but instead would be equal to the decedent’s basis if lower, unless all gain were recognized by the decedent. Indirect investments
in a PFIC may also be subject to these special U.S. federal income tax rules.
The PFIC rules described above
would not apply to a U.S. Holder who makes a QEF election for all taxable years that such U.S. Holder has held the Ordinary Shares or
ADSs while we are a PFIC, provided that we comply with specified reporting requirements. Instead, each U.S. Holder who has made such a
QEF election is required for each taxable year that we are a PFIC to include in income such U.S. Holder’s pro rata share of our
ordinary earnings as ordinary income and such U.S. Holder’s pro rata share of our net capital gains as long-term capital gain, regardless
of whether we make any distributions of such earnings or gain. In general, a QEF election is effective only if we make available certain
required information. The QEF election is made on a shareholder-by-shareholder basis and generally may be revoked only with the consent
of the IRS. We do not intend to notify U.S. Holders if we believe we will be treated as a PFIC for any tax year. In addition, we do not
intend to furnish U.S. Holders annually with information needed in order to complete IRS Form 8621 and to make and maintain a valid QEF
election for any year in which we or any of our Subsidiaries are a PFIC. Therefore, the QEF election will not be available with respect
to our Ordinary Shares or ADSs.
In addition, the PFIC
rules described above would not apply if we were a PFIC and a U.S. Holder made a mark-to-market election. A U.S. Holder of our Ordinary
Shares or ADSs which are regularly traded on a qualifying exchange, including the Nasdaq Capital Market, can elect to mark the Ordinary
Shares or ADSs to market annually, recognizing as ordinary income or loss each year an amount equal to the difference as of the close
of the taxable year between the fair market value of the Ordinary Shares or ADSs and the U.S. Holder’s adjusted tax basis in the
Ordinary Shares or ADSs. Losses are allowed only to the extent of net mark-to-market gain previously included income by the U.S. Holder
under the election for prior taxable years.
U.S. Holders who hold our
Ordinary Shares or ADSs during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC. U.S.
Holders are strongly urged to consult their tax advisors about the PFIC rules.
Tax on Net Investment Income
U.S. Holders who are individuals,
estates or trusts will generally be required to pay a 3.8% Medicare tax on their net investment income (including dividends on and gains
from the sale or other disposition of our Ordinary Shares or ADSs), or in the case of estates and trusts on their net investment income
that is not distributed. In each case, the 3.8% Medicare tax applies only to the extent the U.S. Holder’s total adjusted income
exceeds applicable thresholds.
Tax Consequences for Non-U.S. Holders of Ordinary
Shares or ADSs
Except as provided below,
an individual, corporation, estate or trust that is not a U.S. Holder referred to below as a non-U.S. Holder, generally will not be subject
to U.S. federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, our Ordinary Shares
or ADSs.
A non-U.S. Holder may be subject
to U.S. federal income tax on a dividend paid on our Ordinary Shares or ADSs or gain from the disposition of our Ordinary Shares or ADSs
if: (1) such item is effectively connected with the conduct by the non-U.S. Holder of a trade or business in the United States and, if
required by an applicable income tax treaty is attributable to a permanent establishment or fixed place of business in the United States;
or (2) in the case of a disposition of our Ordinary Shares or ADSs, the individual non-U.S. Holder is present in the United States for
183 days or more in the taxable year of the disposition and other specified conditions are met.
In general, non-U.S. Holders
will not be subject to backup withholding with respect to the payment of dividends on our Ordinary Shares or ADSs if payment is made through
a paying agent, or office of a foreign broker outside the United States. However, if payment is made in the United States or by a U.S.
related person, non-U.S. Holders may be subject to backup withholding, unless the non-U.S. Holder provides an applicable IRS Form W-8
(or a substantially similar form) certifying its foreign status, or otherwise establishes an exemption.
The amount of any backup withholding
from a payment to a non-U.S. Holder will be allowed as a credit against such holder’s U.S. federal income tax liability and may
entitle such holder to a refund, provided that the required information is timely furnished to the IRS.
Information Reporting and Withholding
A U.S. Holder may be subject
to backup withholding at a rate of 24% with respect to cash dividends and proceeds from a disposition of Ordinary Shares or ADSs. In general,
backup withholding will apply only if a U.S. Holder fails to comply with specified identification procedures. Backup withholding will
not apply with respect to payments made to designated exempt recipients, such as corporations and tax-exempt organizations. Backup withholding
is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a U.S. Holder, provided that
the required information is timely furnished to the IRS.
Pursuant to recently enacted
legislation, a U.S. Holder with interests in “specified foreign financial assets” (including, among other assets, our Ordinary
Shares or ADSs, unless such Ordinary Shares or ADSs are held on such U.S. Holder’s behalf through a financial institution)
may be required to file an information report with the IRS if the aggregate value of all such assets exceeds $50,000 on the last day of
the taxable year or $75,000 at any time during the taxable year (or such higher dollar amount as may be prescribed by applicable IRS guidance);
and may be required to file a Report of Foreign Bank and Financial Accounts if the aggregate value of the foreign financial accounts exceeds
$10,000 at any time during the calendar year. You should consult your own tax advisor as to the possible obligation to file such information
report.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to certain
information reporting requirements of the Exchange Act, applicable to foreign private issuers and under those requirements will file reports
with the SEC. The SEC maintains an Internet website that contains reports and other information regarding issuers that file electronically
with the SEC. Our filings with the SEC will also available to the public through the SEC’s website at www.sec.gov.
As a foreign private issuer,
we are exempt from the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors
and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the
Exchange Act. In addition, we are not required under the Exchange Act to file annual, quarterly and current reports and consolidated financial
statements with the SEC as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act.
However, we will file with the SEC, within 120 days after the end of each fiscal year, or such applicable time as required by the SEC,
an annual report on Form 20-F containing consolidated financial statements audited by an independent registered public accounting firm,
and may submit to the SEC, on a Form 6-K, unaudited quarterly financial information.
In addition, since our Ordinary
Shares are traded on the TASE, we have filed Hebrew language periodic and immediate reports with, and furnish information to, the TASE
and the ISA, as required under Chapter Six of the Securities Law. Copies of our filings with the ISA can be retrieved electronically through
the MAGNA distribution site of the ISA (www.magna.isa.gov.il) and the TASE website (www.maya.tase.co.il).
We maintain a corporate website
https://alarum.io/. Information contained on, or that can be accessed through, our website and the other websites referenced above do
not constitute a part of this annual report on Form 20-F. We have included these website addresses in this annual report on Form 20-F
solely as inactive textual references.
I. Subsidiary Information.
Not applicable.
J. Annual Report to Security Holders.
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
In the ordinary course of
our operations, we are exposed to certain market risks, primarily changes in foreign currency exchange rates and interest rates.
Quantitative and Qualitative Disclosure About
Market Risk
We are exposed to market risks
in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse
changes in financial market prices and rates. Our current investment policy is to invest available cash in bank deposits with banks that
have a credit rating of at least A-minus. Accordingly, a substantial majority of our cash is held in deposits that bear interest. Given
the current low rates of interest we receive, we will not be adversely affected if such rates are reduced. Our market risk exposure is
primarily a result of NIS/U.S. dollar exchange rates, which is discussed in detail in the following paragraph.
Foreign Currency Exchange Risk
Our sales contracts are primarily
denominated in U.S. dollars. A material portion of our operating expenses is incurred outside the United States and can be denominated
in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the NIS.
Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement
of operations. The effect of a hypothetical 10% adverse change in foreign exchange rates on monetary assets and liabilities at December
31, 2022 can be material to our financial condition or results of operations. To date, foreign currency transaction gains and losses and
exchange rate fluctuations have not been material to our consolidated financial statements, and we have not engaged in any foreign currency
hedging transactions.
As our international operations
grow, our risks associated with fluctuation in currency rates will become greater, and we will continue to reassess our approach to managing
this risk. In addition, currency fluctuations or a weakening U.S. dollar can increase the costs of our non-U.S. expansion as well as the
Israeli headquarters costs.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES
A. Debt Securities.
Not applicable.
B. Warrants and Rights.
Not applicable.
C. Other Securities.
Not applicable.
D. American Depositary Shares
Fees and Expenses
Persons depositing or withdrawing shares or ADS holders must pay: |
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For: |
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$5.00 (or less) per 100 ADSs (or portion of 100 ADSs). |
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Issuance of ADSs, including issuances resulting from a distribution
of shares or rights or other property.
Cancellation of ADSs for the purpose of withdrawal, including if the
deposit agreement terminates. |
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$.05 (or less) per ADS. |
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Any cash distribution to ADS holders. |
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A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs. |
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Distribution of securities distributed to holders of deposited securities (including rights) that are distributed by the depositary to ADS holders. |
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$.05 (or less) per ADS per calendar year. |
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Depositary services. |
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Registration or transfer fees. |
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Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares. |
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Expenses of the depositary. |
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Cable and facsimile transmissions (when expressly provided in the deposit
agreement).
Converting foreign currency to U.S. dollars. |
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Taxes and other governmental charges the depositary or the custodian has to pay on any ADSs or shares underlying ADSs, such as stock transfer taxes, stamp duty or withholding taxes. |
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As necessary. |
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Any charges incurred by the depositary or its agents for servicing the deposited securities. |
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As necessary. |
The depositary collects its
fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or
from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from
the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual
fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system
accounts of participants acting for them. The depositary may collect any of its fees by deduction from any cash distribution payable
(or by selling a portion of securities or other property distributable) to ADS holders that are obligated to pay those fees. The depositary
may generally refuse to provide fee-attracting services until its fees for those services are paid.
From time to time, the depositary
may make payments to us to reimburse us for costs and expenses generally arising out of establishment and maintenance of the ADS program,
waive fees and expenses for services provided to us by the depositary or share revenue from the fees collected from ADS holders. In performing
its duties under the deposit agreement, the depositary may use brokers, dealers, foreign currency dealers or other service providers that
are owned by or affiliated with the depositary and that may earn or share fees, spreads or commissions.
The depositary may convert
currency itself or through any of its affiliates and, in those cases, acts as principal for its own account and not as agent, advisor,
broker or fiduciary on behalf of any other person and earns revenue, including, without limitation, transaction spreads, that it will
retain for its own account. The revenue is based on, among other things, the difference between the exchange rate assigned to the currency
conversion made under the deposit agreement and the rate that the depositary or its affiliate receives when buying or selling foreign
currency for its own account. The depositary makes no representation that the exchange rate used or obtained in any currency conversion
under the deposit agreement will be the most favorable rate that could be obtained at the time or that the method by which that rate will
be determined will be the most favorable to ADS holders, subject to the depositary’s obligations under the deposit agreement. The
methodology used to determine exchange rates used in currency conversions is available upon request.