NOTE 4   FAIR VALUE MEASUREMENT

The Company measures fair value and discloses fair value measurements for financial assets and liabilities. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The fair value of marketable securities is based on quoted market prices in active markets (level 1). Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

As of December 31, 2014, the Company held government and corporate debt securities with an aggregated cost of  $33,228 thousand and an aggregated fair value of  $32,895 thousand. The gross unrealized gains and losses as of December 31, 2014 were $68 thousand and $249 thousand, respectively. The aggregate fair value of investments with unrealized losses as of December 31, 2014 was $19,529 thousand.

During the year ended December 31, 2014, the Company recognized other-than-temporary impairment of  $152 thousand related to debt securities.

As of December 31, 2013, the Company held debt securities and equity securities. The cost, aggregate fair value and unrealized holding gains and losses by major security types were as follows:

During the years ended December 31, 2013 and 2012 no other-than-temporary impairments were recognized by the Company.

Contractual maturities of investments in available-for-sale debt securities were as follows:

Short-term deposits included in cash and cash equivalents were $192,456 thousand and $31,935 thousand, as of December 31, 2014 and 2013, respectively.

The carrying amount of financial instruments, which include cash and cash equivalents, accounts receivable and accounts payable, approximate fair value because of their generally short maturities.

NOTE 7   COMMITMENTS AND CONTINGENT LIABILITIES

Commitments

a. Lease agreements

In September 2013, the Israeli subsidiary exercised its option to extend the existing operating lease agreement for a period of additional 5 years until the end of February 2019. In July 2014, the Israeli subsidiary came to an agreement with the lessor with regards to the lease terms, which included an amendment to the lease payments rate, as well as the lease of additional space. The Israeli subsidiary was also granted an option to extend the lease term for an additional five year period, at then-current market rates.

As part of this agreement the Israeli subsidiary had secured a bank guarantee in the amount of approximately $1,283 thousand (denominated in NIS).

Rent expenses for the Company for the years ended December 31, 2014, 2013 and 2012 were $2,211 thousand, $1,447 thousand and $1,060 thousand, respectively.

The Israeli subsidiary subleases to a related party, which is an entity co-founded by the Chairman of the Board and CTO and the President and CEO of the Company (“the Company’s founders”) 850 square meters (approximately 9,000 square feet) from the Israeli subsidiary for monthly rent of  $29 per square meter. The lease expires on August 1, 2015 with automatic one year renewals. The Company believes the sublease terms are comparable to those that would have been reached in an arm’s-length negotiation.

Future minimum annual lease commitments under all of the Company’s operating lease agreements are as follows:

Other lease agreements

The Israeli subsidiary leases vehicles under vehicle operating lease agreements. Vehicles lease expenses for the Company for the years ended December 31, 2014, 2013 and 2012 were $661 thousand, $600 thousand, and $554 thousand, respectively.

Future minimum annual lease commitments under operating lease agreements are as follows:

b. Royalty and commissions bearing agreements

The Company signed a number of license agreements and technology transfer agreements with third parties. The agreements allow the Company to utilize and leverage the third parties’ technology in order to integrate it into the Company’s products (“Integrated Product”). In consideration thereof, the Company is obligated to pay royalties to each of the third parties, for each unit of the applicable Integrated Product sold to other parties. As a result, the Company recorded during the years ended December 31, 2014, 2013 and 2012, expenses of approximately $1,768 thousand, $920 thousand and $554 thousand in the financial statements, respectively. These expenses are classified as a component of cost of revenues.

In connection with multiple contractor and agent agreements, the Company is committed to pay commissions ranging between 1% and 3% of the direct sales earned directly as a result of these agreements. These expenses are classified as a component of sales and marketing.

c. Bank guarantees

As of December 31, 2014, the Israeli subsidiary had secured several bank guarantees in a total amount of approximately $1,599 thousand (denominated in NIS) mainly in connection with a lease agreement and the employment encouragement plan of the Israeli Ministry of Industry, Trade and Labor plan it had undertaken.

d. Contingent liabilities:

In October 2012, the Cypriot and Israeli subsidiaries received a lawsuit filed by a former consultant of the Cypriot subsidiary, claiming Euro 260 thousand (approximately $340 thousand) for early termination of the consultancy agreement, reputational damages and interest. On January 22, 2014, the Court rejected the former consultant’s claim and the case was dismissed.

NOTE 8   EQUITY

Share capital

a.

As of December 31, 2014, the issued share capital of the Company is composed of Ordinary shares at EUR 0.01 par value. As of December 31, 2013, the issued share capital of the Company was composed of Class A Ordinary shares (with no liquidation preference), Ordinary shares (with liquidation preference), Class B, C, D, E, F1 and F2 shares, all at EUR 0.01 par value.

b.

On August 6, 2014, the Company completed its IPO. For additional information see note 1.

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c.

In July 2014, the Company’s shareholders approved a five-for-one stock split of all classes of the Company’s shares, which was effective July 10, 2014. The stock split had the following effects: (i) each outstanding share of any class was increased to five shares of the same class; (ii) each outstanding warrant or option to purchase Ordinary shares was proportionately increased on a five-for-one basis; and (iii) the exercise price of each outstanding warrant or option to purchase Ordinary shares was proportionately decreased on a one-for-five basis. All of the share and per share amounts have been adjusted, on a retroactive basis, to reflect this stock split.

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d.

On August 15, 2013 the Company amended its Articles of Association. Accordingly, the authorized shares were divided differently among the different classes of shares (while the total authorized share capital remained the same). Following this amendment, authorized shares are as follows: 100,000,000 class A shares, 200,000,000 Ordinary shares, 25,000,000 class B shares, 25,000,000 class C shares, 50,000,000 class D shares, 20,000,000 class E shares and 80,000,000 class F shares divided into (i) 15,000,000 F1 shares and (ii) 65,000,000 F2 shares.

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e.

Prior to the IPO, in August 2014, the Company had different classes of shares, all of which converted to Ordinary shares on a one-to-one basis in connection with the IPO. Significant terms were as follows:

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Voting

The holders of Ordinary Shares (with liquidation preference), and Class A, B, C, D, E, F1 and F2 Ordinary shares had identical voting rights. The holders of class D shares had a veto right with respect to certain related party transactions and the right to designate a director of the Company. The holders of F1 shares had the right effectively to designate a director of the Company. The holders of Class D shares and Class F shares had the right to veto further issuances of Class D shares and Class F shares, respectively. All of the special rights described above were terminated upon the closing of the IPO on August 6, 2014.

Conversion

Each holder of Class B, C, D, E, F1 and F2 shares had the right, at any time and from time to time, to convert each share held by the holder into one fully paid and non-assessable Ordinary share (with liquidation preference). The Class A shareholders had the right to convert to Ordinary shares (with liquidation preference), however, their shares did not have any additional rights nor liquidation preference as a result of such conversion. Immediately prior to the IPO, all shares of the Company were automatically converted into Ordinary shares, with no effective liquidation rights.

Anti-Dilution Rights

Certain Ordinary shares (with liquidation preference), and certain Class B, C, D, E, F1 and F2 shares had certain contractual anti-dilution rights.

At any time prior to an initial public offering of the Company’s securities, in the event the Company issued any shares to a third party in return for an investment (the “Subsequent Investment”) and the Subsequent Investment is made based on a price per share of less than the “Adjusted Price Per Share” (as defined in the relevant Investment Agreement to which a shareholder is a party), then the Investors (as defined in the relevant agreement) shall be issued additional shares of the Company of the relevant class of shares held by such shareholder, for no further consideration, such that the number of shares of the relevant class held by such Investor shall be increased to such number of shares as such Investor would have held had it originally purchased such shares for the lower price at which shares are proposed to be issued.

The Company determined that the anti-dilution feature is a contingent beneficial conversion feature at the date of issuance. Since this was contingent upon a future event that never occurred, it has not been recorded in the consolidated financial statements as of December 31, 2014.

Liquidation Preference

In the event of any liquidation, dissolution or winding up of the Company, the Company undertook that (i) each holder of Class B and Ordinary shares (with liquidation preference) that is a party to an investment agreement providing for a liquidation preference and (ii) each holder of Class C, D, E, F1 and F2 shares shall be entitled to receive, out of the assets of the Company invested by such holder in the Company (the “Consideration Amount of such holder). Such distribution will be made pro rata to all holders entitled to a liquidation preference, until each holder has received the full Consideration Amount to which it is entitled, after which such holder will not participate in the preferential distribution. After the full preferential amount referred to above has been distributed to all shareholders entitled thereto, the Company’s remaining assets and funds available for distribution will be distributed pro rata to all shareholders. There was no deemed liquidation that requires redemption of the shares.

Following is a summary of the equity activity for the years ended December 31, 2014, 2013 and 2012:

g. Investment transactions

On June 28, 2013, the Company entered into a share purchase agreement with an investor pursuant to which the Company agreed to sell and issue to the investor 4,297,995 Class F1 Shares par value EUR 0.01 each, at a purchase price of  $6.98 per share and total consideration of  $30,000,000. On the same day, investors, including the investor in the preceding sentence, entered into an agreement with the Company and a newly formed Dutch private company, Driving Momentum BV (“Newco”), which owned 500 Ordinary shares (with liquidation preference) of the Company pursuant to which Newco agreed to sell to the investors an aggregate of 10,028,655 Class F1 and 41,547,280 Class F2 shares. NewCo then purchased 51,575,935 issued and outstanding Class A, Ordinary Shares (with liquidation preference), Class B, Class C, Class D and Class E shares of the Company from existing shareholders, at a purchase price of US $6.61 (net of expenses) per share. Newco converted the 51,575,935 shares it had acquired from the existing shareholders into 10,028,655 Class F1 and 41,547,280 Class F2 shares. The closing of the purchase of the 4,297,995 F1 shares from the Company and the 10,028,655 Class F1 and 41,547,280 Class F2 shares from Newco occurred on August 22, 2013. The repurchase conversion and sale of the shares took place simultaneously. Subsequent to the completion of these transactions, Newco, which did not have any substantive net assets, was merged with the Company. This transaction was accounted for as benefit to participating shareholders of the Class A, B, C, D, E and Ordinary shares (with liquidation preference).

h. Employee and Non-employee stock options

Options to employees and service providers

The Company has adopted a stock option plan (the “2003 Plan”), whereby up to 11% (out of the Company’s issued and outstanding aggregate number of shares of all classes) options may be granted to employees and service providers for purchase of the Company’s Ordinary shares. In May 2014, the Company increased the pool of options to be available under the 2003 Plan to up to 18% of the issued and outstanding shares of the Company.

Under the terms of the 2003 Plan, the board of directors or the designated committee will grant options and will determine the period over which options become exercisable and the exercise terms. The Company usually grants options that vests over a period of 4.5 years and expires 7 years after grant. Each option can be exercised into one Ordinary share EUR 0.01 par value of the Company.

In December 2014, the board of directors approved and the Company adopted its 2014 Equity Incentive Plan (the “2014 Plan”). Under the 2014 Plan, the board of directors or the designated committee will grant stock options, restricted shares and restricted share units (“RSUs”). The total number of shares available under both the 2003 Plan and the 2014 Plan shall not exceed 38,619,123. Generally, the 2014 Plan provides for options that vests over a period of 4.5 years and expires 7 years after grant and for RSUs that vests over a period of 3 years. Each option can be exercised into one Ordinary share EUR 0.01 par value of the Company.

No additional awards will be granted under the 2003 Plan.

Both of the Plans with respect to Israeli employees are intended to be governed by the terms stipulated by Section 102 of the Israeli Income Tax Ordinance. In accordance with the capital gain track chosen by the Company and pursuant to the terms thereof, the Company is not allowed to claim, as an expense for tax purposes, the amounts credited to employees as a benefit, including amounts recorded as salary benefits in the Company’s accounts, in respect of options granted to employees under the Plans — with the exception of the work-income benefit component, if any, determined on the grant date. Options granted to employees from other countries are subject to similar terms with certain changes required for local regulations.

The following table summarizes information regarding outstanding and exercisable options under the Company’s plans as of December 31, 2014:

The following table summarizes the option activity for the year ended December 31, 2014 for options granted to employees, directors and service providers:

(1)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of  $40.56 of the Company’s ordinary share on December 31, 2014. This represents the potential pre-tax amount receivable by the option holders had all option holders exercised their options as of such date.

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(2)

On January 13, 2014 the Company granted the Company’s founders, who are also shareholders, 11,500,000 options, exercisable into the same amount of the Company’s Ordinary shares, at an exercise price of  $6.98 per share; 3,850,000 options were vested immediately and the remainder vest over two years.

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On September 7, 2014 the Company granted four of its directors 200,000 options, exercisable into the same amount of the Company’s ordinary shares, at an exercise price of  $25.0 per share, which are subject to graded vesting. Those options were granted in the money.

Subsequent to December 31, 2014, the Company granted to its employee additional 75,650 options exercisable into the same amount of the Company’s Ordinary shares, at an average exercise price of $36.49 per share, and 233,505 RSUs.

At December 31, 2014, there were 190,000 options outstanding with a weighted average exercise price of  $4.17 and weighted average remaining contractual life of 2.95 years, which were granted to service providers. At December 31, 2014, 100,000 of these options were exercisable.

The fair value of options granted was estimated using the Black-Scholes option pricing model, and based on the following assumptions:

The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.

The Company’s computation of expected volatility was based on comparable companies.

The expected option term for options awards that were at the money when granted (plain vanilla options) was calculated in accordance with the simplified method in accordance with ASC 718, as adequate historical experience is not available to provide a reasonable estimate. The simplified method will continue to apply until enough historical experience is available to provide a reasonable estimate of the expected term. The expected term of options granted to non-employee service providers is based on the contractual life.

The Company has historically not paid dividends and has no foreseeable plans to pay dividends.

As of December 31, 2014, approximately $36.9 million of total unrecognized compensation expense related to unvested share-based compensation grants under the Plan. That cost is expected to be recognized over a weighted-average period of 2.02 years.

Share-based compensation expenses included in the Company’s Statements of Operations were:

During December 2013, the Company’s Board of Directors approved the modification of certain outstanding stock options previously granted to employees and service providers. The modification was for the extension of all outstanding options with a termination date earlier than December 31, 2014. The options will now expire on December 31, 2016. The modification resulted in compensation expense of  $823 thousand that was recorded during the year ended December 31, 2013 and included in the above table.

In connection with the closing of the IPO and in accordance with their original terms, the vesting period for certain options was accelerated such that options to purchase 4,950,000 Ordinary shares vested and became exercisable upon the closing of the IPO. Of the 4,950,000 options, options to purchase 3,375,000 Ordinary shares were granted to the Company’s founders who are also shareholders. The acceleration resulted in compensation expense of  $6.6 million that was recorded during the year ended December 31, 2014 and included in the above table.

NOTE 9   TAXES ON INCOME

a. Tax rates

Each of the Company’s subsidiaries is taxed under the applicable law, in accordance with the country of its residence. The enacted statutory tax rates applicable to the significant subsidiaries of the Company’s subsidiaries are as follows:

Cypriot subsidiary — prior to the Company’s reorganization of its internal corporate structure, which took place in July 2014, income is taxed at the corporate tax rate. The Corporate tax rate in Cyprus was 12.5% in 2014. Interest income is taxed at the Defence tax rate. The Defence tax rate in Cyprus was 30% (effective from May 1, 2013). After the Company’s reorganization, the Cypriot subsidiary is taxed under the Israeli law.

The Israeli subsidiary is taxed under the Israeli law. Income not eligible for benefits under the Investment Law mentioned below is taxed at the corporate tax rate. Corporate tax rates in Israel were as follows: 2012 — 25%, 2013 — 25%, 2014 — 26.5%.

Deferred taxes in respect of foreign subsidiaries have not been provided for as it is the Company’s intention to permanently reinvest the foreign subsidiaries’ earnings. An assessment of the tax that would have been payable had the Company’s foreign subsidiaries distributed their income to the Company is not practicable because of the multiple tax rates and different tax regimes through the years.

Israel Tax benefits under the Law for Encouragement of Capital Investments, 1959 (the “Law”)

Benefited Enterprise

Commencing 2005, the Israeli subsidiary has been granted with a “Benefited Enterprise” status, which provides certain benefits for a period of ten years, including tax exemptions for undistributed income and reduced tax rates.

The proportion of the Israeli subsidiary’s taxable income entitled to tax exemption is calculated on the basis of the ratio between the turnover attributed to the “Benefited Enterprise” and the whole turnover of the Israeli subsidiary. The turnover attributed to the “Benefited Enterprise” is calculated, by taking the increase resulting from the comparison of the Israeli subsidiary’s turnover with its “base” turnover, which is the average turnover attributed to the last three years before the activation of the “Benefited Enterprise”, or by applying such other basis as is stipulated in the instrument of approval. The Israeli subsidiary elected 2005 as its “Implementation Year” as stipulated in the Law, and notified the Israeli Tax Authorities that it elects 2007, 2009 and 2012 as its “Expansion Years”, as stipulated in the Law. In the event of distribution of a cash dividend from income which was tax exempt as set forth above, the Israeli subsidiary would have to pay the 25% tax in respect of the amount distributed.

The entitlement to the above benefits is conditional upon the Israeli subsidiary’s fulfilling certain conditions. In the event of failure to comply with these conditions, the entitlement for benefits might be cancelled and the Israeli subsidiary might be required to refund the amount of the benefits, in whole or in part, with the addition of linkage differences to the Israeli CPI and interest. As part of the requirements

necessary to be granted with this status, the Israeli subsidiary was recognized during 2006, by the Chief Scientist Office as a “Research and Development company”. The Company’s management believes that all conditions are fulfilled and therefore these financial statements were prepared under the assumption that the Israeli subsidiary is entitled to those benefits.

Preferred Company

In May 2014, as part of the Company’s reorganization of its internal corporate structure, the Israeli subsidiary made an election under the Investment Law to change its tax status from a “Benefited Enterprise” to a “Preferred Company” to be effective as of January 1, 2014. This election was not subject to an approval by Israeli Tax Authority. The change in the tax status did not have a material effect on the Company’s deferred taxes.

The Investment Law provides certain benefits for income generated by a “Preferred Company” through its “Preferred Enterprise” (as such terms are defined in the Investment Law). The definition of a Preferred Company includes a company incorporated in Israel that is (i) not wholly owned by a governmental entity; (ii) owns a Preferred Enterprise and (iii) that is controlled and managed from Israel, and subject to certain other conditions set in the law. From 2014 and thereafter a Preferred Company is entitled to a reduced corporate tax rate of 16% with respect to its income derived by its Preferred Enterprise, unless the Preferred Enterprise is located in a specified development zone, in which case the rate will be 9%. The Company’s Israeli subsidiary location is entitled to the reduced tax rate of 9%.

During July 2014, the Company finalized the reorganization of its internal corporate structure. The Company took the necessary steps, including shareholder approval, so that since July 2014, the Company is a resident of Israel (and not The Netherlands) for tax purposes.

In addition, as part of the reorganization, the Company’s Cypriot subsidiary, which owned all of the Company intellectual property, has transferred all of its intellectual property to the Israeli subsidiary in July 2014.

On July 20, 2014, the Company obtained a tax ruling from the Israel Tax Authorities providing that, among other matters, the reorganization did not trigger any tax in Israel and did not violate any of the Israeli tax covenants to which the Israeli subsidiary and its shareholder are bound pursuant to a 2001 tax ruling.

b. Tax assessments

The Israeli subsidiary has final tax assessments through 2010. Mobileye N.V. has final tax assessments through 2012, and the Cypriot subsidiary has final tax assessments through 2008. All other Company’s subsidiaries have not been assessed since incorporation.

c. Carryforward tax losses

During the year ended December 31, 2013, the Company released its valuation allowance on deferred tax assets of the Cypriot subsidiary, as it was no longer in a three-year cumulative loss position and management believed that it is more likely than not that the deferred tax asset will be realized within the foreseeable future. During the year ended December 31, 2014, the Company fully utilized all of the carryforward tax losses of  $23,779 related to the Cypriot subsidiary.

d. Profit (loss) before taxes on income included in the statements of operations

Profit (loss) before taxes on income is comprised as follows:

*

As mentioned above, since July 2014, the Company is a resident of Israel and not The Netherlands for tax purposes. Therefore, prior to July 2014 “domestic” represented taxing under Dutch tax authorities and as of July 2014 “domestic” represents taxing under the Israeli tax authorities. Thus, in the periods prior to July 2014 taxing under the Israeli tax authorities is included in the table above as foreign profit (loss) before taxes on income.

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e. Benefit (taxes) on income included in the statement of operations

Benefit (taxes) on income for the years ended December 31, 2014, 2013 and 2012 was composed of the following:

* See comment at section 9(d) above.

A reconciliation of the theoretical tax expense assuming all income is taxed at the statutory rate to taxes on income as reported in the statements of operations:

*

The theoretical tax benefit (taxes on income) for the year ended December 31, 2014 computed on pre-tax income or loss at the weighted average tax rate has been calculated as the sum of the pre-tax income in the Netherlands and Israel multiplied by that jurisdiction’s applicable statutory tax rate. The statutory tax rates by jurisdiction were 26.5% for Israel and 25% for the Netherlands.

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g. Uncertain tax positions

The following is a roll-forward of the Company’s unrecognized tax positions for the years ended December 31, 2014, 2013 and 2012:

Uncertain tax positions included accrued potential penalties and interest of  $73 thousand, $19 thousand and $20 thousand at December 31, 2014, 2013 and 2012, respectively.

All of the above unrecognized tax benefits would affect the effective tax rate if recognized. There are no material anticipated changes in the uncertain tax positions in the next twelve months.

h. Deferred income taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:

Realization of this deferred tax balance is conditional upon earning, in the coming years, taxable income. The amount of the deferred tax asset, however, could be reduced in the near term if estimates of future taxable income are reduced.