Ceragon Networks(CRNT) - 2021 Q4 - Annual Report

PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Information regarding directors, senior management, and advisers is not applicable - Information regarding the identity of directors, senior management, and advisers is not applicable[22] ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Offer statistics and expected timetable information is not applicable - Information on offer statistics and expected timetable is not applicable[23] ITEM 3. KEY INFORMATION This section outlines key information, primarily focusing on a comprehensive list of risk factors affecting Ceragon's business and financial condition Risk Factors Ceragon faces numerous risks including supply chain disruptions, 5G transition uncertainty, customer concentration, intense competition, and the ongoing impact of COVID-19 - Global shortage in components and semiconductors adversely affects supply chain, manufacturing capacity, delivery times, revenue, and gross margins[25][30] - Impact of 5G transition on revenues is difficult to predict due to uncertain technology developments, standardization, and deployment pace[25][31][32] - Significant portion of business concentrated on large mobile operators (e.g., two customers in India accounted for 28.3% of 2021 revenues), leading to high volatility[25][33][34] - Intense competition from larger 'generalists' (Huawei, Ericsson, NEC, Nokia, ZTE) and smaller specialists, and from fiber optics and other wireless technologies[25][37][39][41][42] - COVID-19 pandemic continues to negatively impact global economy, increasing shipment/logistical costs, disrupting marketing/sales, and affecting employee health[25][48][49][50][51][52][54] - Risks related to rapid market changes and failure to timely develop and commercialize new products (e.g., 5G SoC delays) could lead to loss of market share[25][57][58][59][61][62] - Expansion into new business domains (WISPs, private networks, software solutions) poses product development, marketing, sales, and cybersecurity challenges[25][72][73][74][75] - Failure to attract or retain qualified and skilled personnel, especially in R&D and high-tech, due to intense competition and increasing employment costs, could adversely affect business[26][77][78][79][80] - Increased breaches of network/IT security and changes in privacy/data protection laws (e.g., GDPR) pose risks of equipment failures, data leaks, litigation, and fines[27][81][82][83][85][86][87][88][89] - Gross margin is difficult to predict and exposed to significant fluctuations due to potential changes in the geographical mix of revenues, as margins vary significantly between regions[27][90] - Operating results and revenue are hard to predict and may vary significantly quarter-to-quarter due to delays in product delivery, acceptance tests, and customer spending decisions[27][92][93][94][95] - High volatility in customer supply needs leads to delivery issues due to long lead times and component availability, potentially causing increased costs, penalties, and order cancellations[27][96][97] - Reliance on third-party manufacturers, suppliers, and service providers, especially single-source suppliers, risks disruptions, price increases, and delays in product deliveries[27][98][99][101][102][103][104][105][106][107] - Engagement in long-term installation/rollout projects involves risks such as early product delivery with delayed payment terms, delays in acceptance testing, and credit risks[27][109][110][111][112][113][114][115][117] - Exposure to complex and evolving regulatory requirements (trade compliance, export controls, data privacy, environmental laws) in multiple jurisdictions, with non-compliance risking fines and reputational damage[27][118][119][120][121][122][124] - Geopolitical risks, such as the invasion of Ukraine by Russia, negatively impact European markets, leading to sanctions, supply chain disruptions, and increased cyber-attack risks[27][125][126] - International operations expose the company to currency exchange rate fluctuations (devaluation of local currencies against USD, NIS-denominated expenses) and foreign currency exchange controls, despite hedging efforts[27][127][128][129][130][131][132] - Additional tax liabilities could arise from changes in tax rates, legislation, international guidelines (BEPS), or audit results, materially affecting financial condition[27][133] - Majority of sales in emerging markets (Latin America, India, Asia Pacific, Africa) expose the company to political, economic, and regulatory risks, including unexpected tax changes and collection delays[27][134][135][136][137][138][139] - Industry downturns, increased regulation, or new mobile service requirements can cause telecom operators to slow or stop network investments, harming business[27][140][141][142][143] - Company incurred net losses in 2019, 2020, and 2021, and negative operating cash flows in 2019 and 2021, with no assurance of future profitability[27][145][169][170][171] - Consolidation within the customer base (telecommunications industry mergers) can reduce or eliminate sales to existing customers and decrease opportunities for new customers[27][146] - Failure to maintain effective internal control over financial reporting could lead to material misstatements, reporting failures, fines, and loss of investor confidence[27][147][148][149] - Inaccurate forecasts or business changes may lead to inventory-related losses (excess, obsolescence) or increased expenses for accelerated production, impacting gross profit[27][151][152][153][154][155][156][157] - Lengthy sales cycles for competitive bids or prospective customers (3-12 months) require substantial resources and increase uncertainty in forecasting results[27][158] - Failure to obtain regulatory approval for products or insufficient allocation of radio frequency spectrum could restrict marketability and increase competition[27][160][161][162][163] - Products used in critical communications networks expose the company to significant liability claims if products malfunction, potentially leading to litigation and reputational damage[27][164] - Failure to comply with credit agreement covenants or a bank's failure to provide committed credit facilities could materially adversely affect financial condition and liquidity[27][165][166][167] - Inability to protect intellectual property rights (patents, trade secrets) could harm competitive position, and defending against infringement claims is expensive and disruptive[27][172][173][174][175][176] - Unintentional breaches of Open Source licenses could compel publication of proprietary code, incur damages, and result in intellectual property infringement claims[27][177][178] - Merger and acquisition activities expose the company to risks like failure to discover relevant information, integration problems, increased expenses, and potential dilution of shareholders[28][180][181][182][183] - Global operations expose the company to effects of global economic trends such as rising inflation, interest rates, and economic slowdowns, leading to unpredictable results[29][185][186] - Risk of being classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, which could result in adverse tax consequences for U.S. holders[29][187][188] - Price and trading volume of ordinary shares are subject to volatility due to various factors (technological innovations, competition, financial results, macroeconomic developments), potentially limiting investor profit[29][189][190][191][192][193][194][195][197] - Future financings involving the sale of ordinary shares or convertible securities may cause immediate dilution for existing shareholders and a decline in share price[31][198][199][200] - Operations in Israel are adversely affected by political, economic, and military conditions in the Middle East, including armed conflicts, boycotts, and mandatory military service for employees[31][201][202][204][205][206][207][208][209][210] - Grants from the Israel Innovation Authority (IIA) require royalty payments and restrict the transfer of Financed Know-How or manufacturing activities outside of Israel, potentially limiting business flexibility[32][211][212][214] - Tax benefits from approved enterprise programs require satisfying specified conditions; failure to meet them or future reduction/elimination of benefits would increase tax liabilities[33][215][216][217] - As a foreign private issuer, the company is exempt from certain SEC requirements and Nasdaq Rules, which may result in less protection for U.S. investors compared to domestic issuers[33][218][219][220] - Loss of foreign private issuer status would increase compliance costs and negatively impact operations due to stricter U.S. reporting and governance requirements[34][221][222] - Difficulty in enforcing U.S. judgments against the company or its officers/directors in Israel, or asserting U.S. securities laws claims in Israeli courts, due to differences in legal systems[34][223][224][225] - Shareholder rights and responsibilities are governed by Israeli law, which differs from U.S. company laws, potentially imposing additional obligations on shareholders[34][226][227] - Provisions of Israeli law (corporate law, Economic Competition Law, R&D Law) may delay, prevent, or make undesirable an acquisition of the company or its assets, even if beneficial to shareholders[35][229][230][231][232][233] ITEM 4. INFORMATION ON THE COMPANY This section provides an overview of Ceragon Networks Ltd., detailing its history, business operations, and strategic initiatives A. History and Development of the Company Ceragon Networks Ltd. was incorporated in Israel in 1996, with its registered office in Rosh Ha'Ayin and a U.S. subsidiary for service of process - Ceragon Networks Ltd. was incorporated in Israel on July 23, 1996, as Giganet Ltd., changing its name on September 6, 2000[234] - The company's registered office is in Rosh Ha'Ayin, Israel, and its U.S. subsidiary, Ceragon Networks, Inc., serves as its agent for service of process in the United States[234][235] B. Business Overview Ceragon is a leading wireless transport specialist, providing high-capacity connectivity solutions for 4G and 5G networks, leveraging multicore™ technology and offering turn-key services - Ceragon is a leading wireless transport specialist, providing high-capacity wireless connectivity solutions to global markets, mainly wireless (mobile) network service providers[236] - Wireless transport connects mobile network sites to the rest of the network, used when high-speed wireline connectivity (like fiber optics) is unavailable or rapid deployment is needed, accounting for about 45% of global telecom site connections[237] - The company's technology, including multicore™ and disaggregated wireless transport architecture, positions it as a leader in the global wireless transport market, especially for 5G evolution[238][240] - Ceragon's solutions support various wireless access technologies (5G-NR, 4G, 3G, etc.) and network architectures, enabling cost-effective and seamless network evolution[245] - The company serves over 460 service providers and more than 1,500 private networks in approximately 140 countries[246] - Ceragon primarily serves the 'best-of-breed' market segment, where operators prioritize selecting the best wireless transport solution for business efficiency and service reliability[249][250] - Key product offerings include Short-haul solutions (up to 2 Gbps backhaul, 20 Gbps fronthaul for distances up to 10 miles) and Long-haul solutions (up to 20 Gbps for 10 to 50 miles, or even 100 miles)[250][251] - The company's multicore™ technology, integrated into in-house developed chipsets, enables advanced capabilities like Line-of-Sight Multiple Input Multiple Output (LoS MIMO) and Advanced Frequency Reuse (AFR)[252] - Ceragon is investing in a new 8-core (Octa-core) chipset, expected in 2022, to offer industry-leading performance and capacity for 5G, and plans to expand product coverage to W-band (up to 110 GHz) and D-band (up to 170 GHz)[254][317] - Industry trends driving demand include the surge in network traffic (accelerated by COVID-19), 5G adoption requiring higher capacity and lower latency, Open RAN, SDN, distributed cells, and network sharing models[255][256][257][258][259][260][261][263][277][278][279][280][281][283][284][285][286][287] - Wireless transport offers a scalable, flexible, and cost-effective alternative to fiber optics, especially for rapid deployment and bridging the digital divide in emerging markets[264][270][271] - Ceragon offers both licensed (4-86GHz) and license-exempt (V-band 57-66GHz, sub 6GHz) wireless transport solutions, catering to different capacity, range, and regulatory needs[272][273][274][275] - The company's solutions aim to increase operational efficiency (e.g., spectrum utilization, energy reduction), enhance service portfolio (5G use cases), and ensure high service availability through advanced technology[288][289][291][292][293][294] - Product portfolio includes All-outdoor, Split-mount, All-indoor, and Disaggregated transport configurations, with IP-20 and IP-50 platforms supporting various frequencies and networking technologies[299][300][301][302][303][304][305][306][307][309][310] - SDN solutions include an SDN Controller (SDN Master), SDN support in IP-20 and IP-50 products, and SDN applications for network optimization, with plans to expand to stand-alone software solutions and SaaS[313][314][316] - Services include turn-key solutions for network design, implementation, operation, monitoring, and maintenance, leveraging project management tools and experienced teams[320][321][322][323] - Sales channels include direct sales (77% in 2021), OEMs (5%), and system integrators/distributors/resellers (18%), with a global sales and marketing staff of 648 employees[328][329] - Manufacturing is outsourced to contract manufacturers in Israel and Singapore, with exploration of additional lines in the Philippines and India, adhering to ISO standards and EU Directives (RoHS)[334][335][336][337] - Research and Development (R&D) is a key focus, with 229 employees globally (mainly in Israel, Greece, Romania), designing proprietary solutions from chip-level to system integration[338][339][340][341] - Intellectual property is protected through patents (19 granted, 2 pending), copyrights, trademarks (Ceragon Networks, CERAGON, FibeAir, CeraView), and contractual agreements[343][344][345] - Competition is intense and fragmented, with primary competitors being large generalists (Huawei, Ericsson, NEC, Nokia, ZTE) and smaller specialists; Ceragon competes on technology diversification and product performance[346][347][348][349][350][351][352] - The company receives grants from the Israel Innovation Authority (IIA) for R&D, which may require royalty payments and restrict technology transfer or manufacturing outside Israel[353][354][355][356][357][359][360][361][362][363][364][365][366] C. Organizational Structure Ceragon Networks Ltd. is an Israeli company with wholly-owned subsidiaries in the U.S. and India - Ceragon Networks Ltd. is an Israeli company established in 1996[368] Significant Subsidiaries | Company | Place of Incorporation | Ownership Interest | |:---|:---|:---| | Ceragon Networks, Inc. | New Jersey | 100% | | Ceragon Networks (India) Private Limited | India | 100% | D. Property, Plants and Equipment Ceragon's headquarters are in Rosh Ha'Ayin, Israel, with additional leased office and warehouse spaces in the U.S., India, and Romania - Corporate headquarters and principal administrative, finance, and operations departments are located in Nitsba Park, Rosh Ha'Ayin, Israel, with 66,600 sq ft of office space and 5,800 sq ft of warehouse space[369] - Additional leased spaces include 8,200 sq ft in Richardson, Texas (expiring March 2024), 9,800 sq ft in New Delhi, India (expiring December 2024), and 20,000 sq ft in Bucharest, Romania (expiring November 2023)[370][371][372] ITEM 4A. UNRESOLVED STAFF COMMENTS No unresolved staff comments are applicable to this report - No unresolved staff comments are applicable[374] ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes Ceragon's operating results, financial condition, and future prospects, covering industry trends, liquidity, and capital resources A. Operating Results Ceragon's 2021 revenues increased by 10.6% to $290.8 million, with gross profit at 30.4%, but a net loss of $14.8 million due to expenses and taxes - Ceragon is the number one wireless transport specialist in terms of unit shipments and global distribution, providing solutions for mobile broadband, fixed broadband, and IoT services[378] - Industry trends include a surge in network traffic due to COVID-19, 5G adoption requiring higher capacity and lower latency, Open RAN, SDN, distributed cells, network sharing, and modernization of existing cell sites[380][381][382][385][386][387][388][389][390][391][392][393] - The company faces pricing pressures from increased competition, regional dynamics (e.g., India sales at lower gross margins), and demand for volume discounts on larger equipment orders[395][396][397][398] - COVID-19 pandemic continues to cause macro-economic uncertainty, disrupting business activities, increasing lead times and shipping costs, and impacting revenue recognition due to travel limitations and project delays[401] Consolidated Statement of Operations Data (as % of total revenues) | | Year Ended 2020 | December 31, 2021 | |:---|:---|:---| | Revenues | 100% | 100% | | Cost of revenues | 71.2 | 69.6 | | Gross profit | 28.8 | 30.4 | | Operating expenses: | | | | Research and development, net | 11.8 | 10.1 | | Sales and marketing | 12.6 | 11.5 | | General and administrative | 7.3 | 7.1 | | Total operating expenses | 31.7 | 28.7 | | Operating income (loss) | (2.9) | 1.7 | | Financial expenses and others, net | 2.2 | 3.0 | | Taxes on income | 1.0 | 3.8 | | Equity loss in affiliates | 0.4 | - | | Net loss | (6.5) | (5.1) | Revenue and Cost of Revenue Comparison (2020 vs. 2021) | Metric | 2020 (USD Million) | 2021 (USD Million) | Change (USD Million) | Change (%) | |:---|:---|:---|:---|:---|\ | Revenues | 262.9 | 290.8 | 27.9 | 10.6% | | Cost of Revenues | 187.2 | 202.4 | 15.2 | 8.1% | | Gross Profit % | 28.8% | 30.4% | 1.6 pp | - | Revenue by Region (2020 vs. 2021) | Region | 2020 (USD Million) | 2021 (USD Million) | Change (USD Million) | |:---|:---|:---|:---|\ | Latin America | 46.7 | 54.6 | 7.9 | | APAC | 47.7 | 32.0 | (15.7) | | North America | 38.2 | 47.5 | 9.3 | | Africa | 23.5 | 23.2 | (0.3) | | Europe | 44.8 | 47.4 | 2.6 | | India | 62.0 | 86.1 | 24.1 | Operating Expenses Comparison (2020 vs. 2021) | Expense Category | 2020 (USD Million) | 2021 (USD Million) | Change (USD Million) | Change (%) | |:---|:---|:---|:---|:---|\ | Research and Development, Net | 31.0 | 29.5 | (1.5) | (4.8%) | | Sales and Marketing | 33.0 | 33.5 | 0.5 | 1.5% | | General and Administrative | 19.2 | 20.6 | 1.4 | 7.3% | | Financial expenses and others, Net | 5.9 | 8.6 | 2.7 | 45.8% | | Taxes on income | 2.6 | 11.0 | 8.4 | 323.1% | | Net Loss | (17.1) | (14.8) | 2.3 | (13.5%) | - Net loss decreased from $17.1 million in 2020 to $14.8 million in 2021, primarily due to higher revenues and gross profit, partially offset by increased financial expenses and taxes[434] - Currency fluctuations significantly impact results, as a substantial portion of revenues and costs are in non-U.S. dollar currencies (NIS, INR, EUR, BRL, ARS, NOK); the company uses hedging instruments to mitigate this risk[435][436][437] B. Liquidity and Capital Resources Ceragon's liquidity is financed by public offerings, IIA grants, and a revolving credit facility, with $17.1 million cash and $15.0 million cash used in operations in 2021 - Financing operations primarily through initial public offering, follow-on offerings, and grants from the Israel Innovation Authority (IIA)[441] - A revolving Credit Facility of $50 million for loans and $70 million for bank guarantees was amended in June 2021, extending its term to June 30, 2022, and increasing the allowed factoring facility to $100 million[441][442] - As of December 31, 2021, $11.8 million of the $50 million credit line for short-term loans was utilized, and $3 million from an additional $5 million credit facility was used[443] - The Credit Facility is secured by a floating charge over all assets and contains financial covenants, all of which were met as of December 31, 2020 and 2021[444][445] - Cash and cash equivalents decreased to $17.1 million as of December 31, 2021, from $27.1 million in 2020[447] Cash Flow from Operating Activities (2020 vs. 2021) | Factor | 2020 (USD Million) | 2021 (USD Million) | |:---|:---|:---|\ | Net cash provided by (used in) operating activities | 17.2 | (15.0) | | Net loss | (17.1) | (14.8) | | Increase in trade and other accounts receivable and prepaid expenses | - | (18.1) | | Increase in inventories | - | (11.9) | | Depreciation and amortization | 12.9 | 12.2 | | Increase in trade payables, other accounts payable and accrued expenses | 3.9 | 4.3 | | Increase in deferred revenues paid in advance | 3.0 | 1.7 | | Increase in deferred tax assets, net | (0.2) | 8.3 | Cash Flow from Investing and Financing Activities (2020 vs. 2021) | Activity | 2020 (USD Million) | 2021 (USD Million) | |:---|:---|:---|\ | Net cash used in investing activities | (6.5) | (9.4) | | Net cash provided by (used in) financing activities | (7.4) | 14.5 | | Purchase of property and equipment | (6.1) | (9.4) | | Proceeds from bank loan | - | 9.8 | | Proceeds from share options exercise | 1.2 | 4.7 | - Material cash requirements include capital expenditures ($9.4 million in 2021), lease obligations ($5.0 million in 2021), and purchase obligations ($63.9 million outstanding as of December 31, 2021)[455][456][457][458] - Management believes current working capital, cash, and credit facilities will be sufficient for expected requirements for at least the next 12 months[460] C. Research and Development Ceragon emphasizes R&D to enhance products and reduce costs, with 229 employees globally focusing on chip-level design and system integration - Considerable emphasis on R&D to improve and expand existing products, develop new ones (especially for emerging IP-based networks), and lower production costs[461] - R&D activities are mainly conducted in Rosh Ha'Ayin, Israel, and at subsidiaries in Greece and Romania[462] - As of December 31, 2021, the R&D staff consisted of 229 employees globally, with expertise in millimeter-wave design, modem and signal processing, data communications, and networking solutions[462] - R&D department designs and develops proprietary solutions from chip-level (ASICs, RFICs) to full system integration, focusing on extensions to IP-based networking product lines and new technologies[463] D. Trend Information Trend information is discussed in Parts A and B of Item 5, covering industry trends and global event impacts on performance - Trend information relevant to the company is discussed in Parts A and B of Item 5, covering operating results and liquidity/capital resources[468] E. Critical Accounting Estimates Critical accounting estimates are detailed in the 'Critical Accounting Policies and Estimates' section of Item 5 - Critical accounting estimates are detailed in the 'Critical Accounting Policies and Estimates' section of Item 5[469] Effect of Recent Accounting Pronouncements Recent accounting pronouncements and their estimated effects are described in Note 2 of the Consolidated Financial Statements - Recent accounting pronouncements, including ASU 2021-10 on government assistance, are described in Note 2 of the Consolidated Financial Statements[470][918] ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details Ceragon's leadership, compensation, corporate governance, and employee information, including stock ownership A. Directors and Senior Management This section lists Ceragon's directors and executive officers, including key appointments and biographical summaries highlighting their experience Directors and Executive Officers | Name | Age | Position | |:---|:---|:---|\ | Zohar Zisapel | 73 | Chairman of the Board of Directors | | Shlomo Liran (1) | 71 | Director | | Yael Langer | 57 | Director | | (1) Rami Hadar | 58 | Director | | Ilan Rosen (1) | 65 | Director | | David (Dudi) Ripstein (1) | 55 | Director | | Ira Palti | 64 | Director | | (2) Doron Arazi | 58 | Chief Executive Officer | | Ran Vered | 44 | Chief Financial Officer | | Oz Zimerman | 58 | Executive Vice President, Marketing & Corporate Development | | Guy Toibin | 49 | Executive Vice President Chief Information Officer (CIO), IT | | Muki Bourla | 47 | Executive Vice President Global Delivery | | Zvi Maayan | 54 | Executive Vice President, General Counsel & Corporate Secretary | | Michal Goldstein | 50 | Executive Vice President, Global Human Resources | | Ram Prakash Tripathi | 54 | Regional President, India | | Adrian Hipkiss | 55 | Regional President, Europe and Oil & Gas | | Mario Querner | 59 | Regional President, Asia-Pacific and Africa | | (3) Ulik Broida | 54 | Executive Vice President Products | | Ronen Rotstein (4) | 45 | Regional President, North America | - Doron Arazi commenced service as CEO on July 17, 2021; Ulik Broida commenced as Executive Vice President Solutions Management in April 2021 and Executive Vice President Products in February 2022; Ronen Rotstein commenced as Regional President, North America, in February 2022[471] - Biographical summaries highlight extensive experience in telecommunications, finance, and technology sectors for directors and executive officers[473][474][475][476][477][478][479][480][481][482][483][485][486][487][488][489][491][492][493][494][495] B. Compensation Aggregate compensation for directors and senior management in 2021 was $3.9 million in salary and bonuses, plus $0.7 million for benefits - Aggregate compensation for all directors and senior management in 2021 was approximately $3.9 million in salary, fees, bonuses, and commissions, plus $0.7 million for pension/retirement benefits[497] - Executive officers are part of a performance-based bonus plan, reviewed and approved annually by the Compensation Committee and Board of Directors, based on financial and individual performance objectives[499] - Non-executive directors receive cash compensation (annual and participation fees) in accordance with Israeli Remuneration Regulations and annual equity grants (options to purchase ordinary shares) for their three-year terms[500][501] - In 2021, directors and senior management were granted options to purchase 1,190,335 ordinary shares, with exercise prices ranging from $3.12 to $3.70 per share[508] - As of December 31, 2021, directors and senior management held 2,987,500 outstanding options and 18,568 RSUs[508] Individual Compensation of Five Most Highly Compensated Office Holders (2021) | Office Holder | Salary Costs (USD) | Performance Bonus Costs (USD) | Equity Costs (USD) | |:---|:---|:---|:---|\ | Ira Palti (CEO until July 17, 2021) | 376,506 | 0 | 256,977 | | Doron Arazi (CEO commencing July 17, 2021) | 212,231 | 0 | 197,429 | | Adrian Hipkiss (Regional President, Europe and Oil & Gas) | 322,885 | 158,941 | 76,541 | | Erez Schwartz (Executive Vice President of Products until Feb 2022) | 306,589 | 0 | 64,511 | | Mario Querner (Regional President, Asia-Pacific and Africa) | 254,563 | 42,676 | 93,874 | - The Compensation Policy, last revised and adopted by shareholders in July 2020, aims to provide proper incentives, manage risks, and align compensation with corporate objectives and long-term performance[515][516][517][519] C. Board Practices Ceragon's corporate governance adheres to Israeli law and Nasdaq Rules, with a seven-member Board and established committees, and four independent directors - Ceragon is subject to Israeli Companies Law and Nasdaq Rules, utilizing foreign private issuer exemptions for certain corporate governance practices[520] - The Board of Directors consists of seven members and retains all powers not specifically granted to shareholders, operating through various committees[521][523] - Directors are generally elected for three-year terms; four current directors (Shlomo Liran, Ilan Rosen, Rami Hadar, David Ripstein) qualify as independent under Nasdaq Rules[525][531] - The company opted out of Israeli external director requirements in August 2019, complying instead with U.S. securities laws and Nasdaq Rules for independent directors and committee composition[532][535] - Mr. Shlomo Liran is the audit committee financial expert, and Messrs. Zohar Zisapel, Ilan Rosen, Rami Hadar, and David Ripstein satisfy 'accounting and financial expertise' qualifications under Israeli law[537] - Directors' remuneration requires approval from the Compensation Committee, Board, and generally shareholders, consistent with the company's compensation policy[538][539][540][541] - The Financial Audit Committee (Shlomo Liran, Ilan Rosen, David Ripstein) oversees independent auditor appointment, compensation, and financial reporting processes, meeting SEC and Nasdaq standards[543][544] - The Corporate Audit Committee (David Ripstein, Shlomo Liran, Ilan Rosen) identifies business irregularities, reviews related party transactions, and recommends internal auditor appointments[545][547] - The Compensation Committee (Ilan Rosen, Shlomo Liran, Rami Hadar) recommends compensation policy, reviews its implementation, and approves office holder employment terms, also administering the share option plan[549][550][551][553] - The Nomination Committee (Shlomo Liran, Ilan Rosen, Rami Hadar, David Ripstein) recommends director nominees for Board approval[554] - Terms of employment for office holders (including CEO and directors) require multi-level approvals (Compensation Committee, Board, and sometimes shareholders), with specific rules for related party transactions[556][557][558][559][560][561][562][564][565][566][567][568][569][570][571] - Office holders have fiduciary duties (care and loyalty) under Israeli law, requiring good faith, avoiding conflicts of interest, and disclosure of personal interests in transactions[573][574][576][577][578] - Shareholders have duties to act in good faith and refrain from abusing power, especially controlling shareholders who must act with fairness towards the company[579][580] - The company's Articles of Association allow for indemnification and insurance of office holders for certain liabilities, subject to Companies Law limitations and approvals[582][583][584][585][587][588][589][590][591][592][593][594][595][596][598][599] - An internal auditor (Chaikin, Cohen, Rubin & Co.) is appointed by the board, proposed by the corporate audit committee, to examine compliance with law and orderly business procedures[600][601] D. Employees As of December 31, 2021, Ceragon had 1,006 employees globally, with 339 service contractors, maintaining good employee relations - As of December 31, 2021, Ceragon had 1,006 employees worldwide[602] Employee Distribution by Function (2021) | Function | Number of Employees | |:---|:---|\ | Research, Development and Engineering | 229 | | Sales and Marketing (including services and supporting functions) | 648 | | Management and Administration | 29 | | Operations | 100 | Employee Distribution by Geography (2021) | Region | Number of Employees | |:---|:---|\ | Israel | 291 | | United States | 37 | | EMEA (excluding Israel) | 258 | | Latin America | 193 | | Asia Pacific (including India) | 227 | - Additionally, 339 Services Contractors were employed, mainly supporting regional projects[603] - Israeli employees are subject to Israeli labor laws, including severance pay and pension insurance, with contributions made to pension funds and insurance policies[604][605] - Employment agreements include non-competition, intellectual property assignment, and confidentiality undertakings, though non-competition enforceability is limited in some jurisdictions[607] - The company has not experienced labor-related work stoppages and maintains good relations with employees[608] Share Ownership As of March 27, 2022, Zohar Zisapel beneficially owned 8.44% of shares, with all directors and senior management owning 9.72% Share Ownership of Directors and Senior Management (as of March 27, 2022) | Name | Number of Ordinary Shares (1) | Percentage of Outstanding Ordinary Shares | Number of Stock Options Held (2) | Exercise price of Options | Number of RSUs Held (2) | |:---|:---|:---|:---|:---|:---|\ | Zohar Zisapel | 7,117,174 | 8.44% | 300,000 | $ 2.02 – 3.70 | - | | Ira Palti | 612,500 | 0.72% | 720,000 | $ 2.41 – 9.01 | - | | All directors and senior management as a group (20 people) | 8,302,190 | 9.72% | 2,886,563 | $ 2.02 – 9.01 | 10,469 | - The percentage of outstanding ordinary shares is based on 84,001,666 ordinary shares outstanding as of March 27, 2022, including vested options or those vesting within 60 days[609][610] - Zohar Zisapel's holdings include shares held directly, through controlled Israeli companies (Lomsha Ltd., Michael and Klil Holdings (93) Ltd.), and through RAD Data Communications Ltd[612] Stock Option Plan Ceragon's Share Option and RSU Plan, extended through 2022, had 5,186,446 options and 699,679 RSUs outstanding as of December 31, 2021 - The Amended and Restated Share Option and RSU Plan, adopted in 2003 and extended through December 31, 2022, allows grants to officers, directors, employees, and consultants[615][617] - Options generally vest over four years and expire between six to ten years from the grant date[615] Stock Option and RSU Activity (Year Ended December 31, 2021) | Metric | Number of options | Weighted average exercise price (USD) | Weighted average remaining contractual term (years) | Aggregate intrinsic value (USD) | |:---|:---|:---|:---|:---|\ | Outstanding at beginning of year | 6,238,729 | 3.52 | 3.17 | 2,654 | | Granted | 1,902,868 | 3.72 | - | - | | Exercised | (2,098,957) | 2.25 | - | - | | Forfeited or expired | (856,194) | 7.75 | - | - | | Outstanding at end of the year | 5,186,446 | 3.40 | 4.01 | 534 | | Options exercisable at end of the year | 2,342,399 | 3.57 | 2.75 | 370 | | Vested and expected to vest | 4,664,666 | 3.41 | 3.87 | 508 | RSU Activity (Year Ended December 31, 2021) | Metric | Number of RSUs | Aggregate intrinsic value (USD) | |:---|:---|:---|\ | Unvested at beginning of year | 309,986 | 862 | | Granted | 588,466 | - | | Vested | (129,380) | - | | Forfeited | (69,393) | - | | Unvested at end of the year | 699,679 | 1,805 | | Vested and expected to vest | 493,881 | 1,274 | - Total unrecognized estimated compensation cost related to non-vested stock options and RSUs was $4,563,000 as of December 31, 2021, expected to be recognized over approximately one year[1005] Equity-Based Compensation Expense by Category (2019-2021) | Category | 2019 (USD) | 2020 (USD) | 2021 (USD) | |:---|:---|:---|:---|\ | Cost of revenues | 71 | 110 | 289 | | Research and development, net | 366 | 243 | 236 | | Sales and marketing | 708 | 545 | 700 | | General and administrative | 908 | 764 | 1,337 | | Total share-based compensation expenses | 2,053 | 1,662 | 2,562 | ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section identifies major shareholders, including Zohar Zisapel (8.47%), and details $2.7 million in 2021 related-party transactions with the RAD-BYNET Group Major Shareholders As of March 27, 2022, Zohar Zisapel beneficially owned 8.47% of shares, with 97% of shares held in the United States Major Shareholder Ownership (as of March 27, 2022) | Name | Number of Ordinary Shares (2) | Percentage of Outstanding Ordinary (1) Shares | |:---|:---|:---|\ | Zohar Zisapel | 7,117,174 | 8.47% | - Zohar Zisapel's beneficial ownership includes shares held directly, through controlled entities (Lomsha Ltd., Michael and Klil Holdings (93) Ltd.), and through RAD Data Communications Ltd[627] - Approximately 97% of ordinary shares were registered for trade and held in the United States as of March 27, 2022, with 28 record holders in the U.S[629] Related Party Transactions Ceragon engaged in $2.7 million in 2021 arm's length transactions with the RAD-BYNET Group, involving shared expenses and purchases - Zohar Zisapel, Chairman and principal shareholder, beneficially owns 8.47% of ordinary shares and is involved with the 'RAD-BYNET Group'[630][631] - Ceragon shares expenses with RAD-BYNET Group companies for information systems, administrative services, medical insurance, and logistics, and purchases equipment, software, and licenses from them[632] - Aggregate purchases and shared expenses with RAD-BYNET Group in 2021 were approximately $2.7 million[632] - All related-party transactions are arm's length and approved in accordance with the Company's Related Party Policy and applicable law[635] Transactions with Related Parties (2019-2021) | Category | 2019 (USD) | 2020 (USD) | 2021 (USD) | |:---|:---|:---|:---|\ | Revenues | 6,745 | 5,843 | 394 | | Cost of revenues | 1,659 | 4,715 | 1,125 | | Research and development expenses | 1,248 | 1,245 | 608 | | Sales and marketing expenses | 763 | 731 | 617 | | General and administrative expenses | 1,002 | 913 | 1,527 | | Purchase of property and equipment | 46 | 274 | 175 | Balances with Related Parties (as of December 31, 2020 & 2021) | Category | 2020 (USD) | 2021 (USD) | |:---|:---|:---|\ | Trade payables, other accounts payable and accrued expenses | 925 | 376 | | Trade Receivables | 13,117 | 78 | Registration Rights Certain shareholders, including Yehuda and Zohar Zisapel, were granted registration rights for their ordinary shares prior to the 2000 IPO - Registration rights were granted to holders of ordinary shares converted from preferred shares and to Yehuda and Zohar Zisapel, allowing their shares to be included in certain registration statements[640][641] ITEM 8. FINANCIAL INFORMATION This section provides an overview of Ceragon's financial information, including statements, export sales, legal proceedings, and dividend policy Consolidated Statements and Other Financial Information Annual financial statements are located at the end of this report, beginning on Page F-1 - Annual financial statements are found at the end of this annual report, beginning on Page F-1[642] Export Sales In 2021, export sales to end users outside Israel totaled $289.2 million, representing 99.4% of total revenues - In 2021, export sales to end users outside of Israel totaled $289.2 million, accounting for 99.4% of total revenues ($290.8 million)[643] Legal Proceedings Ceragon is involved in a 2015 class action lawsuit, with a January 2022 ruling applying U.S. law, and the company believes it has a strong defense - A purported class action lawsuit was filed on January 6, 2015, in the District Court of Tel-Aviv, alleging breaches of duties by making false and misleading statements in SEC filings, seeking up to $75 million in damages[644] - After several legal proceedings, including a Supreme Court decision on dual-listed companies, a January 2022 judgment ruled that U.S. law would apply to the class action, overturning a prior ruling that applied Israeli law[648][650][654][655][658][659] - On March 20, 2022, the plaintiff filed an amended class action claim based on U.S. law, with Ceragon required to submit its Statement of Defense by June 26, 2022[661] - The company believes it has a strong defense, noting that U.S. law presents a higher bar for plaintiffs, but attorneys cannot assess the chances of acceptance at this preliminary stage[662] Dividends Ceragon has never paid cash dividends and does not anticipate future payments, retaining earnings for operations and expansion - Ceragon has never declared or paid any dividends on its ordinary shares, except for a share dividend from a 250-for-1 recapitalization before its initial public offering[664] - The company does not anticipate paying future dividends, intending to retain all future earnings for operations and business expansion[664] - The Credit Facility restricts dividend distribution without prior written consent from lenders, unless certain terms are met[664] Significant Changes Significant changes, including June 2021 and January 2022 credit facility amendments, are detailed in Item 5 - Significant changes, specifically the June 2021 and January 2022 amendments to the credit facility, are described in Item 5, 'Operating and Financial Review and Prospects - Liquidity and Capital Resources'[665] ITEM 9. THE OFFER AND LISTING Ceragon's ordinary shares are listed on the Nasdaq Global Select Market under the symbol 'CRNT' - Ceragon's ordinary shares are listed on the Nasdaq Global Select Market under the symbol 'CRNT'[666] ITEM 10. ADDITIONAL INFORMATION This section provides additional information on corporate governance, shareholder rights, Israeli and U.S. tax considerations, and public filings Memorandum and Articles of Association – General Description of Ceragon's Memorandum and Articles of Association is incorporated by reference from previous SEC filings - Description of Memorandum and Articles of Association is incorporated by reference from previous registration statements and annual reports (Form 20-F) filed with the SEC[667][668] Articles of Association Ceragon's Articles of Association define its purpose, outline rules for shareholder meetings, voting rights, share transferability, and dividend distribution - Company's purpose is to engage in any lawful undertaking or business, as set forth in Article 1 of its Articles of Association[669] - Annual general meetings must be held once every calendar year, within 15 months of the preceding one; special meetings can be convened by the Board or upon demand by certain shareholders/directors[671] - Quorum for shareholder meetings requires at least two shareholders holding 25% or more of the voting power; adjourned meetings require any two shareholders[675] - Holders of fully paid ordinary shares have one vote per share on all matters, with resolutions generally adopted by a majority of voting power present and voting[676][678] - Ownership or voting of ordinary shares by non-residents of Israel is not restricted, except for citizens of countries at war with Israel[679] - Shares are transferable by proper instrument, subject to applicable securities laws[680] - Rights attached to any class of shares can be modified or abrogated by shareholder resolution, also requiring approval by a majority of that specific class[681] - Dividends can only be distributed from available profits, as determined by the Companies Law, and the Board of Directors decides on distribution amounts[682][683] - In liquidation, assets are distributed to ordinary shareholders in proportion to the nominal value paid up on their shares[684] - Israeli corporate law regulates mergers and acquisitions, requiring specific shareholder approvals (e.g., 75% for pre-Companies Law companies, majority for Ceragon) and tender offers when certain ownership thresholds are exceeded[686][687][688] Material Contracts No material contracts are reported - No material contracts are reported[690] Exchange Controls No Israeli currency control restrictions currently exist on dividend payments or share sales, but administrative controls could be imposed - No Israeli currency control restrictions on dividend payments or share sale proceeds, except for reporting obligations for Israeli residents[692] - Legislation allows for administrative imposition of currency controls at any time[692] - Ownership or voting of ordinary shares by non-residents is unrestricted, except for citizens of countries at war with Israel[693] Taxation This section summarizes Israeli and U.S. federal income tax implications for Ceragon and its shareholders, including corporate tax, capital gains, and PFIC status - Israeli corporate tax rate was 23% in 2021, but effective rates can be lower for companies with 'approved enterprise' or 'preferred enterprise' status under the Investment Law[696][697] - Ceragon has three 'Approved Enterprise' investment programs, which provided tax exemptions for the first two years of taxable income, but the 14-year benefit period has passed as of January 1, 2021[698][699][700][1010][1011][1014][1015] - The 2017 Amendment to the Investment Law offers reduced corporate tax rates (12%, or 7.5% in Development Zone A) for 'Preferred Technology Enterprises' on qualifying income, but Ceragon has not applied this amendment[703][704][705][706][1016] - Israeli tax law allows deductions for scientific R&D expenditures, net of government grants, and Ceragon believes it qualifies as an 'industrial company' under the Industry Encouragement Law[707][708][709][710][712][713][1017][1018][1019][1021] - Israeli capital gains tax on publicly traded shares is generally 25% for individuals (30% for 'significant shareholders') and 23% for companies, with exemptions for non-Israeli residents under certain conditions or tax treaties (e.g., U.S.-Israel Tax Treaty)[714][715][716][717][718][719][721] - Dividends distributed to non-residents are subject to Israeli withholding tax (25%, or 30% for significant shareholders; 20% from Approved/Benefited/Preferred Enterprises), potentially reduced by tax treaties (e.g., 12.5% or 15% for U.S. corporations under U.S.-Israel Tax Treaty)[722] - Israeli Transfer Pricing Regulations (TP Regs) require cross-border transactions between related parties to be conducted on an arm's length basis[723] - U.S. holders of ordinary shares are subject to U.S. federal income tax on dividends and dispositions, with dividends potentially qualifying for reduced rates if certain conditions are met (e.g., 'qualified dividend income')[731][733][734][735][736] - Gain or loss on disposition of ordinary shares is generally treated as U.S. source capital gain or loss, with long-term capital gains potentially subject to reduced rates for non-corporate U.S. holders[737][739] - Certain non-corporate U.S. holders may be subject to an additional 3.8% Net Investment Income Tax[740] - Classification as a Passive Foreign Investment Company (PFIC) would result in increased tax liability for U.S. holders upon sale or excess distributions, with complex rules and potential annual reporting requirements[741][742][744][745][746] - Non-U.S. holders are generally not subject to U.S. federal income or withholding tax on dividends or dispositions unless effectively connected with a U.S. trade or business or certain presence conditions are met[747] - U.S. holders are subject to information reporting and potential backup withholding on dividends and disposition proceeds, unless an exemption is provided[749][750][751] Documents on Display Ceragon files reports with the SEC, available on its website and http://www.sec.gov - Ceragon files reports with the SEC, available on http://www.sec.gov, and also posts information on its website www.ceragon.com[752](index=752&type=chunk)[753] ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Ceragon is exposed to foreign currency risk from non-U.S. dollar transactions, mitigated by hedging, with no material market risk requiring tabular disclosures - Ceragon does not use derivative financial instruments for trading purposes and has no material market risk exposure requiring quantitative tabular disclosures[754] - The company is exposed to foreign currency risk as a significant portion of revenues, cost of revenues, and operating expenses are denominated in non-U.S. dollar currencies (NIS, INR, EUR, BRL, ARS, NOK)[755] - To mitigate foreign currency risk, Ceragon hedges a portion of cash flow transactions and monetary balance sheet items using foreign exchange forward contracts[755] - A 10% strengthening of the U.S. dollar would decrease net monetary assets by approximately $2.4 million, while a 10% weakening would increase them by approximately $3.0 million (as of December 31, 2021)[755] - As of December 31, 2021, outstanding forward contracts amounted to $76.1 million for up to twelve months[757] ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES. No information is applicable regarding securities other than equity securities - No information applicable regarding the description of securities other than equity securities[760](index=7