UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
|
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|
Or
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
|
Or
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report....................
For the transition period from to
|
Commission File number: 000-23288
(Exact name of Registrant as specified in its charter and as translated into English)
|
|
|
(Jurisdiction of incorporation
or organization)
|
(Address of principal executive offices)
Mr. Eran Gilad , CFO and Company Secretary
Telephone: +972 -9-764-4555
E-mail: erang@silicom.co.il
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
|
None
|
None
|
|
|
Title of each class
|
|
Name of each exchange on which registered
|
|
|
|
Trading Symbol(s)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
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:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐ No ☒
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files):
2
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
|
Large accelerated filer ☐
|
|
|
|
Non-accelerated filer ☐
|
Emerging growth company
|
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.
Yes ☒ No ☐
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. ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
|
|
☒
|
International Financial Reporting Standards as issued by the International Accounting Standards Board ☐
|
Other ☐
|
If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ☐ No ☐
This annual report on Form 20-F includes certain "forward-looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934. The use of the words "projects", "expects", "may", "plans", or "intends", or words of similar import, identifies a statement as "forward-looking." There can be no assurance, however, that actual results will not differ materially from our expectations or projections. Factors that could cause actual results to differ from our expectations or projections include the risks and uncertainties relating to our business described in this report at Item 3 titled "Risk Factors."
As used herein or in any document incorporated by reference hereto, the "Company", "Silicom Ltd.", "Silicom", "Registrant", "we", "us", or "our" refers to Silicom Ltd. and its subsidiaries.
We have prepared our consolidated financial statements in United States dollars and in accordance with accounting principles generally accepted in the United States. All references herein to "dollars", "US$", or "$" are to United States dollars, and all references to "Shekels" or "NIS" are to New Israeli Shekels.
3
Table of Contents
| 6 | ||
| 6 | ||
| 6 | ||
| 6 | ||
|
A. |
[Reserved] |
6 |
|
B. |
Capitalization and indebtedness |
6 |
|
C. |
Reason for the offer and use of proceeds
|
6 |
|
D. |
Risk Factors |
6 |
|
32 | ||
|
A. |
History and Development of the Company
|
32 |
|
B. |
Business Overview |
33 |
|
Principal Markets |
36 | |
|
Manufacturing and Suppliers |
36 | |
|
Marketing Channels |
38 | |
|
Patents and Licenses |
40 | |
|
Competition |
41 | |
|
Governmental Regulation Affecting the Company
|
42 | |
|
C. |
Organizational Structure |
43 |
|
D. |
Property, Plant and Equipment |
43 |
| UNRESOLVED STAFF COMMENTS |
44 | |
| OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
44 | |
|
A. |
Operating Results | 45 |
|
B. |
Liquidity and Capital Resources |
49 |
|
C. |
Research and development, patents and licenses,
etc. |
51 |
|
D. |
Trend Information |
53 |
|
E. |
Critical Accounting Estimates |
54 |
| 56 | ||
|
A. |
Directors and Senior Management |
56 |
|
B. |
Compensation |
58 |
|
Board of Directors |
63 | |
|
External Directors |
64 | |
|
Audit Committee |
68 | |
|
Compensation Committee |
70 | |
|
D. |
Employees |
75 |
|
E. |
Share Ownership |
77 |
| 78 | ||
|
A. |
Major Shareholders |
78 |
|
B. |
Related Party Transactions |
79 |
| ITEM 8. | 81 | |
|
A. |
Consolidated Statements and Other Financial Information |
81 |
|
B. |
Significant Changes |
81 |
| THE OFFER AND LISTING |
82 | |
|
A. |
Offer and Listing Details |
82 |
|
Markets and Share Price History |
82 | |
4
|
83 | ||
|
A. |
Share Capital |
83 |
|
B. |
Memorandum and Articles of Association
|
83 |
|
C. |
Material Contracts |
93 |
|
D. |
Exchange Controls |
93 |
|
E. |
Taxation |
94 |
|
F. |
Dividends and Paying Agents |
104 |
|
G. |
Statement by Experts |
104 |
|
H. |
Documents on Display |
104 |
|
I. |
Subsidiary Information |
105 |
| 105 | ||
|
Interest Rate Risk |
105 | |
|
Foreign Currency Exchange Risk |
106 | |
| 108 | ||
| 108 | ||
| 108 | ||
| 108 | ||
| 108 | ||
|
Disclosure Controls and Procedures |
108 | |
|
Management's Annual Report on Internal Control
over Financial Reporting |
108 | |
|
Inherent Limitations on Effectiveness of Controls
|
109 | |
|
Changes in Internal Control over Financial
Reporting |
109 | |
| 109 | ||
| 109 | ||
| 109 | ||
| 109 | ||
| 110 | ||
|
Audit committee's pre-approval policies and
procedures |
110 | |
| 111 | ||
| 111 | ||
| 112 | ||
| 112 | ||
| 115 | ||
| 115 | ||
| 115 | ||
| 115 | ||
| 115 | ||
| 116 | ||
5
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. Reason
for the Offer and Use of Proceeds
Not Applicable.
D. Risk
Factors
This annual report and statements that we may make from time to
time may contain forward-looking information. There can be no assurance that actual results will not differ materially from our expectations,
statements or projections. Factors that could cause actual results to differ from our expectations, statements or projections include
the risks and uncertainties relating to our business described below.
Summary of Risk Factors
An investment in our ordinary shares is subject to a number of
risks. The following summarizes some, but not all, of these risks. Please carefully consider all of the information discussed in “Item
3. Key Information—D. Risk Factors” in this annual report for a more thorough description of these and other risks.
6
Risks Related to Our Business and Industry
| • |
The dollar cost of our operations in Israel may increase to the extent the results of inflation in Israel are not offset by a devaluation
of the NIS against the dollar. |
| • |
We may not be able to capitalize, as planned, on our Design Wins. |
| • |
The market for Cloud-based and Cloud-focused solutions is rapidly developing, and if it develops in ways that differ from our expectations,
our business could be harmed. |
| • |
The market for Edge Networking Devices to Telcos and service providers for NFV or SD-WAN deployments is rapidly developing, and if
it develops in ways that differ from our expectations, our business could be harmed. |
| • |
Should the market for Infrastructure Deployment of 4G/5G Distributed Units and User Plan Functionality, or UPF acceleration with
the Telcos and Mobile operators develops in ways that differ from our expectations, our business could be harmed. |
| • |
Rapid development of our business in the Cloud-based, Telco and service providers' markets may require us to offer our potential
customers with longer payment terms to better position ourselves in these markets, to hold higher inventory levels and to significantly
increase our need for working capital. |
| • |
Our networking and data infrastructure solution products which are targeted by us mainly to customers in the OEM, Cloud, Telco, Mobile
and related service providers' markets, are characterized by long sales cycles. |
| • |
The loss of Design Wins from customers in the Cloud, Telco, Mobile and related service providers' markets may result in significant
quarterly and even annual fluctuations in our revenues. |
| • |
Rapid development of our business in the Cloud, Telco, Mobile and related service providers' markets may lead to a decrease in our
gross margins which may result in a decrease in our profitability. |
| • |
Should some of our customers explore various technologies during their development process in ways which are not compatible with
our solutions, this may result in them deciding to pursue different solutions even after we secured Design Wins with such customers, which
may impair our financial results. |
| • |
A loss of a material Design Win may lead to a decrease in the volume of orders placed in relation to such Design Win, which would
impair our financial results. |
| • |
Difficulties in the fulfillment of financial obligations of one or more of our customers may have an adverse effect on our ability
to collect consideration payable under purchase orders placed by such customers. |
| • |
We may not be successful in achieving and consummating Design Wins for our products for the Cloud, Telco, Mobile and the service
providers markets, which constitute a main source of growth. |
| • |
Significant growth in markets demanding functionality similar to the functionality offered by certain of our products may cause manufacturers
to integrate such characteristics into server motherboards or increase the market share of servers and appliances that already have such
functionality in-built, eliminating the need for our products. |
7
| • |
Our customers may replace the servers and appliances they currently use, use or sell servers and appliances that do not require our
cards, and/or incorporate cards other than ours. |
| • |
We may experience difficulty in developing solutions for servers and appliances with proprietary interfaces, which may be used by
some of our potential customers. |
| • |
The short lead time of customer orders versus the long lead time of our component suppliers could result in either a surplus or lack
of sufficient supplies. |
Risks Related to Operations
in Israel and Internationally
| • |
The tax benefits available to us under Israeli law require us to meet several conditions and may be terminated or reduced in the
future, which would increase our taxes. |
| • |
The government programs and benefits, which we previously received, require us to meet several conditions in order to transfer intellectual
property and know-how developed using government funding abroad, or in order to consummate a change of control. |
| • |
The political environment and hostilities in Israel could harm our business. |
Risks Related to our Ordinary
Shares
| • |
We may experience a decline in our share price, including during periods of uncertainty in global economic conditions, and there
is no guarantee that our share price will remain stable or not decline. |
| • |
If we are characterized as a passive foreign investment company for U.S. federal income tax purposes, our U.S. shareholders may suffer
adverse tax consequences. |
General Risk Factors
| • |
Our business may be adversely impacted by risks arising from a widespread outbreak of an illness or any other communicable disease.
|
| • |
Unfavorable or unstable economic conditions in the markets in which we operate could have a material adverse effect on our business,
financial condition, or operating results. |
| • |
Loss of our sources for certain key components could harm our operations. |
| • |
The markets for our products change rapidly and demand for new products is difficult to predict. |
| • |
We may need to invest significantly in research and development and business development in order to diversify our product offering
and enter new markets. |
8
| • |
Our short lead time of customer orders introduces uncertainty into our revenues and severely limits our ability to accurately forecast
future sales. |
| • |
The fluctuations in components' lead time and price may adversely affect our business. |
| • |
The decrease in demand for basic/standard server adapters may adversely affect our business. |
| • |
The loss or ineffectiveness of any of our key customer relationships or a reduction of purchase orders by such customers may have
a material adverse effect on our operations and financial results. |
| • |
We are dependent on key personnel. |
| • |
We may not be able to protect our intellectual proprietary rights. |
| • |
Inability to cooperate with and receive information from our key component manufacturers could affect our ability to develop new
products. |
| • |
We may make acquisitions or pursue mergers that could disrupt our business and harm our financial condition. |
| • |
We may be subject to risks associated with laws, regulations, economic sanctions and customer initiatives, which may force us to
incur additional expenses and add complexities to our supply chain and operations. |
| • |
We depend on governmental licenses for our exports. |
| • |
Significant disruptions of our information technology systems or breaches of our data security could adversely affect our business.
|
Risks Related to Our Business and Industry
The dollar cost of our operations
in Israel may increase to the extent any continued increases in the rate of inflation in Israel are not offset by a devaluation of the
NIS in relation to the dollar.
Inflation in Israel increased significantly during 2022 and was
5.3% on an annualized basis. Any continued increase in the rate of inflation in Israel, unless the increase is offset on a timely basis
by a devaluation of the NIS in relation to the dollar, may increase labor and other costs, such as our property lease agreements, which
will increase the dollar cost of our operations in Israel and may harm our results of operations.
We may not be able to capitalize,
as planned, on our Design Wins.
Once we secure a Design Win, we may not be able to properly capitalize
on such Design Win. For example, we may not receive revenues from a Design Win due to the customer deciding to hold back the introduction
of its product or service, of which our Design Win product is a component, to the market. Alternatively, we may experience delays in receiving
revenues from a Design Win due to circumstances unrelated to us, such delays may stem from delays in the deployment of the customer's
product/service in the market. Delays may also lead to a request by the customer to change the specifications of our product due to changes
in industry standards and/or market requirements. There is no assurance that we will be able to secure a Design Win for the product with
the new specifications. A customer may also experience a lower demand than forecasted by the customer at the time of securing the Design
Win for its product/service, which will accordingly affect its demand for our Design Win product. Additionally, the Design Win client
may decide to abandon the use of our product and use an alternate source. The adoption of new restrictions relating to the spread of Covid-19,
which may occur in various geographies globally, as well as other factors which may affect our supply chain, such as the war in Ukraine
and related business disruptions and sanctions, as well as U.S. restrictions on certain trade with China, may result in us experiencing
extended delays in materialization of revenue from Design Wins, as mentioned above.
9
The market for Cloud-based
and Cloud-focused solutions is rapidly developing, and if it develops in ways that are different from what we anticipate or expect, our
business could be harmed.
In recent years, the Cloud-based market has rapidly developed,
and the demand for Cloud-based data centers utilizing virtualization and SDN has increased. We expect that this increase in demand will
lead to increased demand for our CPE/EDGE products as well as for our networking, offloading and acceleration related Field Programmable
Gate Arrays, or FPGAs. We also expect the Cloud-based data centers to be increasingly based on generic server platforms. These platforms
will require offload capabilities in order to address the performance challenges resulting from enormous volume of traffic, the high volume
of data, the need to encrypt such data, the need to run in virtualized environment, which by itself is a challenge for the server CPU,
and the need to include switching within the server for high efficiency SDN. We anticipate the demand for add-on adapters which address
these challenges will grow. Power, heat and space limitations in such environments increase the need for hardware accelerators. Such systems
will require essential building blocks in their own generic severs, which can be served by our products.
While we believe that we address the above needs with a comprehensive
suite of products, many factors may affect the market acceptance of cloud-based and cloud-focused solutions, the achievement of Design
Wins relating to such solutions, the consummation of Design Wins achieved by us and/or the acceptance of products incorporated into such
solutions. Some of these factors include the possibility of seeing a reduction in the number of physical servers and appliances required
by the providers of cloud based or virtualized solutions, or the evolving of different architecture designs which provide for functionality
which our products offer without the need for our products. These factors may also affect our ability to accurately predict the anticipated
revenues which may be generated under any such Design Win, our growth potential in the Cloud, our operations, including our inventory
levels, and our financial results.
In addition, we believe that market's demand for our products and
solutions in the Cloud demonstrates that the ongoing industry transition to the Cloud continues to represent a fast-growing opportunity
for us. Nonetheless, if significant organizations providing Cloud based solutions or other virtualized networks do not perceive the benefits
of our cloud-focused and/or virtualized network based solutions, or if our competitors or new market entrants are able to develop solutions
for this market that do not require products such as ours, or offer features that are, or are perceived to be, more effective than our
solutions, this would have a material adverse effect on our ability to achieve and/or consummate Design Wins, on our business, and on
our results of operations and financial condition.
10
The market for Edge Networking
Devices to Telcos and service providers for NFV or SD-WAN deployments is rapidly developing, and if it develops in ways that are different
from what we anticipate or expect, our business could be harmed.
Recently, with the evolution of the NFV and SD-WAN, most Telcos
and service providers have begun seeking for solutions which utilize CPEs for the deployment of SD-WAN or other applications within an
NFV architecture. We believe that our CPE products address the requirements of such Telcos and service providers' needs and requirements,
and in recent years we secured several Design Wins for such products.
While we believe that we address the above needs with a comprehensive
suite of products, many factors may affect the market acceptance of such solutions and our ability to secure Design Wins and/or awards
in this market. Some of these factors include our relatively limited experience in transacting with such Telcos and service providers,
the possible offering of a wider selection of products by some of our competitors, or the possible offering by our competitors of products
which include wider, better suited or more advanced features than the ones included in our products, development of technologies with
which our current products may not be compatible, and the price expectations of such Telcos and service providers which may require us
to offer our products for lower prices in order to better position ourselves in the market, or remain competitive, thus leading to lower
gross profit, which in turn may have an adverse effect on our financial results.
We believe that the market's demand for our products and solutions
in the NFV and SD-WAN era demonstrate that the Telcos' and service providers' related industry is transitioning into CPEs which represent
a fast growing opportunity for us. Nonetheless, if such Telcos and service providers do not perceive the benefits of our Edge Networking
CPEs, or if our competitors or new market entrants are able to develop solutions for this market that are better suited to the market
demand, offer their solutions at lower prices, or offer features that are, or are perceived to be, more effective than ours, this would
have a material adverse effect on our business, results of operations and financial condition.
The market for Infrastructure
Deployment of 4G/5G Distributed Units and UPF acceleration with the Telcos and Mobile operators is rapidly developing, and if it develops
in ways that are different from what we anticipate or expect, our business could be harmed.
Recently, with the evolution of O-RAN, most Telcos have begun seeking
solutions that are compliant with the Disaggregation and Decoupling trends, especially in the Distributed Units market and with respect
to UPF acceleration, where, in both cases, solutions are required which are stand alone and not a part of a comprehensive solution.
While we believe that we address the above needs with a comprehensive
suite of products, many factors may affect the market acceptance of such solutions and our ability to secure Design Wins and/or awards
in this market. Some of these factors include our limited experience in transacting with such mobile operators, the possible offering
of a wider selection of products by some of our competitors, or the possible offering by our competitors of products which include wider,
better suited or more advanced features than those included in our products, development of technologies with which our current products
may not be compatible, and the price expectations of such Telcos and Mobile operators which may require us to offer our products at lower
prices in order to better position ourselves in the market, or remain competitive, thus leading to lower gross profit, which in turn may
have an adverse effect on our financial results.
11
We believe that the market's demand for our products and solutions
in the infrastructure deployment for 4G/5G Distributed Units and UPF acceleration demonstrates a transition by the Telcos and related
industry into O-RAN, which represents a fast-growing opportunity for us. Nonetheless, if such Telcos do not perceive the benefits of our
offering to the market, or if our competitors or new market entrants are able to develop solutions for this market that are better suited
to the market demand, offer their solutions at lower prices, or offer features that are, or are perceived to be, more effective than ours,
this would have a material adverse effect on our business, including the results of operations and our financial condition.
Rapid development of our
business in the Cloud-based, Telco and service providers' markets may require us to offer our potential customers with longer payment
terms in order to better position ourselves in these markets, to hold higher inventory levels and to increase our need for working capital
significantly.
Rapid development of our business in the Cloud-based, Telco, and
service providers' markets, which we consider major sources of growth in the future, may require us to offer longer payment terms to our
targeted customers in the Cloud, Telco and service providers markets as customary in these markets, in order to establish and maintain
relationships with such targeted customers and strengthen our competitive position in such markets. In addition, we may be required by
such customers to hold higher inventory levels in order to meet their expectations for on-demand deliveries, making the higher available
inventory pivotal to our ability to position ourselves and compete in such markets. These factors may significantly increase our need
for working capital in order to support our activities in these markets.
Our networking
and data infrastructure solution products which are targeted by us mainly to customers in the OEM, Cloud, Telco, Mobile and related service
providers' markets, are characterized by long sales cycles.
We target and sell our networking and data infrastructure solution
products to customers mainly in the original equipment manufacturing ("OEMs"), Cloud, Telco, Mobile and related service providers' markets.
We usually sell our products to such customers after achieving Design Wins, which are secured after a process which ends with the implementation
of our products in our customers' systems or their deployment within the relevant customer's network. Securing Design Wins is a lengthy,
time-consuming process, which involves the decision making process of our customers, which usually includes several time consuming processes
as well, resulting from the critical importance of our products in our customers' systems or networks. Our customers usually need to define
the required configuration of their server system, appliance or network, define the needed solution and the type of products that will
address their need, evaluate our products, test and qualify our products for their use and then (or in parallel) negotiate the terms for
a purchase. This process is lengthy and may result in investing twelve months or more from the time we first contact a prospective customer
before such customer implements our products in its system, appliance or network, constituting what is known as a Design Win. Additionally,
once a Design Win for one of our products is secured, our sales of these products typically involve significant capital investment decisions
by the customer or its prospective end customers, as well as a significant amount of time to educate such end customers as to the benefits
of systems and appliances that include our products. As a result, before initiating the deployment of our products within their infrastructure,
and before purchasing systems and appliances, which include our products (and consequently facilitating sales of our products), our potential
customers usually invest a substantial amount of time performing internal reviews and obtaining capital expenditure approvals, thereby
lengthening the period of time required for a Design Win to mature into consistent sales. These long sale cycles make it difficult to
predict when and to what extent, discussions with potential customers will materialize into sales and could cause our revenue and operating
results to fluctuate widely from period to period. These long sale cycles may be especially exacerbated due to the spread of Covid-19,
as detailed above. In addition, once a Design Win has been secured, the ramp-up of sales under the Design Win is dependent on various
factors which are not under our control. This introduces uncertainty as to our ability to accurately predict the ramp-up of sales of our
products, may result in significant quarterly, or even annual, fluctuations in the sale rates of our products and may have an adverse
effect on our backlog, actual sales and results of operation.
12
Furthermore, we are required to allocate significant resources
in order to compete for the achievement of Design Wins. Since there is no guarantee that we will be successful in achieving such Design
Wins or that secured Design Wins will materialize into consistent sales in the competitive and rapidly evolving market in which we operate,
unsuccessful efforts to secure or materialize Design Wins may lead to substantial increases in our expenditures, divert the attention
of our sales force and management from other business opportunities, and could ultimately have a material adverse effect on our business,
results of operations and financial condition.
The loss of Design Wins
from customers in the Cloud, Telco, Mobile and related service providers' markets may result in significant quarterly and even annual
fluctuations in our revenues.
The Cloud, Telco, Mobile and related service providers' markets
constitute major sources of growth. We anticipate that Design Wins secured from customers in these markets would be significantly larger
in size than our Design Wins from other customers. In light of the risk factors related to our operations in the Cloud, Telco, Mobile
and related service providers' markets as detailed elsewhere in this Annual Report, we may experience losses of Design Wins in such markets,
for which we may not be able to compensate in a timely manner. The losses of such Design Wins may result in significant quarterly or even
annual fluctuations in our revenues and results of operations.
Rapid development of our
business in the Cloud, Telco, Mobile and related service providers' markets may lead to a decrease in our gross margins which may result
in a decrease in our profitability.
Rapid development of our business in the Cloud, Telco, Mobile and
related service providers' markets, and our increasing operations and efforts in these markets, require us to adopt a lower gross margin
strategy relative to our gross margins in past years, in order to take advantage of increased revenue potential and opportunities in these
markets. While in the past we were able to increase our profitability while operating under such lower gross margins, there can be no
assurance that we will be able to maintain or increase our profitability and/or earnings per share in the future and we may not be successful
in maintaining or increasing our profitability and/or earnings per share while operating under such lower gross margins in the future.
The rapid development
of the Cloud, Telco, Mobile and related service providers' markets may lead certain of our customers to explore various technologies at
different points in time during their development process, which are not necessarily compatible with our solutions, or for which our solutions
are not designed, for their own internal reasons, even after we secured Design Wins with such customers, and may ultimately decide to
pursue different solutions than ours, which may impact our ability to fully consummate our sales under such secured Design Wins and impair
our financial results.
The rapid development of the Cloud, Telco, Mobile and related service
providers' markets may lead some of the players in these markets to explore different technologies in the course of their internal development
process. Even if we secure Design Wins with some of these players, there is no guarantee that such players will ultimately decide to develop
or commercialize their products for which our solutions were selected, for reasons which are not related to us and which are not under
our control. If such players decide to pursue other paths than the ones for which we secured Design Wins, we may be unable to consummate
such Design Wins, which may lead to excess inventory levels and write-offs, that may increase our costs. These factors may increase our
operational efforts and expenses. We may also be required to find alternative use for any unused inventory relating to such Design Wins,
and if we are unable to find such alternative use or sell such inventory to other customers, we may experience write-offs. All of these
factors may have a material adverse effect on our financial condition and results of operation. While we focus our efforts on securing
Design Wins in these markets, our share price may decline as a result of cancellation of such Design Wins in these markets, if they occur.
A loss of a material Design
Win may lead to a decrease in the volume of orders placed in relation to such Design Win by a few of our customers, which would be harmful
for our business and impair our financial results.
In some cases, one of our Design Wins may lead to the placement
of purchase orders for our products by several of our customers for the purpose of integrating our products into other systems, as part
of the assembly process relating to the said Design Win. The loss of such material Design Win may lead to a decrease in the purchase orders
placed by such customers, impair our revenues generated from such customers and have a material adverse effect on our business and financial
results.
13
Difficulties in the fulfillment
of financial obligations of one or more of our customers may have an adverse effect on our ability to consummate the collection of consideration
payable under purchase orders placed by, or invoiced to, such customers under one or more Design Wins in relation to which such customers
operate.
Certain customers may become significant to us. In some cases,
a customer will place orders for our products under several Design Wins for the purpose of integrating our products into other systems.
In other cases, a customer, especially, but not limited to, those active in the Cloud, Telco, Mobile and related markets, will place very
significant orders for a single Design Win with us. Difficulties in the fulfillment of such customers' financial obligations towards us
may expose us to credit risks, may have a material adverse effect on our business, including on our ability to consummate the collection
of consideration payable by, or invoiced to, such customer in connection with the Design Wins under which such customer placed orders,
may lead to financial losses, may increase our collection expenses, may lead to excess inventory levels, may lead to significant write-offs,
may cause legal disputes, may delay the consummation of the relevant Design Win and may ultimately lead to the reduction in the volume
of orders placed under such Design Win, or even lead to the cancellation thereof. This may have a material adverse effect on our business,
financial condition, and results.
We may not be successful
in achieving and consummating Design Wins for our products for the Cloud, Telco, Mobile and the service providers markets, which constitute
a main source of growth.
Our ability to achieve Design Wins for our products for the Cloud,
Telco, Mobile and related service providers' markets, and to consummate the sales of our products under Design Wins achieved, is dependent
on a large number of factors, many of which are out of our control. These factors include the highly competitive nature of the markets
in which we operate, including the Cloud, Telco, Mobile and service providers' markets, the long sale cycles of our products to our OEMs,
Cloud, Telco and Mobile customers, as well as other factors detailed in this Item 3.D. In addition, the loss, ineffectiveness or inability
to maintain our customer relationships or our inability to develop new customer relationships, especially due to limitations on travel
and meetings, which are still imposed from time to time, and the general disruption of our business by external factors such as the Covid
virus, may have an adverse effect on our ability to achieve, secure or consummate Design Wins for our Cloud, Telco, Mobile and service
providers' related products.
Significant growth in
markets demanding functionality similar to the functionality offered by certain of our products may cause manufacturers to integrate such
characteristics into server motherboards or increase the market share of servers and appliances that already have such functionality in-built,
eliminating the need for our products.
A significant portion of our products are add-on adapters that
are added to existing servers in order to improve their functionality. If demand for improved functionality similar to that of our add-on
adapters increases significantly, server manufacturers may begin incorporating such functionality as a part of the basic design of their
servers, thereby eliminating the need to achieve such functionality through add-on adapters. Furthermore, the market-share of special
purpose servers and appliances that already have such functionality built-in may increase, consequently reducing the market share of solutions
based on servers with add-on adapters. We cannot provide assurance that such a trend will
not occur in connection with our add-on adapters or any of our other products. Such a trend would have a material adverse effect on our
business, results of operations and financial condition.
14
Our customers may replace
the servers and appliances they currently use, use or sell servers and appliances that do not require our cards, and/or incorporate cards
other than ours.
Many of our customers that use and/or sell servers and appliances
which include our cards do so for a few years, and then consider migration to a newer generation. We cannot guarantee that our cards will
be needed or selected for such new generation or compatible with it. A decision by a current customer to select a new server and/or appliance
without including our cards in such new server and/or appliance may have a significant adverse effect on our results of operations and
financial condition.
We may experience difficulty
in developing solutions for servers and appliances with proprietary interfaces, which may be used by some of our potential customers.
The market for networking and data infrastructure includes servers
and appliances that make use of proprietary interfaces. These servers and appliances are offered to our potential customers in addition
to the customary servers and appliances which use standard interfaces. Our potential customers may decide to use servers and appliances
with such proprietary interfaces instead of the customary standard interfaces for which several manufacturers may provide add-on cards.
There can be no assurance that we would be able to develop non-standard add-on cards for servers and appliances with proprietary interfaces
or, if we are successful in developing such cards, that manufacturers of the proprietary interfaces or the customers electing to use these
interfaces will make use of our cards in such non-standard environments.
The short lead time of
customer orders combined with the long lead time of our suppliers when ordering certain components for our products could result in either
a surplus or lack of sufficient supplies and may negatively impact on our financial results.
While we are generally required to fill orders for our products
within one or two weeks following the receipt of a firm purchase order, we are usually required to place orders of certain components
for our products within sixteen to twenty weeks prior to delivery, and more recently, in many cases, even earlier, where the global supply
chains are affected by the external disruptions detailed above. As a result, we must have a significant amount of components in our inventory
to be able to meet our best forecasts of projected purchase orders as opposed to on the basis of firm purchase orders. In the event that
firm purchase orders are significantly lower than such forecasts, a significant part of our inventory will not be used and we may be unable
to adjust costs in a timely manner to compensate for revenue shortfalls and in the event that firm purchase orders exceed such forecasts,
we will not be able to fulfill such purchase orders which may lead to the loss of business from a customer.
15
Risks Related to Operations in Israel and Internationally
The tax benefits
available to us under Israeli law require us to meet several conditions and may be terminated or reduced in the future, which would increase
our taxes.
Our production facilities have been granted "Approved Enterprise"
or "Benefited Enterprise" or "Preferred Enterprise" status in past years and we currently report as a "Preferred Technological Enterprise",
under the Encouragement of Capital Investments Law, and as such, we are entitled to certain tax benefits. In order to be eligible for
these tax benefits, we must meet certain conditions. If we fail to meet these conditions in the future, the tax benefits could be reduced
or canceled. These tax benefits may not be continued in the future at their current levels, or at any level. The termination or reduction
of these benefits may increase our income tax expense in the future. To the best of our knowledge, to date we have met the conditions
for benefits under our "Preferred Technological Enterprise" status in all material respects. There can be no assurance, however, that
we will continue to meet such conditions in the future. If these tax benefits are reduced, cancelled, or discontinued, our Israeli taxable
income would be subject to "regular" Israeli corporate tax rate. In December 2016, the regular tax rate in Israel was reduced to 24% in
2017 and to 23% as from 2018 and thereafter. See "Item 10 – Additional Information – Taxation – the Encouragement of
Capital Investments Law, 1959" for more information about our "Preferred Technological Enterprise" status.
The government programs
and benefits, which we previously received, require us to meet several conditions in order to transfer intellectual property and know-how
developed using government funding abroad, or in order to consummate a change of control.
We received grants from the Government of Israel through programs
with the Office of the Chief Scientist of the Israeli Ministry of Economy and Industry (known as the Israel Innovation Authority, or the
"IIA")to the Israeli Law for the Encouragement of Industrial Research, Development and Technological Innovation, 1984, and related regulations
(the "RD Law").
The RD Law and the IIA impose certain limitations with respect
to transfer of manufacturing rights and know-how, as well as to change of control in companies which receive government funding from the
IIA. Under the IIA rules, the IIA needs to be notified of any offering and the IIA grants and attendant restrictions need to be disclosed
in any applicable prospectus. Companies which received governmental funding from the IIA are also subject to increased payment obligations
with respect to outsourcing or transferring development or manufacturing activities with respect to any product or technology developed
using IIA funding outside of Israel, which may impair our ability to sell such technology assets outside of Israel or to outsource, transfer
development, or manufacturing activities with respect to any such product or technology outside of Israel, or impose difficulties in consummation
of a change of control in the Company.
16
The political environment
and hostilities in Israel could harm our business.
Since the establishment of the State of Israel in 1948, a state
of hostility has existed between Israel and the Arab countries in the region. This state of hostility has varied in degree and intensity
over time. There has also been conflict and unrest between Israel, the Palestinian Authority and certain terrorist groups operating within
the Palestinian Authority and Lebanon.
Also, Israel has been engaged, from time to time, in armed conflicts
with Hamas. These conflicts involve missile strikes against civilian targets in the southern and northern parts of Israel and have also
involved such missile strikes against central parts of Israel, most recently in April 2023. All of the above raise a concern as to the
stability in the region, which may affect the political and security situation in Israel and therefore could adversely affect our business,
financial condition and results of operations.
Civil unrest and political turbulence have occurred in many other
countries in the region, including those which share a common border with Israel, and is affecting the political stability of those countries.
This instability and any intervention may lead to deterioration of the political and economic relationships that exist between the State
of Israel and some of these countries, and may have the potential for additional conflicts in the region. In addition, Iran has threatened
to attack Israel and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist
groups in the region, such as Hamas in Gaza, and Hezbollah in Lebanon. Iran is known to support the government of Syria in its battles
against various rebel militia groups in Syria.
Any future armed conflict, political instability, continued violence
in the region or restrictions could have a material adverse effect on our business, operating results and financial condition. While such
hostilities did not in the past have a material adverse impact on our business, we cannot guarantee that hostilities will not be renewed
and have such an effect in the future. The political and security situation in Israel may result in parties with whom we have contracts
claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions.
Any hostilities involving Israel or the interruption or curtailment
of trade between Israel and its present trading partners could adversely affect our operations and could make it more difficult for us
to raise capital or obtain components used in our products. Since many of our facilities are located in Israel, we could experience serious
disruptions if acts associated with this conflict result in any serious damage to our facilities. Any insurance coverage we may have may
not adequately compensate us for losses that may occur and any losses or damages incurred by us could have a material adverse effect on
our business. Any future armed conflict or political instability in the region could negatively affect business conditions and harm our
results of operations.
Furthermore, several countries still restrict trade with
Israeli companies and additional countries may impose such restrictions as a result of changes in the military and/or political conditions
in Israel and/or the surrounding countries, which may limit our ability to make sales in, or purchase components from, those countries.
In addition, such boycott, restrictive laws, policies, or practices may change over time in unpredictable ways, and could, individually
or in the aggregate, have a material adverse effect on our business in the future. Should the BDS Movement, the movement for boycotting,
divesting and sanctioning Israel and Israeli institutions (including universities) and products become increasingly influential in the
United States, Europe and around the world, this may also adversely affect our business and financial condition.
17
Since early 2023, the current Israeli government has pursued radical
reform to Israel’s judicial system. In response to such developments, Israel has seen mass civilian protests and individuals, organizations,
and financial institutions, both within and outside of Israel, have voiced concerns that the proposed changes may negatively impact the
business environment in Israel. 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, and to
attract or retain qualified and skilled “talents” and personnel. We can give no assurance that the political, economic and
security situation in Israel will not have a material adverse impact on our business in the future.
Many of our employees in
Israel are required to perform military reserve duty.
All non-exempt male adult citizens and permanent residents of Israel
under the age of 40, or older for reserves officers or citizens with certain occupations, as well as certain female adult citizens and
permanent residents of Israel, are obligated to perform military reserve duty and may be called to active duty under emergency circumstances.
In recent years, there have been significant call-ups of military reservists, and it is possible that there will be additional call-ups
in the future. While we have operated effectively despite these conditions in the past, we cannot assess what impact these conditions
may have in the future, particularly if emergency circumstances arise. Our operations could be disrupted by the absence for a significant
period of one or more of our executive officers or key employees or a significant number of our other employees due to military service.
Any disruption in our operations would harm our business.
Exchange rate fluctuations
and international risks could increase the cost of our operations.
Approximately 95% of our international sales are denominated in
U.S. Dollars and may be subject to government controls and other risks, including, in some cases, export licenses, federal restrictions
on export, currency fluctuations, political instability, trade restrictions, and changes in tariffs and freight rates. Our U.S. dollar
costs in Israel and Denmark will increase further to the extent that inflation in Israel and/or Denmark exceeds the devaluation of the
NIS and/or Danish Krone ("DKK"), respectively, against the dollar, if the timing of such devaluation lags behind inflation in Israel and/or
Denmark, or if the dollar devalues against the NIS and/or DKK.
Israeli courts might not
enforce judgments rendered outside of Israel.
We are incorporated in Israel. All of our executive officers and
directors are non-residents of the United States, and a substantial portion of our assets and the assets of these persons are located
outside the United States. Therefore, it may be difficult to enforce a judgment obtained in the United States against us or any such persons.
It may also be difficult to enforce civil liabilities under U.S. federal securities laws in original actions instituted in Israel. However,
subject to certain time limitations, Israeli courts may enforce U.S. final executory judgments for liquidated amounts in civil matters
obtained after due trial before a court of competent jurisdiction (according to the rules of private international law currently prevailing
in Israel) which enforces similar Israeli judgments, provided that the requisite procedural and legal requirements are adhered to.
If a foreign judgment is enforced by an Israeli court, it generally
will be payable in NIS, which can then be converted into foreign currency at the rate of exchange of such foreign currency on the date
of payment. Pending collection, the amount of the judgment of an Israeli court stated in NIS (without any linkage to a foreign currency)
ordinarily will be linked to the Israeli consumer price index plus interest at the annual statutory rate prevailing at such time. Judgment
creditors bear the risk of unfavorable exchange rates.
18
Risks Related to our Ordinary Shares
We may experience a decline
in our share price, including during periods of uncertainty in global economic conditions, and there is no guarantee that our share price
will remain stable or not decline.
In the past, our share price has declined, including during periods
of uncertainty in global economic conditions, and we may be affected by, among others, the current downturn in economic conditions. We
cannot assure you that our share price will remain stable or not decline in the future.
We may not be able to distribute
dividends in the future.
On January 14, 2013, we announced a dividend policy for distributing
up to 50% of our annual distributable profits as a dividend. As part of the stated dividend policy the Company's Board of Directors reserved
the right to declare additional dividend distributions, to change the rate of dividend distributions (either as a policy or on a one-time
basis), to cancel a specific distribution or to cancel the policy as a whole at any time, at its sole discretion. On March 15, 2018, our
Board of Directors adopted a resolution to suspend until further notice the said dividend policy.
Our ability to distribute dividends in the future may be adversely
affected by the risk factors described in this report. Any dividend will depend on our earnings, capital requirements, financial condition
and other business and economic factors affecting us at the time as our board of directors may consider relevant. Our ability to pay cash
dividends may be restricted by instruments governing any of our obligations. We are restricted by Israeli law to pay dividends in any
fiscal year only out of "profits", as defined by the Companies Law, unless otherwise authorized by an Israeli court, and provided that
the distribution is not reasonably expected to impair our ability to fulfill our outstanding and expected obligations. There is no assurance
that we will be able to pay dividends or increase our payment of dividends in the future, nor is there any assurance that our Board of
Directors will not further change or cancel our dividend policy in the future. If we are unable to pay dividends at levels anticipated
by investors in our shares, the market price of our shares may be negatively affected and the value of our shareholders' investment may
be reduced. See "Item 8.A. – Consolidated Statements and Other Financial Information", under the caption "A8. – Dividend Policy"
for additional information regarding the payment of dividends.
19
If we fail
to meet continued listing standards of NASDAQ, our shares may be delisted, which could have a material adverse effect on the liquidity
of our shares.
Our ordinary shares are currently traded on the NASDAQ Global Select
Market. The NASDAQ has requirements that a company must meet in order to remain listed on NASDAQ. In particular, NASDAQ rules require
us to maintain a minimum bid price of US$ 1.00 per share of our ordinary shares. If the closing bid price of our common stock were to
fall below US$ 1.00 per share for 30 consecutive trading days or we do not meet other listing requirements, we would fail to be in compliance
with NASDAQ's listing standards. There can be no assurance that we will continue to meet the minimum bid price requirement, or any other
requirement in the future. If we fail to meet the minimum bid price requirement, the NASDAQ Stock Market may initiate the delisting
process with a notification letter. If our ordinary shares were to be delisted, our liquidity would be adversely affected and our market
price could decrease.
The trading volume of our
shares has been low in the past and may be low in the future, resulting in lower than expected market prices for our shares.
Our shares have been traded at low volumes in the past and may
be traded at low volumes in the future for reasons related or unrelated to our performance. This low trading volume may result in lower
than expected market prices for our ordinary shares and our shareholders may not be able to resell their shares for prices equal to or
higher than the price for which they were purchased.
If we are characterized
as a passive foreign investment company for U.S. federal income tax purposes, our U.S. shareholders may suffer adverse tax consequences.
We will be a passive foreign investment company, or PFIC, if 75%
or more of our gross income in a taxable year, including our pro-rata share of the gross income of any company, U.S. or foreign, in which
we are considered to own, directly or indirectly, 25% or more of the shares by value, is passive income. Alternatively, we will be considered
a PFIC if at least 50% of our assets in a taxable year, averaged over the year and ordinarily determined based on fair market value and
including our pro-rata share of the assets of any company in which we are considered to own, directly or indirectly, 25% or more of the
shares by value, are held for the production of, or produce, passive income. If we were to be a PFIC, and a U.S. Holder does not make
an election to treat us as a "qualified electing fund", or QEF, or a "mark-to-market" election, "excess distributions" to a U.S. Holder,
and any gain recognized by a U.S. Holder on a disposition or our ordinary shares, would be taxed in an unfavorable way. Among other consequences,
our dividends, to the extent that they constitute "excess distributions", would be taxed at the regular rates applicable to ordinary income,
rather than the 20% maximum rate applicable to certain dividends received by an individual from a "qualified foreign corporation", and
certain "interest" charges may apply. In addition, gains on the sale of our shares would be treated in the same way as excess
distributions. The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of future income
and assets, which are relevant to the determination of PFIC status. In addition, under the applicable statutory and regulatory provisions,
it is unclear whether we would be permitted to use a gross loss from sales (sales less cost of goods sold) to offset our passive income
in the calculation of gross income.
20
As a result of our substantial cash position, if the value of our
shares declines, there is a substantial risk that we will be classified as a PFIC under the asset test described above. There can be no
assurance that we will not be classified as a PFIC by the U.S. Internal Revenue Service. In light of the uncertainties described above,
no assurance can be given that we will not be a PFIC in any year. A U.S. Holder who makes a QEF election is taxed currently on such holder's
proportionate share of our earnings, including both ordinary income and net capital gain. If the IRS determines that we are a PFIC for
a year with respect to which we have determined that we were not a PFIC, however, it might be too late for a U.S. Holder to make a timely
QEF election, unless the U.S. Holder qualifies under the applicable Treasury regulations to make a retroactive (late) election. U.S. Holders
who hold ordinary shares during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC, subject
to exceptions for U.S. Holders who made a timely QEF or mark-to-market election, or certain other elections. We do not currently intend
to prepare or provide the information that would enable you to make a Qualified Electing Fund election. Accordingly, our shareholders
are urged to consult their tax advisors regarding the application of PFIC rules.
General Risk Factors
Our
business may be adversely impacted by risks arising from a widespread outbreak of an illness or any other communicable disease, or any
public perception of the risks, related to a pandemic or other health crisis, similar to the COVID-19 pandemic.
Over three years after the World Health Organization declared COVID-19
a pandemic, COVID-19 and its variants have caused and may continue to cause waves of increased infections which may adversely impact economic
activity. The extent to which a pandemic may ultimately impact our business will depend on future developments, which are highly uncertain
and cannot be predicted, such as the geographical spread, duration of the outbreak, and the effectiveness of actions taken in Israel,
the United States and other countries, to contain and treat the disease and address its impact. We, our suppliers and other business partners
may experience significant impairment of business activities due to operational shutdowns or suspensions that may be requested or mandated
by national or local governmental authorities or self-imposed by us, our suppliers or other business partners. We cannot predict whether,
for how long, or the extent to which a pandemic and pandemic containment efforts may disrupt our supply chain and/or operations.
We
may be affected by global economic trends such as recession, rising inflation, rising interest rates, economic slowdown, etc.
Recent inflation, geopolitical
issues, increase in energy costs, increases in interest rates, unstable global conditions and changes in currency exchange rates have
led to global economic instability. Such changes, and their impact on the global macro-economic environment, may adversely affect our
business, operating results, and financial condition.
21
The recent increase in inflation rates in the markets in which
we operate may lead us to experience higher operating costs, as well as a decrease in demand. Our suppliers may raise their prices and,
in the competitive markets in which we operate, we may not be able to make corresponding price increases to preserve our gross margins
and profitability due to market conditions and competitive dynamics. Additionally, should we attempt to increase the price of any of our
products, such increase may not be accepted by our customers. Further, recent increases in interest rates, and any additional increases
in interest rates, may lead us, and our customers, to experience higher financing costs, which may, in turn, negatively affect our business,
financial condition and results of operations. In the event of a global recession or certain other economic conditions we may be forced
to materially reduce our expenses. As a result, we may have difficulty achieving continued profitability during a protracted slowdown.
Despite our record backlog for 2023, it is difficult to make accurate
forecasts regarding our revenues for the near term. This is due to a challenging mixed-signal environment that is impacted both by the
global economic slowdown and the expected continuation of the loosening of the supply chain (following the long period of global component
shortages). As a result, our customers may want to cancel or postpone open purchase orders, which could negatively affect our revenues.
In addition, such negative trends could be exacerbated by, for example, leaving us with inventories which we cannot sell, and/or in the
event that component market prices fall below book value of inventories we hold, resulting in losses, due to devaluation of such held
inventories. This could have an adverse effect on our costs and results of operations.
Environmental, social and governance matters may impact our business
and reputation.
Customers and potential customers are increasingly using ESG screening
criteria in making their business decisions, to provide information relating to our environmental, social and governance, or ESG, practices.
Our failure, or perceived failure, to pursue or fulfill ESG goals, targets and objectives, or to satisfy various ESG reporting standards,
may harm our reputation, impact our relationships with our customers and could adversely affect our business.
Additionally, as ESG best practices, reporting standards and disclosure
requirements continue to develop, we may incur increasing costs related to ESG monitoring and reporting.
Loss of our sources for
certain key components could harm our operations.
Although we generally use standard parts and components for our
products, certain key components used in our products are currently available from only one source, and others are available from a limited
number of sources, on which we depend. Nevertheless, we believe that we maintain a sufficient inventory of these components to protect
against delays in deliveries. However, we cannot guarantee that we will not experience delays in the supply of critical components in
the future or that we will have a sufficient inventory of critical components at such time to produce products at full capacity, especially
due to disruptions to global supply chains, including those related to certain critical components relating to the production of our products,
as detailed above. For example, a key component in many of our cards is manufactured by Intel. While we have not encountered difficulties
in purchasing such components from Intel's distributors, we cannot guarantee that we will continue to be able to purchase such components
without delays or at reasonable prices. In the event that we are not able to purchase key components from our limited sources, or can
only purchase these key components under unreasonable terms, we may need to redesign certain products. We cannot guarantee that we will
have adequate resources for such a redesign or that such a redesign will be successful. Such inability to obtain alternative resources
or to successfully redesign our products could have a material adverse effect on our business, results of operations, and financial condition.
22
The markets for our products
change rapidly and demand for new products is difficult to predict and may affect our ability to commercialize our solutions.
The markets for our products are characterized by rapidly changing
technology and evolving industry standards. For example, the migration to higher line rate Ethernet solutions, the adaptation of new bus
interfaces and increased use of emerging technologies such as Cloud, Virtualization, NFV, SD-WAN, 5G and O-RAN, cause some of our customers
to demand such new products and technologies. In the event that such customers decide to begin using new technologies, we may not be able
to develop products for the new technologies in a timely manner. Such customers may also select competing products despite our ability
to develop products incorporating new technologies. For example, with the shift towards running applications in the Cloud we anticipate
that the demand will grow for add-on adapters and products which address the challenges presented by the Cloud, such as a switch in every
server, hardware acceleration, power, heat and space limitations in such environments, which increase the need for essential building
blocks in generic servers, which can potentially be served by our products. Another example is related to the NFV, SD-WAN, O-RAN
and 5G market sectors, in which our CPE/EDGE (as defined below), as well as our networking, offloading and acceleration related FPGA solutions
may have significant demand. While we have announced the securing of several Design Wins relating to such aforementioned solutions, there
is no assurance that our customers will continue to buy such solutions from us or that we will be able to generate significant sales in
these areas in the long run. If we do not generate significant sales in these areas we may accumulate unusable inventory which can
be used only with older technologies. We intend to continue investing in product and technology development. Although we expect growing
sales in our new market segments, there can be no assurance that we will continue to be successful in the marketing of our current products
and in developing, manufacturing and marketing enhanced and new products in a timely manner. Any decrease in the price of, or demand for,
any of our products or solutions could have a material adverse effect on our business, results of operations and financial condition.
The market for our products
is highly competitive and some of our competitors may be better positioned than us.
The market for our products is highly competitive. We face competition
from numerous companies, some of whom are more established, benefit from greater market recognition and have greater financial, production
and marketing resources than we do. For example, as further detailed in "Item 4.B – Business Overview – Competition", with
respect to Server Adapters, our main competitors are Nvidia, Intel, and Broadcom. However, we believe these companies are targeting mostly
major accounts and we believe rarely offer customized solutions, while we target accounts of all sizes, with a broader product offering
and with various interfaces and form factors. Consequently, we believe that we only overlap with these companies' offerings in a small
part of our target markets.
23
In the Smart Cards products sector, our competition is fragmented
and differs with respect to the specific solution being offered by us. In this sector, Marvel, Nvidia, Netronome, Napatech, Molex, Lanner
and Caswell compete with certain of our Smart Cards. In some cases of FPGA based cards, Intel and AMD also compete with our Smart Cards,
however, similarly to the Server Adapters space, they target mostly the biggest accounts and only with mainstream products, while for
other accounts they cooperate with us.
In the Smart Platforms products sector, our main competitors are
Caswell, Lanner, Advantech and Nexcom.
There may be other solutions which might also compete with our
other products. We cannot guarantee that our present or contemplated products will continue to be distinguishable from those of our competitors
or that the marketplace will find our products preferable to those of our competitors. Furthermore, there can be no assurance that competitive
pressures will not result in price reductions that could materially adversely affect our business, results of our operations and financial
condition.
We may need to invest significantly
in research and development and business development in order to diversify our product offering and enter new markets.
Most of our revenues are generated from the sale of our networking
and data infrastructure solution products. The technology industry in which we operate is characterized by rapid technological changes,
frequent new product introductions, changes in customer requirements and evolving industry standards. While these changes could lead to
a reduction in the demand for our existing products, they could also create an opportunity for us to expand our product offering to our
existing customers and to new customers. Accordingly, our future success may depend on our ability to diversify our product offering and
enter new markets, which could involve numerous risks, including:
| • |
Substantial research and development and business development expenditures, which could divert funds from other corporate uses and/or
have a significant negative effect on our short-term results; |
| • |
Diversion of management's attention from our core business; and |
| • |
Entrance into markets in which we have little or no experience. |
There can be no assurance that we will be able to successfully
complete the development and market introduction of new products and no assurance that we will be able to successfully enter new markets.
This could have a material adverse effect on our business, results of operations and financial condition.
24
We may experience difficulty
in developing new and commercially successful products at acceptable release times.
We conduct extensive research, development and engineering activities.
Our efforts emphasize our view of the importance of and the need for the development of new products, cost reduction of current products,
and enhancement of existing products in response to rapidly changing customer preferences, technologies, and industry standards. We cannot
guarantee the continued success of our efforts, or that our products will continue to be widely accepted by the marketplace or that any
of our ongoing development efforts will result in other commercially successful products, that such products will be released in a timely
manner or at a competitive price, or that we will be able to respond effectively to technological changes or new product announcements
by others. Additionally, this may be exacerbated due to the spread of Covid-19, as detailed above, due to some of our employees being
infected or quarantined along with any periodically imposed lockdowns and travel limitations. Such difficulties along with a material
delay in our ability to release new products, may have a material adverse effect on our business, results of operations and financial
condition.
Our short lead time of
customer orders introduces uncertainty into our revenues and severely limits our ability to accurately forecast future sales.
Our sales are made on the basis of purchase orders, which may
be placed pursuant to Design Wins, rather than long-term purchase commitments. In addition, our customers may defer purchase orders. The
short lead time for firm purchase orders introduces uncertainty into our revenue and production forecasts and business planning, and leads
to our inability to accurately forecast future revenues from product sales. As a result, even dramatic fluctuation in revenue (whether
an increase or decrease) might not be detected until the very end of a financial quarter, which may not enable us to monitor and mitigate
costs in a timely manner in order to compensate for such fluctuation.
The fluctuations in components'
lead time and price may adversely affect our business.
In recent years, the market for electronic components, which
we typically use in our products, has been demonstrating fluctuations in lead time and prices. Such fluctuations are led by some of the
world’s leading vendors for such components and there is a risk that such fluctuations will impact our ability to deliver products
to our customers or to maintain our margins on such products, should they affect components for which we cannot find a replacement in
a timely manner or at a competitive price, and this may have an adverse effect on our business. Delays in lead time and fluctuations in
price, may be further exacerbated by the periodic effects of the Covid virus or other pandemics.
The decrease in demand
for basic/standard server adapters may adversely affect our business.
Over the past few years, we have seen a gradual decrease in
demand for our basic server adapters. There is a risk that the actual decrease in demand would be faster than that projected by us. In
addition, in the case of a decrease in sales, we may accumulate unusable inventory. Any such decrease in the demand for our basic server
adapters could have a material adverse effect on our business, results of operations and financial condition.
25
The possible cancellation
and write-off of capitalized development projects may adversely affect our business.
Capitalized development projects may be cancelled and written-off
due to a change in our strategy (such as that which occurred in 2020 where we aborted some efforts which did not match our focus strategy),
or due to our being unsuccessful in the market, or to other related triggers. Such cancellations may result in a significant one-time
adverse effect on our results of operation.
The loss of a significant
customer may have a material adverse effect on us.
We depend on a small number of customers for our products. Our
top 4 ultimate customers in 2022 accounted for approximately 33% of our revenues in 2022 (out of which our top ultimate customer accounted
for approximately 15% of our revenues in 2022). We expect that a small number of customers will continue to account for a significant
portion of our revenues for the foreseeable future. Loss or cancellation of business from, significant changes in deliveries to, or decreases
in the prices of products sold to, one or more of our key customers has, in the past, significantly reduced our revenues for a reporting
period and could, in the future, harm our business, margins, results of operations, and financial condition.
The loss or ineffectiveness
of any of our key customer relationships or a reduction of purchase orders by such customers may have a material adverse effect on our
operations and financial results.
Our sales and marketing strategy includes development and maintenance
of strategic relationships with leading OEMs in the servers industry and server-based systems industry, as well as with leading Cloud,
Telco and service provider customers, which integrate our products into their own systems, or deploy our products in their network. These
customers are not within our control, are not obligated to purchase our products, and may select other products that may compete with
our lines of products. A reduction in sales efforts or discontinuance of sales of our products by our OEM customers, and/or the reduction
in or discontinuance of deployments by our Cloud, Telco, or service provider customers, could lead to reduced sales and could materially
adversely affect our operating results. In addition, there is the risk that our customers would build up inventories in anticipation of
a growth in sales or deployments. If such growth does not occur as anticipated, such customers may substantially decrease the number of
products ordered in subsequent quarters or discontinue product orders. The termination or loss of either one or more of our key customer
relationships at approximately the same time, without being able to compensate this loss with sales to other customers, may have a material
adverse effect on our operations and financial results.
We are dependent on key
personnel.
Our success has been, and will continue to be, dependent to a large
degree on our ability to retain the services of key personnel and to attract additional qualified personnel in the future. Competition
for such personnel is intense. There can be no assurance that we will be able to attract, assimilate, or retain key personnel in the future
and our failure to do so would have a material adverse effect on our business, financial condition and results of operations.
26
We may not be able to prevent
others from claiming that we have infringed their proprietary rights.
We cannot guarantee that one or more parties will not assert infringement
claims against us. The cost of responding to claims could be significant, regardless of whether the claims have merit. Significant
and protracted litigation may be necessary to determine the scope of the proprietary rights of others or to defend against claims of infringement,
regardless of whether the claims have merit. Although we believe that all our products use only our intellectual property, or intellectual
property which is properly licensed to us, and we are working to ensure that all our employees are properly assigning or licensing to
us all rights to the intellectual property we use in our products on a regular basis, in the event that any infringement claim is brought
against us and infringement is proven, we could be required to discontinue the use of the relevant technology, to cease the manufacture,
use and sale of infringing products, to incur significant litigation damages, costs and expenses, to develop non-infringing technology
or to obtain licenses to the alleged infringing technology and to pay royalties to use such licenses. There can be no assurance that we
would be able to develop any such alternative technologies or obtain any such licenses on terms commercially acceptable to us.
Although in the past we have resolved a claim of infringement through
a license agreement, the terms of which did not have a material effect on our business, any infringement claim or other litigation against
us could seriously harm our business, operating results and financial condition. While there are no other lawsuits or other claims currently
pending against us or our subsidiaries regarding the infringement of patents or intellectual property rights of others, we have been a
party to such claims in the past and may be party to such claims in the future.
We may not be able to protect
our intellectual proprietary rights.
Our success, ability to compete, and future revenue growth are
dependent and will depend, in part, on our ability to protect our intellectual property. It is possible that competitors or other unauthorized
third parties may obtain, copy, use, or disclose our technologies and processes. Any of our existing, acquired, or future patents or other
rights to our intellectual property may be challenged, invalidated, or circumvented. If our intellectual property rights do not adequately
protect our technology, our competitors may be able to offer products similar to ours.
In order to establish and protect the technology we use in our
products, we primarily rely on a combination of non-disclosure agreements and technical measures, and to a lesser degree on patents. We
enter into confidentiality arrangements with our employees, key consultants and other third parties with whom we conduct business. In
addition, our employees and key consultants involved in the development of our technologies are required to sign non-compete and invention
assignment agreements. We also control access to and distribution of our technologies, documentation and other proprietary information.
Despite these efforts, internal or external parties may attempt to copy, disclose, obtain, or use our products, services, or technology
without our authorization.
Despite perceived exclusive access to any intellectual property
rights obtained via acquisition, and our best efforts during any such acquisition process to secure such rights, internal or external
parties may attempt to copy, disclose, obtain, or use our products, services, or technology without our authorization, or others may assert
infringement claims against us with respect to a product of ours which utilizes such acquired intellectual property rights.
27
We believe that the measures we take afford only limited protection,
and accordingly, there can be no assurance that the steps we take will be adequate to prevent the challenging of our rights in our technology,
or misappropriation of our technology or the independent development of similar technologies by others.
In addition, the process of seeking patent protection to our technology
may take a long time and be expensive. We cannot assure that pending or future patent applications will result in the issuance of patents
or that, if patents are issued, they will not be challenged, invalidated, or circumvented or that the rights granted under the patents
will provide us with meaningful protection or any commercial advantage.
In addition, we cannot assure you that other countries in which
we market our services and products will protect our intellectual property rights to the same extent as the United States. Effective intellectual
property enforcement may be unavailable or limited in some countries. It may be difficult for us to protect our intellectual property
from misuse or infringement by other companies in these countries. Our inability to enforce our intellectual property rights in some countries
may harm our business and results of operations. Litigation, which could result in substantial costs to us and diversion of our resources,
may also be necessary to enforce our patents or other intellectual property rights.
Further, we cannot assure you that we will at all times enforce
our patents or other intellectual property rights or that courts will uphold our intellectual property rights, or enforce the contractual
arrangements that we have entered into to protect our proprietary technology, which could reduce our opportunities to generate revenues. Our
intellectual property assignment, confidentiality and non-competition agreements may not be enforceable and our proprietary technology
may not remain a secret. Others may develop similar technology and use it to compete with us. Despite our efforts to protect our proprietary
rights, former employees and other unauthorized parties may attempt to copy aspects of our products or obtain and use information that
we regard as proprietary.
Inability to cooperate with
and receive information from our key component manufacturers could affect our ability to develop new products required by our customers
and by the industry in which we operate.
Our products are based on silicon which is mostly manufactured
by Intel and a few other leading components manufacturers. In order to design our products, we need to receive information that enables
us to design products with the use of such silicon. There can be no assurance that we will continue to receive all the information required
for designing products with the use of new silicons continuously released by such manufacturers. The reduction in the level of cooperation
with our manufacturers, including as a result of such manufacturers' decision to compete with our products, or our inability to obtain
information from our manufacturers relating to their products used by us, may adversely affect our ability to develop new products required
by customers and by the industry in which we operate.
28
Our investment portfolio
may be impaired by disruptions in the financial and credit markets.
Our investment portfolio currently consists of corporate debt securities
which the Company classified on December 31, 2022, as "held-to-maturity." As of December 31, 2022, we hold approximately US$ 19.2 million
in corporate debt securities and government debt securities.
Due to possible significant disruptions in the financial and credit
markets, the corporate debt securities in our portfolio are subject to a possible increased risk of default due to bankruptcy, lack of
liquidity, operational failure, or other factors affecting the issuers of those securities. In addition, securities in our portfolio are
subject to other risks, such as credit, liquidity, market and interest rate risks, which may be exacerbated by market disruptions, and
which may impair the assets. We may be required to adjust the carrying value of our investment securities due to a default, lack of liquidity
or other event. For that matter we are required to use of forward-looking information to calculate credit loss estimates
As of December 31, 2022, we were not required to adjust the carrying
value of our investment securities. If we will experience such a loss, it will be recorded in our consolidated statement of operations
which could materially adversely impact our consolidated results of operations and financial condition.
We may make acquisitions
or pursue mergers that could disrupt our business and harm our financial condition.
As part of our business strategy, we have sought and may continue
to seek to invest in or acquire other businesses, technologies, or assets, and we may enter into joint ventures or other strategic
relationships with third parties.
We may assume liabilities, incur amortization expenses related
to intangible assets, or realize large and immediate write-offs in connection with future acquisitions. In addition, the future valuation
of these acquisitions may decrease from the market price paid by us, which may result in the writing-off or impairing, of the relevant
assets. In addition, our operation of any acquired or merged businesses, technologies, or
assets could involve numerous risks, including:
| • |
Post-merger integration problems resulting from the combination of any acquired operations with our own operations or from the combination
of two or more operations into a new merged entity; |
| • |
Diversion of management's attention from our core business; |
| • |
Substantial expenditures, which could divert funds from other corporate uses; |
| • |
Entering markets in which we have little or no experience; and |
| • |
Loss of key employees of the acquired operations. |
We cannot assure you that any acquisition or merger will be
successful. If the operation of the business of any acquisition or merger disrupts our operations, our business may suffer. In addition,
even if we successfully integrate the acquired business with our own, we may not receive the intended benefits of the acquisition.
29
We may be subject to
risks associated with laws, regulations, economic sanctions and customer initiatives, including such that relate to the environment, conflict
minerals, privacy or other issues, which may force us to incur additional expenses, may make our supply chain and operations more complex
and may result in damage to our reputation with customers.
Our business, results of operations and financial condition
could be adversely affected if new laws, regulations, or standards relating to our business and products, us or our employees (including
labor laws and regulations) are implemented or existing laws, regulations or standards changed. Such laws and regulations include requirements
in the United States, Europe, Israel and other territories, in relation to data privacy and protection, anti-bribery and anti-corruption,
import and export, labor, tax and environmental and social issues. From time to time, we may also operate pursuant to specific authorizations
of, and commitments towards, U.S., Israeli, E.U., or other governmental authorities and agencies. While we make every effort to comply
with such requirements, we cannot assure you that we will be fully successful in our efforts, and that our business will not be harmed.
Failure to comply with such laws, regulations, authorizations and commitments could result in fines, damages, civil liability and criminal
sanctions against us, our officers and our employees, prohibitions on the conduct of our business and damage to our reputation.
The impact of the current war in Ukraine and sanctions on Russia
and Belarus is unknown at this time. However, we may incur additional expenses, adverse effects on sales, or experience delays in our
supply chain and operations as a result.
Such laws and regulations include the EU's General Data Protection
Regulation ("GDPR") and the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The GDPR provides that companies must comply with certain standards
regarding the protection of the personal data or risk significant financial penalties. Regulations or interpretive positions may
be enforced specifically with respect to the use of outsourced services, such as SaaS, hosting and cloud-based services. Compliance with
such legislation and regulations may require that we invest in the modification of our operations to comply with such legislation and
regulations, or subject ourselves to liability resulting from a breach of such regulations. Failure to comply with privacy legislation
or procedures may cause us to incur civil liability to government agencies, customers, shareholders and individuals whose privacy may
have been compromised.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
includes disclosure requirements regarding the use of "conflict" minerals mined from the Democratic Republic of Congo and adjoining countries
("DRC") and procedures regarding a manufacturer's efforts to prevent the sourcing of such "conflict" minerals. These requirements require
companies to undertake due diligence, disclose and report whether or not such "conflict" minerals originate from the DRC. Because our
supply chain is complex, we may face reputational challenges with our customers, shareholders and other stakeholders if we are unable
to sufficiently verify the origins for the minerals used in our products. In such event, we may also face difficulties in satisfying
customers who require that all of the components of our products are certified as conflict mineral free. For additional information see
"Item 4 – Information on the Company – Business Overview."
30
We depend on governmental
licenses for our exports.
Our international sales depend largely on export licenses from
the government of Israel in relation to products which contain encryption capabilities, which we are currently required to hold. As of
the date of this annual report, we have obtained all such licenses necessary to carry out our international sales. If we fail to obtain
a material license in the future, or if a material license previously obtained is revoked or expires and is not renewed, our ability to
sell our products to overseas customers could be interrupted, resulting in a material adverse effect on our business, results of operations
and financial condition.
Significant disruptions
of our information technology systems or breaches of our data security could adversely affect our business.
Although we have not, to date, been the victim of any cybersecurity
incidents, a significant invasion, interruption, destruction, or breakdown of our information technology systems and/or infrastructure
by persons with authorized or unauthorized access could negatively impact our business and operations. We are subject to laws and regulations
governing the collection, use and transmission of personal information. As the legislative and regulatory landscape for data privacy and
protection continues to evolve around the world, there has been an increasing focus on privacy and data protection issues that may affect
our business, including the GDPR, and other laws and regulations governing the collection, use, disclosure and transmission of data. We
could also experience business interruption, information theft, legal claims and liability, regulatory penalties and/or reputational damage
from cyber-attacks, which may compromise our systems and lead to data leakage either internally or at our third party providers. Our systems
may be the target of malware and other cyber-attacks. Although we have invested in measures to reduce these risks, we cannot assure you
that these measures will be successful in preventing the compromise and/or disruption of our information technology systems and related
data. Additionally, this may be exacerbated due to any new waves of Covid-19, where our employees are required to work from home and remotely
access our IT networks.
We are affected by worldwide
downturns in industries based on technology.
The volatility in the securities markets and its effect on high-technology
companies may have a ripple effect on our performance. For example, we were affected by the downturn in the economic markets which began
in 2008, posing a risk to industries based on technology as well as the overall economy. There can be no assurance that our results will
not be affected on a going forward basis by any economic downturns, including the current downturn to the global economy relating to the
spread of Covid-19.
General economic conditions
may adversely affect the Company's results.
Uncertainty in global economic conditions, including any disruption
in financial and credit markets, such as the current disruption to the global economy relating to the spread of Covid-19, pose a risk
to the overall economy that could impact demand for our and our customers' products, as well as our ability to manage commercial relationships
with our customers and suppliers. If the global economic situation worsens, our business could be negatively impacted, including such
areas as reduced demand for our products and services, or supplier or customer disruptions, which could reduce our revenues or our ability
to collect our accounts receivable and could have a material adverse effect on our financial condition and results of operations.
31
|
Item 4.
|
INFORMATION
ON THE COMPANY. |
A. History
and Development of the Company
Our legal and commercial name is Silicom Ltd. We were incorporated
under the laws of the State of Israel in 1987, and we operate under Israeli law and legislation. Our registered and principal executive
offices are located in Israel at 14 Atir Yeda Street, Kfar Sava, Israel 4464323, and our telephone number is +972-(0)9-764-4555.
Our shares have been listed on the NASDAQ Global Select Market
since January 2, 2014 under the ticker symbol "SILC." Prior thereto our shares were listed on the NASDAQ Global Market (previously known
as the NASDAQ National Market) under the ticker symbol "SILC" (and previously "SILCF") from February 11, 2008. Prior thereto, our shares
were listed on the NASDAQ Capital Market (previously known as the NASDAQ Small-Cap). On December 20, 2005, we obtained the approval of
the Tel Aviv Stock Exchange, or TASE, for the listing of our shares on TASE. Trading of our shares on TASE commenced on December 27, 2005.
On October 26, 2015, our Board of Directors resolved to act to delist the Company's shares from trading on the TASE. Consequently, we
applied to the TASE and requested that TASE initiate the delisting process. On October 29, 2015, the TASE announced to the TASE members
on the TASE electronic filing site, the MAYA, and on the ISA electronic filing site, the MAGNA, that the last trading day in the Company's
shares on the TASE shall be January 26, 2016 and that on January 28, 2016, the Company's shares shall be delisted from trading on the
TASE. Accordingly, the last trading day in our shares on the TASE was January 26, 2016, and on January 28, 2016, our shares were delisted
from trading on the TASE. Our shares are currently listed only on the NASDAQ Global Select Market. See "Item 9 – The Offer and Listing
– Markets and Share Price History."
In December 2014, we purchased all of the share capital of Fiberblaze
A/S (now Silicom Denmark (Fiberblaze A/S)), a provider of high performance application acceleration solutions for the mobile, telecommunication,
network monitoring, cyber security, financial and related industries ("Fiberblaze").
In September 2015, we, together with our wholly owned subsidiary,
Silicom Connectivity Solutions, Inc., purchased the assets of ADI Engineering, Inc. ("ADI"), a US company which provides Intel®-based
products targeted at SDN, NFV, IoT ('Internet of Things'), Cloud computing and Virtualization.
On July 1st,
2022, Mr. Shiake Orbach, the Company's President and Chief Executive Officer for the past 21 years, became Executive Vice Chairman of
the Board of Directors, and Liron Eizenman, who served as the Company's Chief Operating Officer, took over as the Company's new President
and Chief Executive Officer.
Principal capital expenditures and divestitures
From January 1, 2022, to December 31, 2022, our capital expenditures
totaled to approximately US$ 2,120 thousand (compared to US$ 2,475 thousand during 2021 and US$ 2,543 thousand during 2020), of which
approximately US$ 1,993 thousand (compared to US$ 1,811 thousand during 2021 and US$ 2,092 thousand during 2020) can be attributed to
machinery and equipment, and approximately US$ 127 thousand (compared to US$ 664 thousand during 2021 and US$ 451 thousand during 2020)
can be attributed to office furniture and equipment and leasehold improvements. We have financed our capital expenditures from our available
internal resources, and expect to continue to finance our capital expenditures in a similar manner in 2023.
32
B. Business
Overview
We are an industry-leading provider of high-performance networking
and data infrastructure solutions. Designed primarily to improve performance and efficiency in Telco and Mobile Deployments Infrastructure,
Cloud and Data Center environments, our solutions increase throughput, decrease latency and boost the performance of compute and networking
nodes within the mobile infrastructure as well as the infrastructure backbone that enables advanced Cloud architectures and leading technologies
like SD-WAN, Telco dedicated routers, SASE, NFV, 5G, Cloud Data Centers and Cyber Security. Our innovative solutions for high-density
networking, high-speed fabric switching, offloading and acceleration, which utilize a range of cutting-edge silicon technologies as well
as FPGA-based solutions, are ideal for scaling-up and scaling-out mobile and cloud infrastructures.
Our products target major Telcos and Mobile operators, Telcos and
Mobile Equipment vendors, Cloud players, Networking appliances vendors, service providers and OEMs as components of their infrastructure
offerings.
Products
Our products are comprised of:
| (i) |
Server network interface cards (Server Adapters) - These adapters are used mostly in networking appliances which are used both in
the Cloud (including public cloud and On Premise cloud) and in the Edge. |
| (ii) |
Smart Cards - Intelligent and/or programmable cards, with features such as encryption, Time Synchronization, acceleration, data compression,
redirection and switching, packet processing, time stamping, packet capture solutions, ultra-low latency solutions, and other offloading
features. These products are used mostly inside servers which are a part of Cloud and Enterprise Data centers or inside Distributed Units
and Central Units which are a part of mobile infrastructures. |
| (iii) |
Smart Platforms - (Edge Products) - including virtualized Customer-Premises Equipment (vCPE) and universal Customer-Premises Equipment
(uCPE) (together, "CPE"), Edge devices for SD-WAN, SASE, Telco dedicated routers and NFV deployments. |
33
Server Adapters
We have developed a line of products for the server networking
industry, which facilitates interaction between servers and switches, allowing them to communicate with each other through a larger number
of ports and with higher performance than their original manufacturer designed capabilities. Our designs have resulted in powerful products
that allow server-based systems to fully exploit the high speed potential of 1/10/25/40/100 Gigabit Ethernet. The products have either
one, two, four, six, or eight ports, which plug into servers which need to have such capabilities. Some of these products include bypass
functionality which allows continuation of traffic even when the server carrying the card is failing.
Smart Cards
Our Smart Card products include smart server adapters such as:
(a) redirector and switching cards, with and without x86 CPU (b) encryption and data compression hardware acceleration cards, (c) FEC
(Forward Error Correction) acceleration and offloading cards, (d) Time Synchronization cards, and (e) FPGA based cards.
Our redirector and switching cards improve performance by: (a)
enabling switching fabric on a network interface card ("NIC") while (in some cases) providing separate data path and management path for
the switching fabric and sometimes eliminating the need for a Top Of Rack switch within the Cloud, (b) enabling traffic filtering in order
to reduce the amount of traffic received by the server, limiting it to only essential traffic for the server CPU, and consequently improving
server performance, (c) load-balancing between external servers and/or CPUs and/or CPU cores increasing the efficiency of the server,
and (d) offloading some of the server CPU tasks to the CPU and/or the switch on the NIC.
Our product line of high-performance encryption cards is designed
to improve the throughput of servers with respect to which the traffic into and from them requires encryption or decryption. The products
improve the performance of such servers by independently executing encryption tasks, thereby accelerating the encryption process and freeing
the CPUs of such servers for other activities. This product line can off-load not only encryption functionality, but compression functionality
as well. The market need for compression off-load was previously limited to some content delivery and WAN optimization networking applications;
however, such compression off-load is now becoming increasingly important in the storage market especially within the Big-Data area, which
is the market sector that is the primary target of this functionality.
Our FEC cards offload the Forward Error Correction tasks that are
supposed to be carried out by the CPU of the Distributed Unit within 4G/5G mobile deployments, in order to allow for better performance.
Such performance is more necessary in the 5G space, due to the higher bandwidth, and additional calculations and processing that need
to occur at the edge, while at the same time more Radio Units are required to be attached to each DU. Therefore, it is essential to offload
the FEC task from the main CPU onto a card.
Our Time Synchronization cards provide a solution for the 4G/5G
deployment time synchronization requirements. In 4G, when the quantity of edge compute units was relatively small and most of the computation
was done in the core or back haul, the solution for time synchronization was based on external switching units which included the time
synchronization mechanisms. Such solutions are very expensive. In 5G, where both the quantity of Distributed Units is increasing and the
requirements for time synchronization are becoming more complex, there is a need for a different solution and our solution incorporates
the full features required for time synchronization on a card which is also a NIC. The card integrates NIC technologies with time synchronization
technologies, while the software handling the entire process is ported to run on the host DU processor and as such we believe, provides
the best performance to price ratio. We have built a number of variants of our Time Synchronization cards, which address various numbers
of ports (up to 12) as well as various speeds.
34
Our FPGA based cards are divided between two families of cards,
based on the world’s largest providers of such FPGA components: AMD and Intel. Our Xilinx based cards are sold mostly in the Packet
Capturing market and towards the High Frequency Trading market, or HFT market. For the Packet Capture market, we sell cards which include
our IP for Packet Capturing. For the HFT market we sell mostly “naked” cards which do not include any software code other
than the code which is required by our customers in order to add their own code to the cards. For some of our Xilinx based cards, we provide
a framework which we call Packet Mover. Such framework allows the customer to add to the FPGA its own application, while the various interfaces
are already a part of the framework, providing optimized solutions for low latency, throughput and speed. Our Intel based FPGA cards are
a result of a close relationship with Intel over the past few years, during which we have engaged in co-development and co-marketing activities
with Intel. As a result of such cooperation, we now have a variety of Intel based FPGA Smart Cards addressing mostly the mobile infrastructure
market and the cloud. Such cards include a variety of mechanisms making them suitable for these markets, beginning with Inline Standard
NIC on top of the FPGA facilitating immediate integration with virtual operating systems, FEC and Compression offloading, time synchronization,
5G DU shells, and UPF (User Plan Functionality) shell.
Smart Platforms
Our Smart Platform products are used at the Edge as CPEs (including
also uCPEs and vCPEs) which are used by Telcos, Cloud Players, service providers and Application vendors (OEMs) to provide a variety of
services to their customers. These are full computing platforms in a networking intensive environment and many of the technologies incorporated
into these platforms are similar to those incorporated into our Server adapters and Smart cards products.
Our products include an entry level of very low end IoT devices,
going through typical branch/CPE units and up to rack mounted devices targeting large scale branches.
The main application for which our CPE/Edge devices are used is
SD-WAN, for which most of our systems have been deployed. The devices are also frequently used to provide SASE, NFV, Telco dedicated routers
and other such services. Our capabilities within the Edge world include modular approach and secured management features, as well as customized
designs, to help the customer achieve its required challenging performance, data volume and infrastructure-scale-up goals. Our Smart Platforms
products offer reliability and robust performance, addressing challenges of SD-WAN and other network functions integration and deployment.
We also sell Smart Platforms which consist of a combination of
all product families in a single product. An example of such integration is our IBS (Intelligent Bypass Switches), which combine functionalities
as well as design elements from each of our Server Adapters, our Smart Cards and our Smart Platforms.
On April 24, 2023, we issued a press release on form 6-K announcing
that we secured two NIC Design Wins, one for an advanced encryption offload acceleration card, and the other for an FPGA-based SmartNIC,
from a Tier 1, US-based cybersecurity vendor. Both Design Wins will be ramping up during the second half of 2023, and mass deployment
will begin in 2024.
35
On February 27, 2023, we issued a press release on form 6-K announcing
that we secured an additional Design Win for one of our Edge Networking products, from a leading Secure Access Service Edge (SASE) vendor.
Delivery of an initial deployment order in connection with this Design Win, is scheduled for the first half of 2023.
On February 6, 2023, we issued a press release on form 6-K announcing
that we secured a new Design Win from a leading provider of enterprise voice solutions.
On January 4, 2023, we issued a press release on form 6-K announcing
that we secured a new Design Win from a leading SD-WAN vendor with SD-WAN-related customers in the Americas, APAC and EMEA. The win is
for a customized version of one of our 5G-intergrated High-Runner Edge Networking products. Orders based on this Design Win are expected
throughout 2023, with deployment levels reaching a steady state in 2024.
On November 7, 2022, we issued a press release on form 6-K announcing
that we secured a new Design Win and an initial order from an existing customer for our new Edge product, with delivery requested during
the second quarter of 2023.
On August 3, 2022, we issued a press release on form 6-K announcing
that we secured an initial order of an Edge product from a US-based provider of cloud-based SASE (Secure Access Service Edge) solutions.
On May 3, 2022, we issued a press release on form 6-K announcing
that one of our existing customers, one of the SD-WAN market's largest vendors, has placed purchase orders for our SD-WAN Smart Platforms
with delivery requested during 2022.
Principal Markets
The principal markets in which we compete are set forth more particularly
in, and are incorporated by reference to Note 13A to the consolidated financial statements set forth in Item 18 of this annual report.
In 2020, 2021 and 2022 approximately, 61%, 70% and 72% of our sales, respectively, were in North America, 33%, 23% and 23% of our sales,
respectively, were in Europe, and 6%, 7% and 5% of our sales, respectively, were in Asia-Pacific. Our main business is not seasonal, and
we believe that there are sufficient sources and raw materials available to sustain it.
Manufacturing and Suppliers
Our manufacturing operations consist primarily of producing finished
goods on our own, with assistance from sub-contractors, from (i) components purchased from third parties, and (ii) sub-assemblies manufactured
by sub-contractors. In addition, we perform testing and quality assurance procedures with respect to the components and sub-assemblies
which are incorporated into our final products and to the final products themselves.
36
We seek to monitor quality with respect to each stage of the production
process including, but not limited to, the selection of component suppliers, warehouse procedures and final testing, packaging, and shipping.
We have been certified as complying with "ISO-28001:2007", "ISO 9001:2015", and "ISO 14001:2015", which are the quality control standard
used in our industry. We believe that our quality assurance procedures have been instrumental in achieving a high degree of reliability
for our products. We intend to continue to maintain and improve the efficiency of such procedures.
Although we generally use standard parts and components for our
products, certain key components used in our products are currently available from only one source, and others are available from a limited
number of sources, on which we are dependent. For example, some key components in many of our products are manufactured by Intel®
and Broadcom. We believe that during regular supply periods we maintain a sufficient inventory of these components to protect against
delays in deliveries. For additional information see the risk factor entitled "Loss of our sources for certain key components could harm
our operations" under Item 3.D – "Risk Factors."
Firm purchase orders for our products generally include an agreed
supply date for the supply of our products. In addition, we may agree to fill orders for our products within short periods of time after
receipt of a firm purchase order based on the immediate availability of our products and/or components in our inventory. Consequently,
we need to maintain inventory at levels that are in accordance with our forecasts and those of our customers. There can be no assurance
that such forecasts will indeed materialize into firm purchase orders and consequently we cannot guarantee that the full volume of such
inventory will be delivered against firm purchase orders and not remain unused.
The Dodd-Frank Wall Street Reform and Consumer Protection Act includes
disclosure requirements regarding the use of "conflict" minerals mined from the DRC and procedures regarding a manufacturer's efforts
to prevent the sourcing of such "conflict" minerals. These requirements will require companies to undertake due diligence, disclose and
report on whether or not such "conflict" minerals originate from the DRC. This implementation of these requirements could adversely affect
the sourcing, availability and pricing of minerals such as cassiterite, wolframite, columbite-tantalite (coltan), gold and/or their derivatives
(tantalum, tin, and tungsten) which are used in the manufacture of certain components used in our products, as well as affect the companies
we use to manufacture components of our products. As a result, this could limit the pool of suppliers who can provide us DRC "conflict
free" components and parts, and we may not be able to obtain DRC "conflict free" products or supplies in sufficient quantities for our
operations. In circumstances where conflict minerals in our products are found to be sourced from the DRC, we may take actions to change
materials or designs to reduce the possibility that our purchase of conflict minerals may fund armed groups in the region. These actions
could add engineering and other costs to the manufacture of our products, and we may not be able to obtain "conflict free" products or
supplies in sufficient quantities for our operations. In addition, we incur additional costs to comply with the disclosure requirements,
including costs related to determining the source of any of the relevant minerals and metals used in our products, as further elaborated
below. Also, because our supply chain is complex, we may face reputational challenges with our customers, shareholders and other stakeholders
if we are unable to sufficiently verify the origins for the minerals used in our products. In such event, we may also face difficulties
in satisfying customers who require that all of the components of our products are certified as conflict mineral free. There can be no
assurance that we will not experience delays in the supply of critical components in the future or that we will have a sufficient inventory
of critical components at such time to produce products at full capacity. If we do experience such delays and there is an insufficient
inventory of critical components at that time, our operations and financial results would be adversely affected.
37
Marketing Channels
The principal market sectors for our products are:
| (i) |
Providers of applications on Network appliances, including mostly SD-WAN, Cyber Security and Application Delivery applications;
|
| (ii) |
Telcos / Carriers / service providers deploying CPEs/Edge for SD-WAN, SASE and NFV; |
| (iii) |
Mobile Operators/Telcos/Carriers deploying 4G/5G infrastructure; |
| (iv) |
The "Cloud". |
Our main business model for our line of products is called the
Design Win Model. The following are the main aspects of this model:
| • |
We approach a potential customer or are approached by such customer. |
| • |
If the potential customer shows interest in the products and we believe that achievement of a business relationship with the potential
customer is possible, we ship products for such potential customer's evaluation. |
| • |
During the evaluation process the potential customer receives a few units of the relevant product for initial basic testing. If the
evaluation process is successful, we ship products for qualification. |
| • |
During the qualification process the potential customer usually purchases a larger amount of our products for more specific testing,
which may include certain adaptations of our products to its needs. |
| • |
If the qualification process is successful, we enter into negotiations regarding the terms of a business relationship. |
| • |
In some cases, typically with the larger customers and with respect to Smart Cards and Smart Platforms, the evaluation and qualification
process may take 12 months or more. |
Once all phases mentioned above are successfully concluded, the
customer will purchase products from us by placing purchase orders (under which our products are to be sold to such customer) in order
to either (i) incorporate such products within its systems, and thereafter sell or deploy such systems with our cards embedded in them,
or, (ii) deploy our Smart Platform products within a network. The sale or deployment of our products within such systems or network, as
applicable, is the objective of our Design Win Model. In most cases, once we secure a Design Win, our customer will continue to buy our
products for as long as it (i) continues to sell or deploy its system in which our products are incorporated, or (ii) continues to deploy
our Smart Platform as part of its network.
38
For all of our Server Adapters and for some of our Smart Cards
and Smart Platforms, our sales and marketing have been mostly carried out through a network of strategic relationships with leading OEMs
that sell our products, generally as a part of their systems and sometimes under their own private labels. Our current OEM customers are
mostly active in the SD-WAN market, Cyber Security market, Data Storage market, Application Delivery market, Traffic Management market,
Network Monitoring market, WAN Optimization market and other server based applications markets. Our OEM customers sell their products
to Telcos, Governments, Enterprises (headquarter and branch) and to Data Centers (regular and virtualized, including to the Cloud). Our
strategy of carrying out strategic relationships with OEM customers continues to be a significant part of our strategy. We believe that
these relationships enable us to take advantage of the superior financial resources and market presence of these companies to increase
our sales and establish, maintain and strengthen our position and reputation in the market. In addition, we believe that relationships
with OEMs improve access to new technologies developed by such OEMs, thereby ensuring smooth integration of our products and technology
with those of the OEMs.
In addition, due to the trends that we see in our industry, including
primarily the shift to the Cloud and the trend of Disaggregation (non-proprietary standards that allow separate parts of the network to
be purchased separately) and Decoupling of Hardware and Software, we are now implementing an additional marketing strategy which involves
our direct sales to major Telcos, Mobile operators, Cloud players, and service providers. In some cases, such sales involve a relationship
with an independent software vendor, which is the case in most of our SD-WAN Edge Platforms sales and also 4G/5G Smart NICs sales.
The main aspects of the OEM business model, by which in most cases
our customer will continue to buy our cards for as long as it continues to sell or deploy its system, are similar in our business model
when we sell directly to Telcos or other service providers.
Our cooperation with Intel has resulted in material benefits to
our selling process. Due to our close relationship with Intel, we mostly use their components in our products, and as such they provide
us with assistance in the sales process, mostly with Smart Cards and Smart Platforms.
The loss of some of our customers, or any single key customer, may have a material adverse
effect on our operations and financial results and we cannot assure you that we will be able to enter into strategic relationships with
any such customer in the future. Payment terms of our customers are, on average, approximately 70 days net. Approximately 95% of our international
sales are denominated in U.S. Dollars and may be subject to government controls and other risks, including, in some cases, export licenses,
federal restrictions on export, currency fluctuations, political instability, trade restrictions and changes in tariffs and freight rates.
We have experienced no material difficulties to date as a result of these factors.
Our arrangements with our customers (and distributors and resellers
when applicable) are generally non-exclusive. We have generally experienced good relations with our customers and are not aware of any
pending material terminations other than with respect to products that newer technologies have eliminated the need for.
39
Our customers, distributors and resellers are not under our control.
They are not obligated to purchase products from us and may use or represent other lines of products. A reduction in sales effort or discontinuance
of sales of our products by our customers could lead to reduced sales and could materially adversely affect our operating results. In
addition, our business model also entails the risk that our customers will build up inventories in anticipation of a growth in deployments
or sales. If such growth does not occur as anticipated, these customers may substantially decrease the number of products ordered from
us in subsequent quarters, discontinue product orders or even attempt to return unused or unsold products. The loss of a major or key
customer or group of customers, or a loss or ineffectiveness of some of our relationships at approximately the same time, might have a
material adverse effect on us.
Patents and Licenses
Our success and ability to compete are dependent to a significant
degree on our technology. In order to establish and protect the technology we develop and/or acquire to use in our products, we primarily
rely on a combination of non-disclosure agreements and technical measures, and to a lesser degree on patents. These measures afford only
limited protection, and accordingly, there can be no assurance that the steps we take will be adequate to prevent misappropriation of
our technology or the independent development of similar technologies by others. Despite our efforts to protect our technology, unauthorized
parties may attempt to copy aspects of our products and develop similar hardware or software or to obtain and use information that we
regard as proprietary. In addition, there can be no assurance that one or more parties will not assert infringement claims against us.
The cost of responding to claims could be significant, regardless of whether the claims are valid. We cannot assure that the scope of
any issued patent will adequately protect our intellectual property rights, or that patents will not be challenged, invalidated, or circumvented,
or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage.
On April 8, 2010, we filed a patent application with the United
States Patents and Trademarks Office, or the USPTO, for the 'Server-Based Network Appliance'. On June 12, 2012 we were issued patent No.
8,199,523 entitled 'Server-Based Network Appliance' from the United States Patent and Trademark Office, which relates to a server-based
network appliance in which a computer motherboard is mounted in a case with the bus slots of the motherboard adjacent to the rear side
of the case.
On September 16, 2013, we acquired all of the intellectual property
related to the unique Virtualization Off-Load Engine developed by Net Perform Technology, Ltd., a privately held company registered in
Hong Kong, China. Despite perceived exclusive access to this product, and our best efforts during the acquisition process to secure the
same, internal or external parties may assert a claim of infringement regarding such intellectual property. We do not consider this intellectual
property to be material for our operations.
40
On February 8, 2015, we filed a patent application in the USPTO
with respect to Hybrid Networking Application Switch. On January 2, 2018, we were issued patent No. 9,858,227 entitled 'Hybrid Networking
Application Switch' from the United States Patent and Trademark Office. The patent relates to a unique solution for combining functionalities
of a rack mounted networking switch and a rack mounted server into a single rack mounted enclosure comprising a hybrid networking application
switch or an accelerated hybrid networking application switch.
For additional information regarding the risks to the Company with
respect to patents and other intellectual property rights see the risk factor entitled "We may not be able to protect our intellectual
proprietary rights" under Item 3.D. – "Risk Factors."
Competition
The networking and data infrastructure solutions industry is highly
competitive. We face competition from numerous companies, some of which are more established, benefit from greater market recognition
and have greater financial, production and marketing resources than we do. We cannot guarantee that our present or any contemplated products
will continue to be distinguishable from those of our competitors or that the marketplace will find our products preferable to those of
our competitors. Furthermore, there can be no assurance that competitive pressures will not result in price reductions that could materially
adversely affect our business and financial condition and the results of our operations.
We believe that our expanded feature set coupled with our customization
capabilities and the general wide spectrum of solutions we offer give us a competitive edge.
With respect to Server Adapters, our main competitors are Nvidia,
Intel, and Broadcom. However, these companies seem to be targeting mostly major accounts with their somewhat limited offering of standard
cards and rarely offer customized solutions. We target accounts of all sizes with a broader product offering with various interfaces and
form factors while providing very fast and efficient path to customized solutions required by customers, we are actually only overlapping
with these companies' offerings in a small part of our target markets. Although the situation may change in the future, we believe that
our competition in areas which are not being pursued by the large companies, is less significant.
In the Smart Cards products sector, our competition is fragmented,
and differs with respect to the specific solution being offered by us. In this sector, Marvel, Nvidia, Netronome, Napatech, Molex, Lanner
and Caswell compete with certain of our Smart Cards. In some cases of FPGA based cards, Intel and AMD also compete with our Smart Cards,
however, as with the Server Adapters space, they target mostly the biggest accounts and only with mainstream products while for other
accounts they cooperate with us.
In the Smart Platforms products sector, our main competitors are
Caswell, Lanner, Advantech and Nexcom. We believe that we provide a fast and efficient path to customized Smart Platforms frequently required
by customers, which coupled with our well established technical and business relationships with Intel (the major supplier of the main
building block of these Smart Platforms' X86-based CPUs), provides us with an advantage over our main competitors in this area.
41
Governmental Regulation Affecting the Company
We are affected by the terms of research and development grants
we have received from the IIA.
Under the RD Law, research and development programs approved
by the Research Committee of the IIA (the "Research Committee") are eligible for "Benefits" which include grants, loans, exemptions, discounts,
guarantees and additional means of assistance, but with the exclusion of purchase of shares, provided under various tracks promulgated
by the Council body (the "Tracks"). Most Tracks require the repayment of the Benefits in the form of the payment of royalties from the
sale of the product developed in accordance with the published Track guidelines and subject to other restrictions. Once a project is approved,
the IIA awards grants of up to 50% of the project's expenditures in return for royalties, usually at the rate of 3% of sales of products
developed with such grants. For projects approved after January 1, 1999, the amount of royalties payable was up to a dollar-linked amount
equal to 100% of such grants plus interest at LIBOR or other applicable interest rate.
The terms of these grants prohibit the manufacture outside of Israel
of the product developed in accordance with the program without the prior consent of the Research Committee. Such approval is generally
subject to an increase in royalty rates, as well as in the total amount to be repaid to the IIA to between 120% and 300% of the amount
granted, depending on the extent of the manufacturing that is conducted outside of Israel.
The RD Law, also provides that know-how from the research
and development and any derivatives thereof, cannot be transferred or licensed to Israeli third parties without the approval of the Research
Committee. The RD Law stresses that it is not just transfer of know-how that was prohibited, but also transfer of any rights in such
know-how. Approval of the transfer and/or license could be granted only if the Israeli transferee undertook to abide by all of the provisions
of the RD Law and regulations promulgated thereunder, including the restrictions on the transfer of know-how and the obligation to
pay royalties, if applicable. Generally, royalty payments by the transferor are required in connection with the transfer to an Israeli
third party.
The know-how from the research and development and any derivatives
thereof cannot be transferred to non-Israeli third parties without the approval of the Research Committee, whose approval is generally
contingent on payment of a significant penalty of up to six times the dollar-linked grant amount plus LIBOR or other applicable interest
rate and minus any royalties paid. Such restriction does not apply to exports from Israel of final products developed with such technologies.
The approval of out-licensing arrangements and other arrangements
for granting of an authorization to an entity outside of Israel to use know-how developed under research and development programs funded
by the IIA and any derivatives thereof is generally subject to payment of a "License Fee" to the IIA, at a rate that will be determined
by the IIA in accordance with the IIA’s Licensing its rules, of up to six times the dollar-linked amount plus LIBOR or other applicable
interest rate and minus any royalties paid.
42
In addition, we receive certain tax benefits and reduced tax rates
from the Israeli government due to our status as a "Preferred Technological Enterprise" under the Law for the Encouragement of Capital
Investments-1959, as amended. See "Item 10.E. – Additional Information – Taxation." The entitlement to these benefits is conditional
upon our fulfillment of the conditions stipulated by the law and the regulations promulgated thereunder. In the event of failure to comply
with these conditions, the benefits could be canceled, and we would be required to refund the amount of the benefits, in whole or in part,
with the addition of linkage differences and interest.
Our total outstanding contingencies in respect of IIA or IIA royalty-bearing
participations received or accrued, net of royalties paid or accrued before interest, amounted to approximately US$ 2,960 thousand as
of December 31, 2022, which are attributable to sales of certain discontinued products. As of the date of this annual report, all
of our IIA programs have been closed per our request. We are not anticipating any sales of our products developed with IIA funding and
accordingly do not expect to be required to pay any royalties to the IIA. In the unlikely event we do sell products developed using IIA
funding, we will be required to pay royalties to the IIA as set forth in the RD Law and directives published by the IIA.
C. Organizational
Structure
We have the following two wholly owned subsidiaries:
| • |
Silicom Connectivity Solutions, Inc. – a private company incorporated in the United States; and |
| • |
Silicom Denmark (Fiberblaze A/S) – a private company incorporated in Denmark. |
D. Property,
Plant and Equipment
We do not own any real property, but we lease property at seven
locations. Our manufacturing plant and additional storage space are located in two locations in Yokne'am, Israel, as well as one
storage space located in Migdal Ha’emek, Israel, our executive offices are located in Kfar Sava, Israel, our marketing and sales
offices are located in our Kfar Sava, Israel offices, in Søborg, Denmark, and in Paramus, New Jersey, the United States, and our
research and development facilities are located in Kfar Sava, Israel, in Søborg, Denmark, and in Charlottesville, Virginia, the United
States.
Our executive offices in Kfar Sava are approximately 2,350 square
meters in size. The remaining lease period is approximately two years, ending February 28, 2025. Our monthly rental payments for this
office space (which include various maintenance services) are equal to approximately US$ 58,300.
We have conducted our manufacturing in Yokne'am, Israel since 2000.
In March 2020, we entered into a lease agreement for the lease
of an approximately 4,000 square meter manufacturing facility, as well as an approximately 360 square meters of storage space, in Yokne'am,
Israel, for a period of up to 120 months. The monthly rental payments (which include various payments including maintenance services)
will vary during the remaining lease period from between approximately US$ 72,300 to approximately US$ 80,800
43
In September 2022, we entered into a lease agreement for the lease
of approximately 670 square meters of storage space in Migdal Ha’emek, Israel, for a period of 60 months, for monthly rental payments
of approximately US$ 13,600. The agreement also includes two options for the extension of the lease: the first, for a period of 36 months
commencing on October 1, 2027, which will include a 7% percent increase in the monthly rent, and the second, for a period of 24 months
commencing on October 1, 2030, which will not include an additional rent increase.
In October 2019, we entered into a commercial lease agreement to
lease office space in Charlottesville, Virginia, in the United States for a 37-month period commencing on December 1, 2019. The lease
agreement includes two options for the extension of the lease for 24-months each. In July 2022, we exercised the first option to extend
the lease agreement for a period of 24 months, commencing on January 1, 2023. The facility is approximately 606 square meters in size
and the monthly payments are approximately US$ 8,900 per month in the first 12 months and approximately US$ 9,100 per month in the following
12 months.
Since April 2017, we have leased office space of approximately
2,500 square feet in Paramus, New Jersey. Our current lease is until June 2027. Currently, the monthly rental payments (including utilities)
for this space are US$ 4,820.
In addition, we lease office space of approximately 1,800 square
meters in Søborg, Denmark. The term of the lease agreement expires on November 1, 2025. The lease can be terminated by a six-month
advanced notice to the landlord. The monthly rental payment (including maintenance services) for this space is approximately US$ 20,100.
We believe that our facilities in Israel, the United States and
Denmark are suitable and adequate for our operations as currently conducted. In the event that additional facilities are required, or
we need to seek alternative rental properties, we believe that we could obtain such additional or alternative facilities at commercially
reasonable prices.
|
Item
4A. |
UNRESOLVED
STAFF COMMENTS |
There are no unresolved staff comments.
|
Item 5.
|
OPERATING
AND FINANCIAL REVIEW AND PROSPECTS |
General
Overview
Silicom was incorporated in Israel and commenced operations in
1987. We are currently engaged in the design, manufacture, marketing and support of high-performance networking and data infrastructure
solutions. Designed primarily to improve performance and efficiency in Cloud and Data Center environments, our solutions increase throughput,
decrease latency and boost the performance of servers and networking appliances, the infrastructure backbone that enables advanced Cloud
architectures and leading technologies like NFV, SD-WAN and Cyber Security. Our products are used by major Cloud players, service providers,
Telcos and Mobile operators and OEMs as components of their infrastructure offerings, including both add-on adapters in the Data Center
and stand-alone virtualized/universal CPE devices at the edge. In 2020, 2021 and 2022 we recorded sales from all of our networking and
data infrastructure solutions of approximately, US$ 107.4 million, US$ 128.5 million and US$ 150.6 million respectively. We primarily
sell our products to major Cloud players, service providers, Telcos and Mobile operators and OEMs and, to a lesser extent, through independent
distributors (on a non-exclusive basis).
44
Recent Accounting Pronouncements
Not applicable.
| A. |
Operating Results |
You should read the following management's discussion and analysis
of our financial condition and operating results in conjunction with the consolidated financial statements and the related notes thereto
included in this annual report. The following table sets forth, for the periods indicated, the relationship (in percentages) of items
from our Consolidated Statement of Operations Data to our total sales:
|
Year
Ended December 31, |
2020 |
2021 |
2022 |
|
Sales |
100% |
100% |
100% |
|
Cost of sales |
68.6 |
65.4 |
65.5 |
|
Gross profit |
31.4 |
34.6 |
34.5 |
|
Research and development expenses
|
16.1 |
15.6 |
13.7 |
|
Sales and marketing expenses |
5.8 |
5.1 |
4.6 |
|
General and administrative expenses
|
3.7 |
3.6 |
3.0 |
|
Operating Income |
5.8 |
10.2 |
13.2 |
|
Financial income, net |
1.0 |
(0.1) |
1.6 |
|
Income before income taxes |
6.8 |
10 |
14.9 |
|
Income tax expenses |
1.4 |
1.8 |
2.7 |
|
Net Income |
5.4 |
8.2 |
12.2 |
45
Sales in 2022 increased by 17.2% to US$ 150,582 thousand compared
to US$ 128,460 thousand in 2021, reflecting the continued high demand for our products and our success in mitigating the impacts of the
global component shortage crisis. The increase in sales was mainly attributed to the success of our Smart Edge products, expanding our
total addressable market for these products beyond SD-WAN to markets such as SASE, Dedicated Internet, as well as other markets.
Sales in 2021 increased by 19.6% to $128,460 thousand compared
to $107,398 thousand in 2020, reflecting the combined impact of two opposite vectors: the significant increased demand for our products
on one hand, and the growing global component shortages crisis on the other hand. The increase in demand and sales was mainly attributed
to the continuous success of our Smart Edge products, especially in the SD-WAN market, and to our initial penetration to the 5G/O-RAN
market. Both, SD-WAN and O-RAN, are part of the significant Disaggregation and Decoupling industry trends.
Gross profit in 2022 was US$ 51,956 thousand compared to US$ 44,388
thousand in 2021. Gross profit as a percentage of sales in 2022 was 34.5%, compared to 34.6% in 2021. The change in the gross profit percentage
in 2022 compared to 2021 was mainly attributed to the mix of products that we sold in 2022, on which our gross profit is largely dependent.
Gross profit was also affected by, among other factors, write-downs of inventory made with respect to any slow moving or obsolete inventory
we can no longer use; the inventory write-downs as a percentage of sales in 2022 decreased to 2.0%, compared to 4.1% in 2021.
Gross profit in 2021 was US$ 44,388 thousand compared to US$ 33,766
thousand in 2020. Gross profit as a percentage of sales in 2021 was 34.6%, compared to 31.4% in 2020. The higher gross profit percentage
in 2021 compared to 2020 was mainly attributed to: (i) a one-time US$ 1.7 million impairment of intangible assets in 2020, (ii) changes
to the mix of products that we sold in 2021, on which our gross profit is largely dependent. Gross profit was also affected by, among
other factors, write-downs of inventory made with respect to any slow moving or obsolete inventory we can no longer use; the inventory
write-downs as a percentage of sales in 2021 increased to 4.1%, compared to 1.5% in 2020.
Research and development expenses in 2022 increased by 2.3% to
US$ 20,563 thousand compared to US$ 20,091 thousand in 2021. This increase was mainly attributed to a decrease in capitalization of internal
software development costs in the amount of US$ 2,547 thousand in 2022, compared to US$ 3,562 thousand in 2021, as well as an increase
in the share-based compensation which amounted to approximately US$ 1,454 thousand in 2022, compared to US$ 1,011 thousand in 2021, offset
by a strengthening of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our research and
development expenses are incurred in New Israeli Shekels and Danish Krone), which amounted to approximately US$ 1,018 thousand.
Research and development expenses in 2021 increased by 16.5% to
US$ 20,091 thousand compared to US$ 17,244 thousand in 2020. This increase was mainly attributed to an increase in our research and development
employees' and subcontractors' related costs, required for our continued investment in new product development, enhancements to existing
products and the development of new networking and connectivity technologies expanding our product offering to our target markets, which
contributed approximately US$ 4,540 thousand to such increase, combined with the following factors: (i) capitalization of internal software
development costs in the amount of US$ 3,562 thousand in 2021, compared to US$ 822 thousand in 2020, (ii) an increase in the share-based
compensation which amounted to approximately US$ 1,011 thousand in 2021, compared to US$ 959 thousand in 2020, as well as to (iii) a weakening
of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our research and development expenses
are incurred in New Israeli Shekels and Danish Krone), which amounted to approximately US$ 995 thousand.
46
Sales and marketing expenses in 2022 increased by 5.9% to US$ 6,990
thousand compared to US$ 6,599 thousand in 2021. This increase was mainly attributed to our continued investment in the promotion of our
networking and data infrastructure solutions, expanding our customer base and product offering, which contributed approximately US$ 484
thousand, as well as to an increase in the share-based compensation which amounted to approximately US$ 774 thousand in 2022, compared
to US$ 697 thousand in 2021, offset by a strengthening of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant
portion of our sales and marketing expenses are incurred in New Israeli Shekels and Danish Krone) which amounted to approximately US$
170 thousand.
Sales and marketing expenses in 2021 increased by 6.3% to US$ 6,599
thousand compared to US$ 6,209 thousand in 2020. This increase was mainly attributed to our continued investment in the promotion of our
networking and data infrastructure solutions, expanding our customer base and product offering, which contributed approximately US$ 110
thousand, as well as to an increase in the share-based compensation which amounted to approximately US$ 697 thousand in 2021, compared
to US$ 602 thousand in 2020, as well as to a weakening of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant
portion of our sales and marketing expenses are incurred in New Israeli Shekels and Danish Krone) which amounted to approximately US$
185 thousand.
General and administrative expenses in 2022 decreased by 3.5% to
US$ 4,477 thousand compared to US$ 4,641 thousand in 2021. This decrease was mainly attributed to a strengthening of the US Dollar against
the New Israeli Shekel and the Danish Krone (since a significant portion of our general and administrative expenses are incurred in New
Israeli Shekels and Danish Krone) which amounted to approximately US$ 228 thousand, offset by an increase in payroll related expenses
attributed to general and administrative activity which amounted to approximately US$ 28 thousand, as well as to an increase in
the share-based compensation, which amounted to approximately US$ 710 thousand in 2022, compared to US$ 674 thousand in 2021.
General and administrative expenses in 2021 increased by 14.2%
to US$ 4,641 thousand compared to US$ 4,065 thousand in 2020. This increase was mainly attributed to (i) an increase in payroll related
expenses attributed to general and administrative activity which amounted to approximately US$ 313 thousand, (ii) to an increase in the
share-based compensation, which amounted to approximately US$ 674 thousand in 2021, compared to US$ 615 thousand in 2020, as well as to
(iii) a weakening of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our general and
administrative expenses are incurred in New Israeli Shekels and Danish Krone) which amounted to approximately US$ 204 thousand.
47
Financial income, net in 2022 amounted to US$ 2,464 thousand compared
to financial expenses, net of US$ 152 thousand in 2021. The change is mainly attributed to a strengthening of the US Dollar against the
New Israeli Shekel and the Danish Krone, which created net financial income in US Dollars from exchange rate differences (a portion of
our balance sheet assets and obligations are denominated in New Israeli Shekels as well as Danish Krone) of US$ 2,308 thousand in 2022
compared to financial expenses of US$ 1,031 thousand in 2021, offset by a decrease in income from investment in marketable securities
and bank deposits, which was attributed to a decrease in funds available for investment, which amounted to US$ 230 thousand in 2022 compared
to US$ 927 thousand in 2021.
Financial expenses, net in 2021 amounted to US$ 152 thousand compared
to financial income, net of US$ 1,034 thousand in 2020. The change is mainly attributed to the following factors: (i) a decrease in income
from investment in marketable securities and bank deposits, which was attributed to a decrease in funds available for investment, which
amounted to US$ 927 thousand in 2021 compared to US$ 1,953 thousand in 2020, and (ii) a weakening of the US Dollar against the New Israeli
Shekel and the Danish Krone, which created net financial expenses in US Dollars from exchange rate differences (a portion of our balance
sheet assets and obligations are denominated in New Israeli Shekels as well as in Danish Krone) of US$ 1,031 thousand in 2021 compared
to net financial expenses of US$ 748 thousand in 2020.
In 2022 we recorded current income tax expenses of US$ 2,963 thousand
and deferred income tax expenses of US$ 1,178 thousand compared to current income tax expenses of US$ 2,473 thousand and deferred income
tax expenses of US$ 48 thousand in 2021. The increase in our current income tax expenses was mainly attributed to an increase in our income
and the resulting taxable income. The increase in the deferred income tax expenses was mainly attributed to the following factors: (i)
deferred income tax expenses relating to research and development costs, which amounted to US$ 620 thousand in 2022 compared to deferred
income tax benefit in the amount of US$ 141 thousand in 2021, (ii) deferred tax expenses relating to intangible assets, which amounted
to US$ 253 thousand in 2022 compared to deferred income tax expenses in the amount of US$ 25 thousand in 2021, (iii) deferred income
tax expenses relating to share-based compensation provided to our employees and directors, which amounted to US$ 36 thousand in 2022 compared
to deferred income tax benefit in the amount of US$ 62 thousand in 2021, offset by (iv) a decrease in income tax expenses relating to
tax loss carryforwards, which amounted to US$ 0 thousand in 2022 compared to income tax expenses which amounted to US$ 66 thousand in
2021. In addition, in 2022 we recorded an income tax benefit relating to prior years in the amount of US$ 57 thousand, compared to an
income tax benefit relating to prior years In the amount of US$ 157 thousand in 2021.
In 2021 we recorded current income tax expenses of US$ 2,473 thousand
and deferred income tax expenses of US$ 48 thousand compared to current income tax expenses of US$ 1,766 thousand and deferred income
tax benefit of US$ 61 thousand in 2020. The increase in our current income tax expenses was mainly attributed to an increase in our income
and the resulting taxable income. The change in the deferred income tax expenses was mainly attributed to the following factors: (i) a
deferred income tax benefit relating to research and development costs, which amounted to US$ 141 thousand in 2021, compared to a deferred
income tax benefit in the amount of US$ 262 thousand in 2020, (ii) deferred income tax expenses relating to intangible assets, which amounted
to US$ 25 thousand in 2021, compared to a deferred income tax benefit in the amount of US$ 134 thousand in 2020, offset by (iii) a decrease
in income tax expenses relating to tax loss carryforwards, which amounted to US$ 66 thousand in 2021, compared to deferred income tax
expenses which amounted to US$130 thousand in 2020. (iv) a deferred income tax benefit relating to share-based compensation provided by
us to our employees and directors, which amounted to US$ 62 thousand in 2021, compared to deferred income tax expenses in the amount of
US$ 9 thousand in 2020. In addition, in 2021 we recorded an income tax benefit relating to prior years in the amount of US$ 157 thousand,
compared to an income tax benefit relating to prior years in the amount of US$ 148 thousand in 2020.
In 2022 we recorded net income of US$ 18,306 thousand compared
to net income of US$ 10,541 thousand in 2021, an increase of 73.7%. The increase was mainly attributed to the increase in our activity
and sales.
In 2021 we recorded net income of US$ 10,541 thousand compared
to net income of US$ 5,725 thousand in 2020, an increase of 84.1%. This increase was mainly attributed to the increase in our activity
and sales.
48
Impact of Inflation and Currency Fluctuations
on Results of Operations, Liabilities and Assets
Since the majority of our revenues are denominated and paid in
U.S. Dollars, we believe that inflation in Israel and in Denmark and fluctuations in the U.S. dollar exchange rates do not have any material
effect on our revenue. Inflation in Israel or Denmark and the Israeli and Danish currency as well as U.S. dollar exchange rate fluctuations,
may however, have an effect on our expenses and, as a result, on our net income/loss. The cost of our Israeli and Danish operations, as
expressed in U.S. Dollars, is influenced by the extent to which any change in the rates of inflation in Israel or Denmark are not offset
(or are offset on a lagging basis) by a change in valuation of the NIS or DKK in relation to the U.S. dollar.
We do not presently engage in any hedging or other transactions
intended to manage the risks relating to foreign currency exchange rate or interest rate fluctuations. However, we may in the future undertake
such transactions, if management determines that it is necessary to offset such risks.
B. Liquidity and Capital
Resources
As of December 31, 2022, we had working capital of US$ 126,505
thousand and our current ratio (current assets to current liabilities) was 5.67. Cash and cash equivalents as of December 31, 2022 increased
by US$ 1,449 thousand to US$ 30,734 thousand, compared to US$ 29,285 thousand as of December 31, 2021. Short-term marketable securities
decreased by US$ 4,246 thousand to US$ 4,020 thousand, compared to US$ 8,266 thousand as of December 31, 2021, and long-term marketable
securities decreased by US$ 8,610 thousand to US$ 15,163 thousand, compared to US$ 23,773 thousand as of December 31, 2021. The net decrease
of US$ 11,407 thousand in these three balance sheet items in 2022 was mainly attributed to the following factors: (i) purchase of treasury
shares in the amount of approximately US$ 3,428 thousand, (ii) payments in relation to purchase of property, plant and equipment which
amounted to US$ 2,089 thousand, and (iii) to investment in intangible assets which amounted to US$ 2,603 thousand, as well as negative
cash used in operating activities in the amount of US$ 4,090 thousand.
49
Trade receivables decreased to US$ 27,258 thousand as of December
31, 2022, compared to US$ 31,120 thousand as of December 31, 2021. This decrease was mainly attributed to shorter customer payment cycles,
as averaged out. Other receivables decreased to US$ 3,620 thousand as of December 31, 2022, compared to US$ 4,693 thousand as of December
31, 2021.
Trade payables decreased to US$ 15,922 thousand as of December
31, 2022, compared to US$ 29,918 thousand as of December 31, 2021. This decrease was mainly attributed to the reduction in purchasing
of materials in the second half of 2022. Other payables and accrued liabilities decreased to US$ 9,641 thousand as of December 31, 2022,
compared to US$ 18,582 thousand as of December 31, 2021. This decrease was mainly attributed to a decrease in our accrued expenses.
Inventories increased to US$ 87,985 thousand as of December 31,
2022, compared to US$ 75,753 thousand as of December 31, 2021. This increase was primarily the result of an increase in our inventory
purchasing, in order to secure continuous production to support our customers' expectations of a swift delivery, making the readily available
inventory pivotal to our business.
Cash used in operating activities in 2022 amounted to US$ 4,090
thousand compared to cash provided by operating activities in the amount of US$ 1,079 thousand in 2021. This was mainly attributed to
an increase in our inventory, as well as a decrease of trade accounts payable and other accounts payable and accrued expenses, offset
by an increase in our net income.
Capital expenditures on property and equipment for the year ended
December 31, 2022 were US$ 2,121 thousand, compared to US$ 2,475 thousand as of December 31, 2021.
We have cash and cash equivalents that we believe are sufficient
for our present requirements. Furthermore, our cash resources are sufficient to fund our operating needs for at least the next twelve
months.
Other Long-Term Liabilities Reflected on the Company's Balance
Sheet:
The liability for employees' severance benefits amounted to approximately
US$ 3,425 thousand as of December 31, 2022.
The liability for employees' severance benefits is calculated on
the basis of the latest monthly salary paid to each employee multiplied by the number of years of employment. The liability is covered
by the amounts deposited by us into employees' managers' insurance and/or pension fund accounts in respect of severance obligations to
such employees, including accumulated income thereon as well as by the unfunded provision reflected on the balance sheet.
While the timing of such obligations cannot be pre-determined (and
as such were not included in the above table), such liability will be removed, either by termination of employment or retirement.
50
C. Research
and Development, Patents and Licenses, etc.
Since we commenced operations, we have conducted extensive research,
development and engineering activities. Our efforts emphasize the development of new products, cost reduction of current products, and
the enhancement of existing products, generally in response to rapidly changing customer preferences, technologies and industry standards.
Because the market for our products is characterized by rapidly
changing technology and evolving industry standards, our success depends upon our ability to select, develop, manufacture and market new
and enhanced products in a timely manner to meet changing market needs. As such, we invest significant resources in research and new product
development, enhancements to existing products, and the development of new networking and connectivity technologies, and we expect to
continue to do so.
As of June 2012, we have a patent No. 8,199,523 entitled 'Server-Based
Network Appliance' from the United States Patent and Trademark Office, which relates to a server-based network appliance in which a computer
motherboard is mounted in a case with the bus slots of the motherboard adjacent to the rear side of the case.
On September 16, 2013, we acquired all of the intellectual property
related to the unique Virtualization Off-Load Engine developed during the last two years by Net Perform Technology, Ltd., a privately
held company registered in Hong Kong, China.
As of December 2014, we own or have licenses or similar rights
with respect to Silicom Denmark (Fiberblaze A/S), including Silicom Denmark (Fiberblaze A/S)'s high performance OEM hardware platform
for Ethernet and network interface product family, registered names and domain name.
As of October 2015, we own all intellectual property and intellectual
property rights in which ADI has an ownership interest or have licenses or similar right where ADI has such licenses or rights, including
with respect to custom embedded, communications and networking products based on the latest Intel® silicon, registered names and
domain name.
As of January 2018, we have a patent No. 9,858,227 entitled 'Hybrid
Networking Application Switch' from the United States Patent and Trademark Office, which relates to a unique solution for combining functionalities
of a rack mounted networking switch and a rack mounted server into a single rack mounted enclosure comprising a hybrid networking application
switch or an accelerated hybrid networking application switch.
We cannot assure you that the scope of any issued patent will adequately
protect our intellectual property rights, or that patents will not be challenged, invalidated, or circumvented or that the rights granted
under the patents will provide us with meaningful protection or any commercial advantage.
51
For additional information regarding the risks to the Company with
respect to patents and other intellectual property rights see the risk factor entitled "We may not be able to protect our intellectual
proprietary rights" under Item 3.D. – "Risk Factors."
The Government of Israel encourages research and development projects
oriented towards products for export or projects which will otherwise benefit the Israeli economy. In each of the three fiscal years from
1999 to 2001, we received grants from the Office of the Chief Scientist, replaced by the IIA, for the development of systems and products.
We have received from the IIA up to 30% of certain research and development expenditures for particular projects. Under the terms of Israeli
Government participation, a royalty usually at the rate of 3% of sales of products developed from a project funded by the IIA must be
paid, beginning with the commencement of sales of products developed with grant funds and ending when a dollar-linked amount equal to
100% of such grants without interest, for projects approved prior to December 2000, and plus interest at LIBOR or other applicable interest
rate, for amounts received after that date, is repaid. The terms of Israeli Government participation also place restrictions on the location
of the manufacturing of products developed with government grants, which, in general, must be performed in Israel, and on the transfer
to third parties of technologies developed through projects in which the government participates. The IIA has previously provided funding
in relation to our research and development efforts. As of the date hereof, we have received funding from the IIA in the aggregate amount
of approximately US$ 4,388,000 and have paid the IIA an aggregate amount of approximately US$ 1,428,000 in royalties in relation thereto.
See "Item 4.B. – Information on the Company – Business Overview – Governmental Regulation Affecting the Company."
In August 2005, we received approval for a US$54 thousand-dollar
grant from the Korea-Israel Industrial Research and Development Foundation, or Koril-RDF, in connection with the joint development of
a certain product with a Korean company. Under the terms of this grant we are required to repay the amounts received at a rate of 2.5%
per year of our gross sales of the product developed with the grant in each such year, until 100% of the grant (and any other sums received
from Koril-RDF) are repaid. We received approximately 20%-30% of certain research and development expenditures for two projects in 2003
and 2004. As of January 2006, and to date, our research and development activities have been sponsored and funded by us, and we did not
participate in any new encouragement programs or received any additional grants from the IIA or Koril-RDF. We have closed all our IIA
funded programs, and do not anticipate having any sales of products funded by IIA grants or be required to pay any royalties to the IIA
with respect thereto.
We expect that we will continue to commit resources to research
and development in the future. As of March 31, 2023, we had 136 employees engaged primarily in research and development and design activities
of which 90 employees in Israel, 19 in Denmark and 27 in the U.S. In 2020, 2021 and 2022 our research and development expenses were, US$
17,244 thousand, US$ 20,091 thousand, and US$ 20,563 thousand respectively, constituting approximately 16.06%,15.64% and 13.66% respectively,
of our sales.
The increase in our research and development expenses in 2022 compared
to 2021 was mainly attributed to a decrease in capitalization of internal software development costs in the amount of US$ 2,547 thousand
in 2022, compared to US$ 3,562 thousand in 2021, as well as an increase in the share-based compensation which amounted to approximately
US$ 1,454 thousand in 2022, compared to US$ 1,011 thousand in 2021, offset by a strengthening of the US Dollar against the New Israeli
Shekel and the Danish Krone (since a significant portion of our research and development expenses are incurred in New Israeli Shekels
and Danish Krone), which amounted to approximately US$ 1,018 thousand.
52
D. Trend
Information
In today's network-based environment, the rate at which traffic
is generated is continuously growing and as such there is a continuous demand for scalability of the networks. This demand is behind some
of the trends that have a significant impact on us.
The first and obvious trend is the shift to the Cloud, whether
it is a public cloud or a private cloud. One of the main messages of the Cloud shift is the call for standardization, which is key for
scalability. Standardization has created two important trends, which are Disaggregation and Decoupling. Disaggregation calls for disconnecting
the proprietary interfaces between the various parts of the network and allowing various parts to be procured separately from different
vendors. Decoupling is the decoupling of the Hardware from the Software also allowing for separate procurement efforts for the Software
and the Hardware and also resulting in the ability to purchase from different vendors.
The Disaggregation and Decoupling trends, which started at the
Cloud level, continued into the Mobile operators' and Telcos' worlds, where Mobile operators and Telcos have also moved towards buying
Hardware platforms separately from the Software running on such Hardware platforms, each of which came from a different vendor. This process
started with SD-WAN applications, then moved into additional applications through NFV, both of which increasingly utilize Hardware platforms
for deployment. Mobile operators and Telcos have applied the same trends of Disaggregation and Decoupling to their 4G/5G infrastructure
deployment. A significant indication in that direction was the adoption of O-RAN (Open RAN or Open Radio Access Networks), a process standardizing
the interfaces in the mobile network, and as such, allowing both Disaggregation (not everything from one vendor) and Decoupling (obtaining
the Hardware and the Software separately).
These trends are having a significant impact on us.
The basic Cloud trend is creating a gradual decrease in demand
for our Server Adapters as these are sold mostly through appliances vendors which have less need for our products. Such vendors are now
forced to sell to the Cloud players, rather than to their traditional end customers, and such Cloud players are now buying from them Software
only, rather than a full system comprised of Hardware and Software. Even when the Cloud is a private or On Premise, it is based on standard
components with decreasing demand for specialized and customized Server Adapters.
On the other hand, having such standardization increases the demand
for our Smart Cards as the standard servers, which constitute the Cloud, need acceleration and offloading in order to increase their performance.
Furthermore, the Disaggregation and Decoupling trends have created
significant demand by the Mobile Operators, Service Providers and Telcos for CPE devices used in connection with SD-WAN, SASE, Telco dedicated
Routers and NFV, and we are currently seeing the increasing demand for our CPE devices due to that trend.
53
As with the basic trends, the impact of Disaggregation and Decoupling
is impacting the mobile 4G/5G infrastructure market through O-RAN, as Mobile operators and Telcos are not currently limited to buying
all of their necessary parts from the same suppliers (for example, as sold by Nokia and Ericsson), but rather can split their networks
into different components and as such, they may buy parts of their network from us. Also, the fact that the Software is decoupled from
the Hardware means that they can buy from us (and from companies like us) the Hardware only (including the Software which is related to
the Hardware, rather than the full solution). Since the Hardware that is required under O-RAN needs acceleration, and we have such acceleration
with our time synchronization products, FEC accelerators and FPGA cards, we are well placed to provide solutions to this market.
The sales cycles in the markets for our products are long. Continuous
achievement of Design Wins according to the process described above and obtaining new customers is time consuming. However, each Design
Win we have achieved and will continue to achieve, may represent an opportunity for sustained long-term revenues once we establish a relationship
with a customer.
Although we expect our business and products to further develop
in the coming years through these trends, there is no assurance that we will continue to generate significant sales in the areas in which
we operate and specifically the new areas as described above.
E.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles
generally accepted in the United States of America. The preparation of the financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Critical accounting policies are defined as those that are reflective
of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and
conditions. We believe that our critical accounting policies are limited to those described below.
Revenue recognition – We recognize revenue upon transfer
of control of the promised goods in a contract with a customer in an amount that reflects the consideration we expect to receive in exchange
for those products. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment
or once delivery and risk of loss has transferred to the customer. We account for a contract with customer when it has approval and commitment
from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability
of consideration is probable. Each of our contracts includes one type of performance obligation. We evaluate each distinct performance
obligation within a contract, whether it is satisfied at a point in time or over time. Most of our revenues are recognized at a point
in time. Revenue is recognized over time for sales of goods manufactured to unique customer specifications, in which our performance does
not create an asset with an alternative use to us and we have an enforceable right to payment for performance completed to date if the
customer were to terminate the contract. Revenue recognized over time is measured by the costs incurred to date relative to the estimated
total direct costs to fulfill each contract. Incurred costs represent work performed, which corresponds with, and thereby best depicts,
the transfer of control to the customer. Contract costs include labor, materials and overhead.
54
Capitalization of software development costs (mainly salary) related
to programmable components incorporated into our products, are charged to expense until technological feasibility has been established
for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for
general release to customers. Judgment is required in determining when technological feasibility of a product is established. We have
determined that technological feasibility for our software components of hardware products is reached after all high-risk development
issues have been resolved through coding and testing. Amortization begins once the software is ready for its intended use, generally based
on the pattern in which the economic benefits will be consumed. The amortization of these costs is included in cost of revenue over the
estimated life of the products. Other costs incurred in the research and development of our products are expensed as incurred.
On July 22, 2002, our audit committee and the Board of Directors
approved an Indemnification Agreement with our directors and officers. Our shareholders approved the terms of this agreement in a General
and Extraordinary Meeting held on January 7, 2004. In Amendment 3 to the Companies Law, the instances in which a company may indemnify
its officers and directors were broadened. In December 2007, each of our audit committee and Board of Directors approved a new form of
Indemnification Agreement with our directors and officers so as to reflect this amendment. Our shareholders approved the terms of this
new Indemnification Agreement in January 2008. The Indemnification Agreement provides that the directors and officers will be exempt from
liability in certain circumstances. The Indemnification Agreement also provides for the indemnification by us for certain obligations
and expenses imposed on the officer in connection with an act performed in his or her capacity as an officer of the Company. This right
to indemnification is limited, and does not cover, among other things, a breach of an officer's duty of loyalty, a willful breach of an
officer's duty of care, or a reckless disregard for the circumstances or consequences of a breach of duty of care. The right to indemnification
also does not cover acts that are taken intentionally to unlawfully realize personal gain. The maximum amount of our liability under these
Indemnification Agreements for any monetary obligation imposed on an officer or a director in favor of another person by a judgment is
currently US$ 3,000,000 for each instance of a covered scenario. In addition, we would be liable to indemnify the officer or director
for all reasonable litigation expenses with respect to certain proceedings. We are not aware of any material pending action that may result
in anyone claiming such indemnification.
An amendment in 2011 to the Israeli Securities Law, 5728-1968 (the
"Israeli Securities Law"), and a corresponding amendment to the Companies Law, authorized the Israel Securities Authority (the "ISA")
to impose administrative sanctions against Israeli public companies and their office holders for certain violations of the Israeli Securities
Law or the Companies Law. These sanctions include monetary sanctions and certain restrictions on serving as a director or senior officer
of a public company for certain periods of time. The Israeli Securities Law and the Companies Law provide that only certain types of such
liabilities may be reimbursed by indemnification and insurance. Specifically, legal expenses (including attorneys' fees) incurred by an
individual in the applicable administrative enforcement proceeding and certain compensation payable to injured parties for damages suffered
by them are permitted to be reimbursed via indemnification or insurance, provided that such indemnification and insurance are authorized
by the company's articles of association, and receive the requisite corporate approvals. In January 2012 each of our audit committee and
Board of Directors approved a new form of Indemnification Agreement with our directors and officers serving in such capacities from time
to time so as to reflect this amendment, and at the Annual General Meeting of the Shareholders held on April 11, 2012 our shareholders
approved these amendments to the Company's Articles of Association (the "Articles of Association") and a revised form of Indemnification
Agreement for directors serving in such capacity from time to time.
As per Amendment 20 to the Companies Law ("Amendment 20"), it was
decided on July 31, 2013, at the Extraordinary General Meeting of the Shareholders to adopt the Executive Compensation Policy of the Company,
which was recommended by our Compensation Committee and approved by our Board of Directors. The Executive Compensation Policy included
the above referenced form of Indemnification Agreement to be entered into by the Company with our directors and officers serving in such
capacities from time to time. The Executive Compensation Policy also noted that going forward, any change to the Indemnification Agreement,
including any changes which materially depart from the key terms of the current agreement (provided that such changes apply equally to
all executives of the Company, including directors) will be submitted to the Company's Compensation Committee and the Board of Directors
for their approval but shall not, unless required by law or the Company's Articles, be presented at a General Meeting of the shareholders.
As set forth in the Companies Law, an Executive Compensation Policy for a period exceeding three years has to be re-approved once every
three years. Accordingly, our Amended Executive Compensation Policy was brought for shareholders' re-approval at the annual general meeting
of our shareholders in 2019. At the Annual General Meeting, held on June 7, 2022, an Amended Executive Compensation Policy was rejected
by our shareholders but following the Meeting it was approved by our compensation committee and the Board of Directors on June 12, 2022,
in accordance with the Companies Law in Israel and after determining that the approval of the Amended Compensation Policy was for the
benefit of the Company.
We are not a party to any other material off-balance sheet arrangements
or contingent obligations.
55
|
Item 6.
|
DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES |
A. Directors
and Senior Management
The following table and notes thereto set forth information regarding
our directors and senior management as of March 31, 2022:
|
Name |
Age |
Position with Company |
|
Avi Eizenman(1) |
65 |
Active Chairman of the Board |
|
Shaike Orbach(2)
|
71 |
Executive Vice Chairman of the Board |
|
Ayelet Aya Hayak(3)
|
53 |
Director |
|
Ilan Erez(3) |
55 |
Director |
|
Eli Doron(4) |
70 |
Director |
|
Liron Eizenman(5)
|
37 |
President, Chief Executive Officer |
|
Eran Gilad |
55 |
Chief Financial Officer and Company Secretary |
| (1) |
Serving an additional two-year term, commencing as of June 7, 2022. |
| (2) |
Serving an additional three-year term, commencing as of June 8, 2020. |
| (3) |
Serving an additional three-year term, commencing as of June 7, 2022. |
| (4) |
Serving an additional three-year term, commencing as of June 3, 2021. |
| (5) |
Liron Eizenman, who is the son of the active chairman of our board, Avi Eizenman, commenced serving as our President and Chief Executive
Officer, on July 1, 2022. |
Avi Eizenman
co-founded the Company in 1987 and has served as a Director since its inception. Mr. Eizenman also served as our President and Chief Executive
Officer from the Company's inception until April 1, 2001, and on such date, he resigned from his positions as President and Chief Executive
Officer and was appointed Active Chairman of the Board of Directors. Before the incorporation of Silicom, Mr. Eizenman held various engineering
and management positions at Scitex Ltd. and at the Electronic Research Development Department of the Israeli Ministry of Defense.
Mr. Eizenman holds a B.Sc. degree, with honors, in Electrical Engineering from the Technion, and an M.B.A. from Tel Aviv University.
Shaike
Orbach was our President and Chief Executive Officer from April 2001 until June 30, 2022, and has
been a director on our Board since December 2001. On July 1, 2022, Mr. Orbach was appointed Executive Vice Chairman of the Board. Prior
to joining our Company, Mr. Orbach was President and CEO of Opgal Ltd., a high-tech subsidiary of Israel's Rafael and El-Op corporations,
for a period of four and a half years. Previously, he was General Manager of Edusoft, an Israeli company the shares of which were traded
on the NASDAQ National Market (now, the NASDAQ Global Market), and Managing Director of Tecsys Ltd. He holds a B.Sc degree in Mechanical
Engineering from the Technion.
56
Ayelet Aya
Hayak has served as a director since July 1, 2013. Ms. Hayak provides financial consulting services to corporations. Hayak Ayelet
was the CEO of an Automation company, and also serves as a director in several companies. Ms. Hayek holds a BA degree in accounting and
business administration from the Tel Aviv College of Management and is also a Certified Public Accountant.
Ilan Erez has
served as a director since July 2010. Mr. Erez has been CFO and General Manager of AlgoSec Inc. since October 2019. Algosec is a global
leader in securing application connectivity anywhere. Its software platform enables the world's most complex organizations to
gain visibility, reduce risk and process changes at zero-touch across the hybrid network. Prior to that, Mr. Erez had been General
Manager of 3D Systems Corporation's (NYSE: DDD) Software Business Unit from September 2016 to March 2019 and co-managed that business
unit from May 2015 to September 2016. 3D Systems provides comprehensive 3D products and services, including 3D printers, print materials,
on-demand manufacturing services and digital design and manufacturing tools. From 2005 to 2015, Mr. Erez served as Chief Financial
Officer of Cimatron Ltd. (NASDAQ: CIMT) engaged in the design and sale of CAD/CAM software for the tool-making and discrete manufacturing
industries. From 1998 to 2005 Mr. Erez served as the Chief Financial Officer of the Company. He also served as VP Operations of the Company
from May 2001 to 2005. From 1996 to 1998 Mr. Erez served as Controller and Assistant to the Chief Executive Officer of Bio-Dar Ltd. From
1994 to 1996 Mr. Erez served as an auditor at Kesselman Kesselman, a PWC member firm. Mr. Erez is a Certified Public Accountant
in Israel and holds a B.A in Accounting and Economics from the Hebrew University and an LL.M. in Business Law from Bar-Ilan University.
Eli Doron
is the Co-founder and CTO of Carteav, that develops and manufactures an autonomous low speed vehicle. Eli Doron is also the founder of
Connesta Ltd. ("Connesta"), an Israeli high-tech company engaged in developing and providing SaaS virtual control room solutions, founded
in 2011. From inception, Mr. Doron serves as the Chief Executive Officer of Connesta. Prior thereto and during 2010, Mr. Doron was the
Chief Executive Officer of Computerized Electricity Systems ("CES"). Prior to joining CES, Mr. Doron was the co-founder of Radvision Ltd.
(formerly NASDAQ: RVSN. Acquired by Avaya Ltd. in 2011; "Radvision"). From 1992 and until 2009 Mr. Doron served as the Chief Technology
Officer of Radvision, and from 2006 and until 2009 he served as President of Radvision. Prior to founding Radvision and from 1983, Mr.
Doron served at SIMTECH Advanced Training and Simulation Systems Ltd., initially as hardware manager and from 1988 as Chief Technology
Officer. Prior thereto and from 1977, Mr. Doron served as an electronic engineer at MBT Israel Aircraft Industries Ltd. Mr. Doron holds
a B.Sc degree in electronics and computer science from Ben-Gurion University and an M.B.A. degree from the University of Bradford in the
United Kingdom.
Liron Eizenman
joined the company in 2015 as Chief Executive Officer of Silicom’s North American subsidiary and led the Edge Networking Solutions
strategy to its leadership position in the SD-WAN/Edge platforms market. In July 2022, Mr. Eizenman was named President and Chief Executive
Officer, after spending two and a half years as the Company's Chief Operating Officer. Prior to joining Silicom, Mr. Eizenman held engineering
and management roles at Microsoft and two early-stage startups. Mr. Eizenman holds a B.Sc. degree in Computer Science from the Academic
College of Tel Aviv.
57
Eran Gilad
has served as our Chief Financial Officer from May 2005 and the Secretary of the Company from 2012. From 1995 to 2005, Mr. Gilad held
senior financial and operational positions in various public and private companies operating in the high-tech field. He is a Certified
Public Accountant in Israel and holds an M.A in Economics from Tel-Aviv University and a B.A in Accounting and Economics from Tel-Aviv
University.
B. Compensation
In accordance with the Companies Law, the following
table presents information regarding compensation actually received by our five most highly paid office holders during the year ended
December 31, 2022. All amounts are in USD, based on the following components:
“Salary
and Benefits” include annual salary or service fees paid, payments to the National Insurance Institute, manager’s insurance
and pension funds, severance, advanced education funds, basic health insurance, vacation pay, recuperation pay, tax gross-up payments,
automobile-related expenses, telephone expenses and benefits and perquisites as mandated by Israeli or applicable law.
“Cash
Bonus” includes bonus payments as recorded in our financial statements for the year ended December 31, 2022.
“Equity-based
Compensation” includes the expense recorded in our financial statements for the year ended December 31, 2022, with respect
to equity-based compensation granted to the executive officers detailed above.
Avi
Eizenman – Active Chairman. Salary
and Benefits $518,856; Cash Bonus $308,115; Equity-based
Compensation $457,933.
Yeshayahu
(‘Shaike’) Orbach – Executive Vice Chairman (*).
Salary and Benefits $528,465; Cash Bonus $154,058; Equity-based
Compensation $457,933.
Liron Eizenman
– President and CEO (*). Salary and Benefits $322,932; Cash Bonus $174,775; Equity-based
Compensation $287,699.
Eran
Gilad – CFO and Company Secretary.
Salary and Benefits $270,172; Cash Bonus $35,123; Equity-based Compensation $103,360.
David Castiel
– VP Engineering. Salary and Benefits $270,020; Cash Bonus $35,123; Equity-based Compensation
$103,360.
| (*) |
Yeshayahu ('Shaike') Orbach served as CEO and President until June 30, 2022, and Liron Eizenman has served as our CEO and President since July 1, 2022. |
The aggregate direct remuneration paid to all persons as a group
who served in the capacity of director or office holder during the year ended December 31, 2022, was US$ 3,693 thousand. The aggregate
amount accrued to provide for severance payments to all persons as a group who served in the capacity of director or executive officer
as of the year ended December 31, 2022, was US$ 1,785 thousand. The severance terms of our Chief Executive Officer and Chairman of the
Board, as previously approved by the audit committee, board of directors and shareholders of the Company, and in accordance with the Amended
Executive Compensation Policy of the Company, may entitle them, in certain circumstances, to additional payments. of the
Mr. Liron Eizenman, Mr. Avi Eizenman and Mr. Shaike Orbach may
also be entitled to cash bonuses by meeting some pre-determined thresholds, and as calculated based on a pre-determined formula set by
our Board of Directors, as approved by the annual general meeting of our shareholders for the years commencing in 2017 on June 8, 2016.
Mr. Liron Eizenman, Mr. Avi Eizenman and Mr. Orbach’s annual cash bonuses may not exceed the value of 18 times their monthly salaries,
respectively. Mr. Liron Eizenman, Mr. Avi Eizenman and Mr. Orbach’s annual cash bonus formulas were based on achieving one or more
of the following thresholds: (i) the Company’s actual annual revenue for each applicable year is 80% or more of the pre-determined
budget target for the relevant year; and (ii) the Company’s actual annual operating profit for each applicable year is 65% or more
of the pre-determined budget target for the relevant year. The Compensation Committee may, in its sole discretion, raise or lower such
annual cash bonuses by up to 30%. Furthermore, in accordance with the Company’s recoupment policy, Mr. Liron Eizenman, Mr. Avi Eizenman
and Mr. Orbach may be required to reimburse the Company for the cash bonuses (or any part thereof) paid in the previous 3 years, in the
event such cash bonuses were based on financial data included in the Company’s financial statements that were found to be inaccurate
and were subsequently restated.
Non-employee directors, including External Directors within the
meaning of the Companies Law, are entitled to be paid cash compensation for board and any committee member services, as applicable,
in accordance with the amounts which are permitted under the Companies Regulations (Rules Regarding Compensation and Expenses of External
Directors) – 2000 enacted pursuant to the Companies Law. Office holders, including External Directors or Independent Directors,
may waive their entitlement to their compensation, subject to applicable law.All our office holders other than Mr. Eli Doron and our independent
directors are employed by us. We do not currently grant any variable bonus or equity-based compensation, nor any separation payments to
our non-employee directors. Certain of the compensation previously paid to our directors was paid in the form of options which were granted
under share option plans which have expired (including under the Share Option Plan (2004)), or options and RSU’s which were and
may be granted under the Silicom Ltd. – Global Share Incentive Plan (2013), as described below.
58
On December 30, 2004, our shareholders adopted our Share Option
Plan (2004), which expired at the end of 2014. As of March 31, 2019, there were no outstanding options under the Share Option Plan (2004)
which were granted to directors and office holders.
On October 21, 2013, our board of directors adopted our Global
Share Incentive Plan (2013). On April 30, 2014, the annual general meeting of our shareholders approved the Global Share Incentive Plan
(2013) to qualify for incentive stock options for U.S. tax purposes. The Global Share Incentive Plan (2013) is administered by the board
of directors, which determines the number of our ordinary shares available for issuance under the plan, designates the award recipients
and types of awards, dates of grant, vesting periods and the exercise price of awards. Under the Global Share Incentive Plan (2013) the
Company may grant awards of options, restricted shares, restricted share units (“RSUs”) or other equity-based awards. The
board of directors has determined that initially up to a maximum of 500,000 of our ordinary shares are reserved for issuance, subject
to certain adjustments, upon the exercise of equity-based awards granted to employees, directors, office holders, consultants and service
providers. On January 29, 2018, our board of directors increased the number of our ordinary shares available for issuance under the Global
Share Incentive Plan (2013) by 600,000 Ordinary Shares, and on January 27, 2022, our board of directors increased the number of our ordinary
shares available for issuance by an additional 750,000 Ordinary. The awards are non-assignable except by the laws of descent. Certain
tax advantages apply to certain of our directors, office holders and employees with respect to equity-based awards granted to them under
Global Share Incentive Plan (2013).
As of December 31, 2016, our compensation committee and board of
directors, respectively, have approved the grant of a total of 82,000 RSUs and 209,963 options under the Global Share Incentive Plan (2013),
of which the following were granted to directors and office holders: (a) in 2014 a total of 54,000 RSUs were granted, (b) in 2015 a total
of 29,999 options were granted with an exercise price of US$ 26.91, and with an expiration date upon the earlier to occur of: (i) July
28, 2023; and (ii) the closing price of the shares falling below US$ 13.46 at any time after the date of grant, (c) in 2016 a total of
29,999 options were granted with an exercise price of US$ 28.38, and with an expiration date upon the earlier to occur of: (i) June 8,
2024, or (ii) the closing price of the shares falling below US$ 14.19 at any time after the date of grant.
In January 2017, our compensation committee and board of directors,
respectively, approved a grant under the Global Share Incentive Plan (2013) of a total of (a) 119,925 options of which a total of 29,999
options were granted to directors and office holders with an exercise price of US$ 39.62, and an expiration date upon the earlier to occur
of: (i) January 30, 2025, or (ii) the closing price of the shares falling below US$ 19.81 at any time after the date of grant, and (b)
78,000 RSUs were granted, of which 54,000 RSUs were granted to directors and office holders. The annual general meeting of our shareholders
approved such grants of options and of RSUs granted to directors in their meeting on June 5, 2017.
59
In April, 2018, our compensation committee and board of directors,
respectively, approved the grant under the Global Share Incentive Plan (2013) of a total of 137,010 options under the Global Share Incentive
Plan (2013), of which 29,999 options were granted to directors and office holders. The exercise price for the options (per ordinary share)
is US$ 36.11. Such options shall expire, by their terms, on the earlier to occur of: (a) April 30, 2026, and (b) the closing price of
the shares falling below US$ 18.06 at any time after the date of grant. The annual general meeting of our shareholders approved such grants
of options to directors in their meeting on June 12, 2018.
In January 2019, our compensation committee and board of directors,
respectively, approved the grant under the Global Share Incentive Plan (2013) of a total of 141,928 options under the Global Share Incentive
Plan (2013), of which 29,999 options were granted to directors and office holders. The exercise price for the options (per ordinary share)
is US$ 33.83. Such options shall expire, by their terms, on the earlier to occur of: (a) January 31, 2027, and (b) the closing price of
the shares falling below US$ 16.92 at any time after the date of grant. The annual general meeting of our shareholders approved such grants
of options granted to directors in their meeting on June 5, 2019.
In January 2020, our compensation committee and board of directors,
respectively, approved the grant of a total of 148,426 options and a total of 86,000 RSUs under the Global Share Incentive Plan (2013),
of which 29,999 options and 54,000 RSUs were granted to directors and office holders. The exercise price for the options (per ordinary
share) is US$ 32.54. Such options shall expire, by their terms, on the earlier to occur of: (a) June 8, 2028, and (b) the closing price
of the shares falling below US$ 16.27 at any time after the date of grant. The annual general meeting of our shareholders approved such
grants of options and of RSUs granted to directors in their meeting on June 8, 2020.
In January 2021, our compensation committee and board of directors,
respectively, approved the grant of a total of 137,759 options under the Global Share Incentive Plan (2013), of which 29,999 options were
granted to directors and office holders. The exercise price for the options (per ordinary share) is US$ 41.84. Such options shall expire,
by their terms, on the earlier to occur of: (a) June 3, 2029, and (b) the closing price of the shares falling below US$ 20.92 at any time
after the date of grant. The annual general meeting of our shareholders approved such grants of options granted to directors in their
meeting on June 3, 2021.
In January 2022, our compensation committee and board of directors,
respectively, approved the grant of a total of 121,508 options and 16,000 RSUs under the Global Share Incentive Plan (2013), of which
3,333 options were granted to an office holder. The exercise price for the options (per ordinary share) is US$ 47.98. Such options shall
expire, by their terms, on the earlier to occur of: (a) January 27, 2030, and (b) the closing price of the shares falling below US$ 23.99
at any time after the date of grant and remains at such price or at a lower price for a period of at least 30 days.
In March 2022, our compensation committee and board of directors,
respectively, approved the grant of a total of 26,666 options under the Global Share Incentive Plan (2013), of which 26,666 options were
granted to directors and office holders. The exercise price for the options (per ordinary share) is US$ 35.69. Such options shall expire,
by their terms, on the earlier to occur of: (a) June 7, 2030, and (b) the closing price of the shares falling below US$ 17.85 at any time
after the date of grant and remains in such price or at a lower price for a period of at least 30 days. The Annual General Meeting of
our shareholders approved such grants of options granted to directors in their meeting on June 7, 2022.
60
In April 2022, our compensation committee and board of directors,
respectively, approved the grant of a total of 50,000 options under the Global Share Incentive Plan (2013), of which 50,000 options were
granted to an office holder. The exercise price for the options (per ordinary share) is US$ 34.90. Such options shall expire, by their
terms, on the earlier to occur of: (a) July 1, 2030, and (b) the closing price of the shares falling below US$ 17.45 at any time after
the date of grant and remains at such price or at a lower price for a period of at least 30 days. The Annual General Meeting of our shareholders
approved such grant of options in their meeting on June 7, 2022.
In March 2023, our compensation committee and board of directors,
respectively, approved the grant of a total of 137,911 options and 86,000 RSUs under the Global Share Incentive Plan (2013), of which
29,999 options and 54,000 RSUs will be granted to directors and office holders. The grants are subject to the approval of our 2023 Annual
General Meeting, which will convene on June 14, 2023.
As of March 31, 2023, a total of 143,699 of the options granted
under the Global Share Incentive Plan (2013) were returned to the company after not being exercised following the cessation of employment
of certain employees, as set forth in the terms of grant of such options.
C.
Board Practices
Avi Eizenman was re-elected to the Board of Directors on June 7,
2022, to serve until the Annual General Meeting to be held in the year 2024, and until his successor has been duly elected, subject to
the Companies Law and our Articles. Avi Eizenman is a founder of the Company and has served as a director since our inception in 1987.
Shaike Orbach was re-elected to hold office as a director most recently on June 8, 2020, to serve until the Annual General Meeting which
will take place in 2023. Eli Doron was re-elected to the board of directors most recently in June 3, 2021, to serve until the Annual General
Meeting to be held in 2024. On July 1, 2010, Mr. Ilan Erez was elected as an External Director for an initial term of three years in accordance
with Section 245(a) of the Companies Law, with such term ending as of July 1, 2013. At the Annual General Meeting of our shareholders
held on April 14, 2013, the shareholders re-elected Mr. Ilan Erez as an External Director for a second three-year term, and elected Ms.
Ayelet Aya Hayak as an External Director for an initial three-year term, with such terms of office for the external directors commencing
as of July 1, 2013. Mr. Ilan Erez and Ms. Ayelet Aya Hayak were re-elected as External Directors for a fourth three-year term and third
three-year term, respectively, at the Annual General Meeting of our shareholders, which took place on June 5, 2019. Mr. Ilan Erez and
Ms. Ayelet Aya Hayak were elected as directors to the board of directors on June 7, 2022, to serve until the Annual General Meeting to
be held in 2025.
61
None of the members of the Board of Directors is entitled to receive
any severance or similar benefits upon termination of his or her service with the Board of Directors, except for Avi Eizenman, who also
serves as the active Chairman of the Board, Shaike Orbach, who until the last Annual General Meeting held on June 7, 2022 served as President
and Chief Executive Officer (and currently serves as the Executive Vice Chairman of our Board), and Liron Eizenman, who serves as our
President and Chief Executive Officer (See “Item 6.B. – Directors and Senior Management – Compensation” above).
Notice of Termination
In December 2007, our audit committee and Board of Directors approved
severance arrangements for each of Mr. Avi Eizenman and Mr. Yeshayahu ('Shaike') Orbach, which provide for extended notice provisions
and severance payments in the event of termination. The arrangements were approved by our shareholders in January 2008. On April 28, 2022,
Our Compensation Committee and Board of Directors approved severance arrangements for Mr. Liron Eizenman. Mr. Liron Eizenman's severance
arrangements were then approved by our shareholders at the most recent Annual General Meeting, held on June 7, 2022. The severance arrangements
include the following main terms and conditions (identical with respect to each of Mr. Avi Eizenman, Mr. Shaike Orbach and Mr. Liron Eizenman):
The termination of employment of Mr. Avi Eizenman, Mr. Shaike Orbach
or Mr. Liron Eizenman by him or by us, for any reason other than cause (which is generally defined as willful conduct or omission materially
injurious to the company), death or disability, shall require 12 months advance written notice. If, however, following a change of control
transaction, either: (i) he shall give notice of termination of his employment for good reason (which is generally defined as an adverse
change to the status, responsibilities, salary or other material terms of his employment); or (ii) we shall give notice of termination
of his employment for any reason other than cause or disability, 18 months advance written notice shall be required. A change of control
transaction includes transactions such as sale of all or substantially all of the company’s shares or assets, or a merger, acquisition,
or other reorganization in which control of our company changes following such transaction.
Severance Payments
If the employment of Mr. Avi Eizenman, Mr. Shaike Orbach or Mr.
Liron Eizenman shall be terminated for any reason other than cause, he shall be entitled to receive his last full monthly salary multiplied
by the number of years (or portions thereof) that he was employed by us (i.e. the severance amount he would be entitled to receive under
the Israeli law, had we terminated his employment for any reason other than cause) (the “Severance Law Amount”). If, however,
his employment shall be terminated: (i) by the company for any reason other than cause or disability; or (ii) by him for a good reason
following a change of control, he shall be entitled to receive one and half times the Severance Law Amount. If his employment under the
arrangement is terminated by reason of death or disability, then, in addition to the above, he shall be entitled to receive a lump sum
severance payment equal to his last full monthly salary multiplied by twelve 12 months.
62
As per Amendment 20, it was decided at the Extraordinary General
Meeting of the Shareholders on July 31, 2013, to adopt the Executive Compensation Policy of the Company, which included the above referenced
extended notice provisions, and severance payments in the event of termination, with respect to each of Mr. Avi Eizenman and Mr. Shaike
Orbach. The Amended Executive Compensation Policy was approved by our Annual General Meeting convened in June 2019. At the Annual General
Meeting, held on June 7, 2022, an Amended Executive Compensation Policy was rejected by our shareholders but following the Meeting it
was approved by our compensation committee and the Board of Directors on June 12, 2022, in accordance with the Companies Law in Israel
and after determining that the approval of the Amended Compensation Policy was for the benefit of the Company.
Board of Directors
Our Articles provide for a Board of Directors of not less than
two and not more than eight members. At the Annual General Meeting of the Shareholders on June 8, 2016, it was decided to adopt a new
Directors Voting Mechanism, and to amend the Articles accordingly. Under the new Directors Voting Mechanism, Directors are divided into
three groups, Group A, Group B and Group C. Each group is brought for re-election once every three years, on a rotating basis, such that
at each Annual General Meeting of the shareholders a given group of Directors is brought for election, to serve on a continuous basis
for a three-year term, until the Annual General Meeting in three years’ time and until their respective successors are duly elected,
at which point their term in office shall expire. At each Annual General Meeting, the Annual General Meeting shall be entitled to elect
Directors to replace the Directors whose three-year term in office has expired, and so on ad infinitum, so that each year, the term in
office of one group of directors shall expire. Other office holders serve at the discretion of the Board of Directors. The amended and
restated Articles of Association of the Company provide that any director may, subject to the provisions of the Companies Law and the
approval by the Board of Directors, appoint another person to serve as an Alternate Director and may cancel such appointment. Under the
Companies Law, a person who is already serving as a director will not be permitted to act as an Alternate Director. Additionally, the
Companies Law prohibits a person from serving as an Alternate Director for more than one Director. Appointment of an Alternate Director
for a member of a board committee is only permitted if the alternate is a member of the Board of Directors and does not already serve
as a member of such committee. If the committee member being substituted is an External Director, the alternate may only be another External
Director who possesses the same expertise as the External Director being substituted. The term of appointment of an Alternate Director
may be for one meeting of the Board of Directors or for a specified period or until notice is given of the cancellation of the appointment.
To our knowledge, no Director currently intends to appoint any other person as an Alternate Director, except if the Director is unable
to attend a meeting of the Board of Directors.
63
External Directors
Under the Companies Law, companies registered under the laws of
Israel, the shares of which have been offered to the public in or outside of Israel, are required to appoint no less than two external
directors. No person may be appointed as an external director if such person is a relative (as defined in the Companies Law) of a “controlling
shareholder” or if such person, or the person’s relative, partner, employer or any entity under the person’s control,
has or had, on or within the two years preceding the date of the person’s appointment to serve as External Director, any affiliation
with any of either the company, any entity or person controlling, controlled by or under common control with the company” or relatives
of such person. The term “affiliation” includes:
| • |
An employment relationship; |
| • |
A business or professional relationship maintained on a regular basis; |
| • |
Control; and |
| • |
Service as an office holder. |
The Israeli Minister of Justice, in consultation with the ISA,
may determine that certain matters will not constitute an affiliation, and has issued certain regulations with respect thereof.
If the company does not have a “controlling shareholder”
or a shareholder who holds company shares entitling him to vote at least 25% of the votes in a shareholders meeting, then the company
may not appoint as an external director any person or such person’s relative, partner, employer or any entity under the person’s
control, who has or had, on or within the two years preceding the date of the person’s appointment to serve as external director,
any affiliation with the Chairman of the Board, Chief Executive Officer, a substantial shareholder who holds at least 5% of the issued
and outstanding shares of the company or voting rights which entitle him to vote at least 5% of the votes in a shareholders meeting, or
the Chief Financial Officer.
A person shall be qualified to serve as an external director only
if he or she possesses “expertise in finance and accounting” or “professional qualifications.” At least one external
director must possess “expertise in finance and accounting.”
A director can satisfy the requirements of having “expertise
in finance and accounting” if due to his or her education, experience and qualifications he or she has acquired expertise and understanding
in business and accounting matters and financial statements, in a manner that allows him or her to understand, in depth, the company’s
financial statements and to spur a discussion regarding the manner in which the financial data is presented.
A public company’s board of directors must evaluate the proposed
external director’s “expertise in finance and accounting”, by considering, among other things, such candidate’s
education, experience and knowledge in the following: (i) accounting and auditing issues typical to the field in which the company operates
and to companies of a size and complexity similar to such company; (ii) the company’s independent public accountant’s duties
and obligations; (iii) preparation of the company’s consolidated financial statements and their approval in accordance with the
Companies Law and the Israeli Securities Law.
64
A director is deemed to be ”professionally qualified”
if he or she meets any of the following criteria: (i) has an academic degree in any of the following professions: economics, business
administration, accounting, law or public administration; (ii) has a different academic degree or has completed higher education in a
field that is the company’s main field of operations, or a field relevant to his or her position; or (iii) has at least five years’
experience in any of the following, or has at least a cumulative total of at least five years’ experience in any two of the following:
(A) a senior position in the business management of a corporation with a significant extent of business, (B) a senior public position
or a senior position in public service, or (C) a senior position in the company’s main field of operations. As with a candidate’s
“expertise in finance and accounting”, the board of directors here too must evaluate the proposed external director’s
“professional qualification” in accordance with the criteria set forth above.
The declaration required by law to be signed by a candidate to
serve as an external director must include a statement by such candidate concerning his or her education and experience, if relevant,
in order that the board of directors may properly evaluate whether such candidate meets the requirements of having “expertise in
finance and accounting” or being “professionally qualified” as set forth in the regulations. Additionally, the candidate
should submit documents and certificates that support the statements set forth in the declaration.
No person may serve as an external director if the person’s
position or other business activities create, or may create, a conflict of interest with the person’s responsibilities as an external
director or may otherwise interfere with the person’s ability to serve as an external director. Additionally, no person may serve
as an external director if the person, the person’s relative, spouse, employer or any entity controlling or controlled by the person,
has a business or professional relationship with someone with whom affiliation is prohibited, even if such relationship is not maintained
on a regular basis, excepting negligible relationships, or if such person received from the company any compensation as an external director
in excess of what is permitted by the Companies Law. Pursuant to the recently enacted amendment to the Companies Regulations (Matters
Which do not Constitute Affiliation), 2006, effective as of April 3, 2016 (the “Amendment to the Affiliation Regulations”),
business or professional relationship maintained on a regular basis between the company and the external director will not constitute
affiliation if the relationship commenced after the appointment of the external director for office, the company and the external director
consider the relationship to be negligible and the audit committee approved, based on information presented to it, that the relationship
is negligible, and the external director declared that he or she did not know and could not have reasonably know about the formation of
the relationship and has no control over its existence or termination. If, at the time external directors are to be appointed, all current
members of the board of directors who are not controlling shareholders or relatives of such shareholders are of the same gender, then
at least one external director must be of the other gender.
65
External directors are to be elected for a term of three years
by a majority vote at a shareholders’ meeting, provided that either:
| • |
the majority includes at least a majority of the shares held by non-controlling and disinterested shareholders who are present and
voting at the meeting; or |
| • |
the total number of shares held by non-controlling and disinterested shareholders that voted against the election of the director
does not exceed two percent of the aggregate voting rights in the company. |
External directors may be re-elected for two additional terms of
three years each, provided that with respect to the appointment for each such additional three-year term, one of the following has occurred:
(i) the reappointment of the external director has been proposed by one or more shareholders holding together 1% or more of the aggregate
voting rights in the company and the appointment was approved at the general meeting of the shareholders by the requisite majority, provided
that: (1) in calculating the majority, votes of controlling shareholders or shareholders having a personal interest in the appointment
as a result of an affiliation with a controlling shareholder and abstentions are disregarded, (2) the total number of shares of shareholders
who do not have a personal interest in the appointment as a result of an affiliation with a controlling shareholder and/or who are not
controlling shareholders, present and voting in favor of the appointment exceed 2% of the aggregate voting rights in the company, and
the external director who has been nominated in such fashion is not a “linked or competing shareholder”, and does not have
or has not had, on or within the two years preceding the date of such person’s appointment to serve for another term as external
director, any affiliation with a linked or competing shareholder. The term “linked or competing shareholder” means the shareholder(s)
who nominated the external director for reappointment or a material shareholder of the company holding more than 5% of the shares in the
company, provided that at the time of the reappointment, such shareholder(s) of the company, the controlling shareholder of such shareholder(s)
of the company, or a company under such shareholder(s) of the company’s control, has a business relationship with the company or
are competitors of the company; the Israeli Minister of Justice, in consultation with the ISA, may determine that certain matters will
not constitute a business relationship or competition with the company; (ii) the reappointment of the external director has been proposed
by the board of directors and the appointment was approved by the majority of shareholders required for the initial appointment of an
external director; or (iii) the external director has proposed himself for reappointment and the reappointment was approved in accordance
with Sub-section (i) above.
However, under regulations promulgated pursuant to the Companies
Law, companies whose shares are listed for trading on specified exchanges outside of Israel, including the NASDAQ Global Select, Global
and Capital Markets, may elect external directors for additional terms that do not exceed three years each, beyond the three three-year
terms generally applicable, provided that, if an external director is being re-elected for an additional term or terms beyond three three-year
terms: (i) the audit committee and board of directors must determine that, in light of the external director’s expertise and special
contribution to the board of directors and its committees, the re-election for an additional term is to the company’s benefit; (ii)
the external director must be re-elected by the required majority of shareholders and subject to the terms specified in the Companies
Law; and (iii) the term during which the nominee has served as an external director and the reasons given by the audit committee and board
of directors for extending his or her term of office must be presented to the shareholders prior to their approval.
66
Further to these regulations, an amendment to the Companies Regulations
(Relief for Companies Whose Shares are Registered for Trading Outside of Israel) – 2000, (the “Amendment to the Relief Regulations”),
provides additional exemptions for such companies whose shares are listed for trading on specified exchanges outside of Israel, including
the NASDAQ Global Select, Global and Capital Markets, provided that: (i) such company does not have a controlling shareholder; and (ii)
the company complies with the requirements of the foreign securities laws and stock exchange regulations applicable to companies which
are incorporated under the laws of such foreign countries with regard to appointing independent directors and composition of the compensation
and audit committees. Any company that satisfies the above criteria and elects to comply with the applicable foreign securities laws and
stock exchange regulations, shall be exempt from the following rules under the Companies Law: (i) to have at least 2 external directors
appointed to serve in a public company; (ii) at least one of the external directors is required to have financial and accounting expertise
and the rest are required to have professional expertise; (iii) the external directors shall be appointed by the general meeting and subject
to certain voting thresholds; (iv) if all of the board members who are not controlling shareholders are of one sex, the appointed external
director shall be of the other sex; (v) all of the board committees which are empowered and authorized to exercise any of the board’s
authorities must consist of at least one external director. The exemption from these rules under Amendment 1 requires that the board be
composed of both male and female directors.
External directors may be removed only by the same percentage of
shareholders as is required for their election, or by a court, and then only if the external directors cease to meet the statutory qualifications
for their appointment, violate their duty of loyalty to the company or are found by a court to be unable to perform their duties on a
full-time basis. External directors may also be removed by an Israeli court if they are found guilty of bribery, fraud, administrative
offenses in a company or use of inside information. Each committee of a company’s board of directors which has been granted any
authority normally reserved for the board of directors must include at least one external director; provided, however, that the audit
committee and compensation committee must each include all external directors then serving on the board of directors.
Following termination of service as an external director, a public
company, a controlling shareholder thereof and any entity controlled by a controlling shareholder, may not grant any benefit, directly
or indirectly, to any person who served as an external director of such public company, or to his or her spouse or child, including, not
appointing such person, or his or her spouse or child, as an office holder of such public company or of any entity controlled by a controlling
shareholder of such public company, not employing such person or his or her spouse or child and not receiving professional services for
pay from such person, either directly or indirectly, including through a corporation controlled by such person, all until the lapse of
two years from termination of office with respect to the external director, his or her spouse or child; and with respect to other relatives
of the former external director – until the lapse of one year from termination of office.
67
An external director is entitled to compensation as provided in
regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly,
in connection with service provided as an external director.
In accordance with the Amendment to the Relief Regulations and
in compliance with the terms described above in connection therewith, in July 2020, the Company elected to take advantage of the aforementioned
exception and has chosen to opt out of the requirement to appoint external directors and regarding the composition of the audit committee
and compensation committee, subject to the following conditions: (i) none of the Company's shareholders is a controlling shareholder;
(ii) the Company complies with NASDAQ rules and regulations with respect to the composition of the Company’s audit and compensation
committees; (iii) the Company complies with NASDAQ rules and regulations with respect to the requirements of independent directors. For
so long as the Company meets the requisite requirements, the Company intends to apply the exemption from appointing at least two external
directors under the Companies Law. Accordingly, Mr. Ilan Erez and Ms. Ayelet Aya Hayak who were originally elected by our shareholders
as external directors under the Companies Law, are no longer classified as external directors, but have continued to serve on the Company’s
board of directors as independent directors under the NASDAQ rules.
Audit Committee
The Companies Law requires public companies to appoint an audit
committee. The responsibilities of the audit committee pursuant to the Companies Law include identifying irregularities in the management
of our business and approving related party transactions as required by law, classifying company transactions as extraordinary transactions
or non-extraordinary transactions and as material or non-material transactions in which an office holder has an interest (which will have
the effect of determining the kind of corporate approvals required for such transaction), assessing the proper function of the company’s
internal audit regime and determining whether its internal auditor has the requisite tools and resources required to perform his or her
role and to regulate the company’s rules on employee complaints, reviewing the scope of work of the company’s independent
accountants and their fees, and implementing a whistleblower protection plan with respect to employee complaints of business irregularities.
In addition, the responsibilities of the audit committee under the Companies Law also include the following matters: (i) to establish
procedures to be followed in respect of related party transactions with a controlling shareholder (where such are not extraordinary transactions),
which may include, where applicable, the establishment of a competitive process for such transaction, under the supervision of the audit
committee, or individual, or other committee or body selected by the audit committee, in accordance with criteria determined by the audit
committee; and (ii) to determine procedures for approving certain related party transactions with a controlling shareholder, which were
determined by the audit committee not to be extraordinary transactions, but which were also determined by the audit committee not to be
negligible transactions.
Under the Companies Law, an audit committee must consist of at
least three directors, including all the external directors of the company, and a majority of the members of the audit committee must
be independent or external directors. The Companies Law defines independent directors as either external directors or directors who: (1)
meet the requirements of an external director, other than the requirement to possess accounting and financial expertise or “professional
qualifications”, with audit committee confirmation of such; (2) have been directors in the company for an uninterrupted duration
of less than 9 years (and any interim period during which such person was not a director which is less than 2 years shall not be deemed
to interrupt the duration); and, (3) were classified as such by the company.
68
The following persons may not be a member of the audit committee:
| • |
The chairman of the board of directors; |
| • |
Any director employed by or otherwise providing services to the company or to the controlling shareholder or entity under such controlling
shareholder’s control; |
| • |
Any director who derives his salary primarily from a controlling shareholder; |
| • |
A controlling shareholder; or |
| • |
Any relative of a controlling shareholder. |
According to the Companies Law, (1) the chairman of the audit committee
must be an external director, (2) the required quorum for audit committee meetings and decisions is a majority of the committee members,
of which the majority of members present must be independent and external directors, and (3) any person who is not eligible to serve on
the audit committee is further restricted from participating in its meetings and votes, unless the chairman of the audit committee determines
that such person’s presence is necessary in order to present a certain matter, provided however, that company employees who are
not controlling shareholders or relatives of such shareholders may be present in the meetings but not for the actual votes, and likewise,
company counsel and company secretary who are not controlling shareholders or relatives of such shareholders may be present in the meetings
and for the decisions if such presence is requested by the audit committee.
Pursuant to the Amendment to the Relief Regulations, companies
whose shares are listed for trading on specified exchanges outside of Israel, including the NASDAQ Global Select, Global and Capital Markets,
and which satisfy the criteria detailed above, are exempt from the following rules regarding the audit committee under the Companies Law:
(i) the committee shall be comprised of at least 3 members, who shall include all of the external directors, and the majority of the members
shall be independent; (ii) the audit committee may not include the chairman of the board, or any director employed by the Company, by
a controlling shareholder or by any entity controlled by a controlling shareholder, or any director providing services to us, to a controlling
shareholder or to any entity controlled by a controlling shareholder on a regular basis, or any director whose income is primarily dependent
on a controlling shareholder, and may not include a controlling shareholder or any relatives of a controlling shareholder; (iii) the controlling
shareholder or his relatives shall not be members of the audit committee; (iv) the chairman of the audit committee shall be an external
director; (v) a person who is prohibited from being a member of the audit committee shall not be present at the committee’s meetings;
(vi) if the committee also serves as a financials committee, the rules applicable to the financials committee shall apply; (vii) the legal
quorum shall be the majority of the committee members, provided that the majority of directors present are independent, at least one of
whom is an external director.
Currently, Ms. Ayelet Aya Hayak, Mr. Ilan Erez and Mr. Eli Doron
serve as members of our audit committee, and Mr. Ilan Erez serves as the chairperson.
69
Compensation Committee
Pursuant to the Companies Law, the Board of Directors of Israeli
publicly traded companies are required to appoint a compensation committee comprised of at least three members, including all external
directors, who must also comprise a majority of the members of the compensation committee. In addition, the chairman of the compensation
committee must be an external director. Following the compensation committee’s recommendations, the Board of Directors is required
to establish a compensation policy, which includes a framework for establishing the terms of office and employment of the office holders
and guidelines with respect to the structure of the variable pay of office holders. Such guidelines are the basis for adequate balance
between the components of compensation, which exists when a linkage is maintained between compensation and performance and the creation
of value for shareholders in the Company, while maintaining the Company’s ability to recruit and maintain talented officeholders
and incentivizing them to pursue the Company’s objectives. In particular, an appropriate balance between the fixed component (base
salary and additional benefits) and the variable component and capital compensation avoids placing an exaggerated emphasis on one component.
The following persons may not be a member of the compensation committee:
| • |
The chairman of the board of directors; |
| • |
Any director employed by or otherwise providing services to the company or to the controlling shareholder or entity under such controlling
shareholder’s control; |
| • |
Any director who derives his salary primarily from a controlling shareholder; |
| • |
A controlling shareholder; or |
| • |
Any relative of a controlling shareholder. |
The responsibilities of the compensation committee include the
following:
| 1. |
To recommend to the Board of Directors as to a compensation policy for office holders of the company, as well as to recommend, once
every three years to extend the compensation policy subject to receipt of the required corporate approvals; |
| 2. |
To recommend to the Board of Directors as to any updates to the compensation policy which may be required; |
| 3. |
To review the implementation of the compensation policy by the company; |
70
| 4. |
To approve transactions relating to terms of office and employment of certain company office holders, which require the approval
of the compensation committee pursuant to the Companies Law; and |
| 5. |
To exempt, under certain circumstances, a transaction relating to terms of office and employment from the requirement of approval
of the shareholders meeting. |
In December 2012, our Board of Directors changed the composition
of the members of our compensation committee by removing Mr. Avi Eizenman from the compensation committee, and appointing the Company’s
two external directors, Mr. Ilan Erez and Ms. Einat Domb-Har to our compensation committee, and appointing Mr. Ilan Erez as chairman of
our compensation committee. On July 1, 2013, following the election of Ms. Ayelet Aya Hayak as an external director instead of Ms. Einat
Domb-Har, Ms. Aya Hayak replaced Ms. Domb-Har on our compensation committee. Following the election of Mr. Eli Doron as a member of our
board of directors, Mr. Eli Doron replaced Mr. Zohar Zisapel on our compensation committee. Our compensation committee has been nominated
and empowered by the Board of Directors to act in accordance with the powers and prerogatives delegated to it by the Companies Law and
take any decisions and make any recommendations to the Board all as set forth in the Companies Law.
Pursuant to Amendment 27 to the Companies Law, effective as of
April 3, 2016 (“Amendment 27”), the audit committee may serve as the company’s compensation committee, provided that
it meets the composition requirements of the compensation committee.
Pursuant to the Amendment to the Relief Regulations, companies
whose shares are listed for trading on specified exchanges outside of Israel, including the NASDAQ Global Select, Global and Capital Markets,
and satisfying the criteria detailed above, are exempt from the following rules regarding the Compensation Committee under the Companies
Law: (i) the board of a public company is required to appoint a compensation committee; (ii) the compensation committee shall be comprised
of at least 3 members, all of the external directors shall be members and shall constitute the majority of its members and the rest of
the members shall be members whose terms of service are as required under the Companies Law.
Under Section 267B(a) and Parts A and B of Annex 1A of the Companies
Law, which were legislated as part of Amendment 20, a company’s compensation policy shall be determined based on, and take into
account, the following parameters:
| a. |
Advancement of the goals of the company, its working plan and its long term policy; |
| b. |
The creation of proper incentives for the office holders while taking into consideration, inter alia, the company’s risk management
policies; |
| c. |
The company’s size and nature of its operations; |
| d. |
The contributions of the relevant office holders in achieving the goals of the company and profit in the long term in light of their
positions; |
71
| e. |
The education, skills, expertise and achievements of the relevant office holders; |
| f. |
The role of the office holders, areas of their responsibilities and previous agreements with them; |
| g. |
The correlation of the proposed compensation with the compensation of other employees of the company, and the effect of such differences
in compensation on the employment relations in the company; and |
| h. |
The long term performance of the office holder. |
In addition, the compensation policy should take into account that
in the event the compensation paid to office holders shall include variable components – it should address the ability of the board
of directors to reduce the value of the variable component from time to time or to set a cap on the exercise value of convertible securities
components that are not paid out in cash. Additionally, in the event that the terms of office and employment include grants or payments
made upon termination – such grants should take into consideration the length of the term of office or period of employment, the
terms of employment of the office holder during such period, the company’s success during said period and the office holder’s
contribution to obtaining the company’s goals and maximizing its profits as well as the circumstances and context of the termination.
In addition, the compensation policy must set forth standards and
rules on the following issues: (a) with respect to variable components of compensation – basing the compensation on long term performance
and measurable criteria (though a non-material portion of the variable components can be discretionary awards taking into account the
contribution of the office holder to the company. Pursuant to Amendment 27, variable components in the amount of up to a three month salary
of the relevant office holder, on an annual basis, shall be considered a non-material portion of the variable components); (b) establishing
the appropriate ratio between variable components and fixed components and placing a cap on such variable components (including a cap
on the grant date value of convertible securities components that are not paid out in cash); (c) setting forth a rule requiring an office
holder to return amounts paid, in the event that it is later revealed that such amounts were paid on the basis of data which prove to
be erroneous and resulted in an amendment and restatement of the company‘s financial statements; (d) determining minimum holding
or vesting periods for equity based variable components of compensation, while taking into consideration appropriate long term incentives;
and (e) setting a cap on grants or benefits paid upon termination.
The board of directors of a company is obligated to adopt a compensation
policy after considering the recommendations of the compensation committee. The final adoption of the compensation committee is subject
to the approval of the shareholders of the company, which such approval is subject to certain special majority requirements, as set forth
in the Companies Law, pursuant to which one of the following must be met:
| (i) |
the majority of the votes includes at least a majority of all the votes of shareholders who are not controlling shareholders of the
company or who do not have a personal interest in the compensation policy and participating in the vote; abstentions shall not be included
in the total of the votes of the aforesaid shareholders; or |
| (ii) |
the total of opposing votes from among the shareholders described in Sub-section (i) above does not exceed 2% of all the voting rights
in the company. |
Nonetheless, even if the shareholders of the company do not approve
the compensation policy, the board of directors of a company may approve the compensation policy, provided that the compensation committee
and, thereafter, the board of directors determined, based on detailed, documented, reasons and after a second review of the compensation
policy, that the approval of the compensation policy is for the benefit of the company.
72
Executive Compensation Policy
On July 31, 2013, an Extraordinary General Meeting of the Shareholders
of the Company took place, approving the Executive Compensation Policy as later amended at the Annual General Meeting of the Shareholders
held on June 5, 2019 (the “Policy”), which had been recommended by the Compensation Committee and approved by the Board of
Directors, for the Company's directors and office holders, in accordance with the requirements of the Companies Law. The Policy was approved
by our shareholders at the Annual General Meeting of our shareholders, which took place on June 5, 2019. At the Annual General Meeting,
held on June 7, 2022, an Amended Executive Compensation Policy was rejected by our shareholders but following the Meeting it was approved
by our compensation committee and the Board of Directors on June 12, 2022, in accordance with the Companies Law in Israel and after determining
that the approval of the Amended Compensation Policy was for the benefit of the Company.
The Policy includes, among other issues prescribed by the Companies
Law, a framework for establishing the terms of office and employment of the office holders, a recoupment policy, and guidelines with respect
to the structure of the variable pay of office holders.
Each of our compensation committee and board of directors may engage
compensation advisors and other professionals to assist in formulating compensation packages in line with the Policy, including, without
limitation, to assist in collecting relevant data, framing the appropriate factors to be considered and evaluating the different factors
being considered.
All compensation arrangements of office holders are to be approved
in the manner prescribed by applicable law. Our office holders, including External Directors or Independent Directors, may waive their
entitlement to their compensation, subject to applicable law.
Our recoupment policy relating to office holder compensation allows
for the recovery of all or a portion of any compensation paid to our office holders during the previous three years on the basis of financial
data included in our financial statements in any fiscal year that were found to be inaccurate and were subsequently restated. In such
event, we will seek reimbursement from the office holders to the extent such office holders would not have been entitled to all or a portion
of such compensation, based on the financial data included in the restated financial statements. Our compensation committee will be responsible
for approving the amounts to be recouped and for setting terms for such recoupment from time to time. Notwithstanding the aforesaid, the
recoupment policy will not be triggered in the event of a financial restatement due to changes in the applicable reporting or accounting
standards. The above noted recoupment policy does not derogate from any relevant recoupment or claw-back provisions under any applicable
law or regulatory rules which apply to us.
73
All of our office holders (other than non-employee directors) may
be incentivized through cash bonuses and long-term equity-based incentives to provide the office holder with a stake in our success –
thus linking the office holder's long-term financial interests with the interests of our shareholders. In accordance with the Policy,
the incentives are developed through a program that sets performance targets based on each office holder's role and scope. Actual
payments are driven by the business and individual performance vis-à-vis the performance targets set at the beginning of the year.
The formula for the performance targets and the maximum variable components payable to each office holder (other than directors) shall
be presented and recommended by our Chief Executive Officer and reviewed and approved by our compensation committee and our board of directors. The
formula for the performance targets and the maximum variable components payable to any employee office holders who are also directors
shall be presented and recommended by our compensation committee and reviewed and approved by our board of directors and our shareholders.
The maximum value of the variable compensation components for an office holder at the Company shall not exceed eighty percent of such
office holder's total compensation package on an annual basis. The maximum annual value of the equity-based long-term compensation components
and cash bonuses of all of our office holders shall not exceed two percent of our market cap.
Unless otherwise specified in the terms of the variable compensation
of an office holder, our Policy dictates that the board of directors shall not have discretion to unilaterally reduce such office holder's
variable compensation. Equity based compensation may be granted in any form permitted under our equity incentive plans, as in effect
from time to time (collectively, the "Equity Incentive Plans"), including stock options, restricted share units and restricted stock. Equity
grants to office holders shall be made in accordance with the terms of the Equity Incentive Plans. All equity-based incentives granted
to our office holders shall be subject to vesting periods in order to promote long-term retention of the awarded office holders. Unless
determined otherwise in a specific award agreement approved by the compensation committee and the board of directors, grants to our office
holders other than directors shall vest gradually over a period of between two to four years. We do not have any equity ownership
guidelines that require any of our office holders to hold a stated number or fixed percentage of our ordinary shares, nor do they have
to continue to hold for any period of time shares in the Company which they acquired as a result of the exercise of fully vested equity
grants. The value of the equity-based compensation shall be calculated on the grant date, according to acceptable valuation practices
at the time of grant. The board of directors shall not have discretion to limit the value of the equity-based compensation at the
time of exercise. The board of directors may, following approval by our compensation committee, extend the period of time for which
an award to an office holder is to remain exercisable, or make provisions with respect to the acceleration of the vesting period of any
office holder's awards, including, without limitation, in connection with a corporate transaction involving a change of control.
Our compensation committee will periodically review the Policy
and monitor its implementation, and recommend to our board of directors and shareholders to amend the Policy as it deems necessary from
time to time. The term of the Policy shall be three years as of the date of its re-adoption on June 12, 2022, during which, the Board
of Directors is required to examine the Policy and revise it from time to time, if the circumstances under which it had been adopted have
materially changed.
Following such three-year term, the Policy, including any revisions
recommended by our compensation committee and approved by our board of directors, as applicable, will be brought once again to the shareholders
for approval.
74
Internal Auditor
Under the Companies Law, the board of directors of a public company
must appoint an internal auditor, who is nominated by the audit committee. The role of the internal auditor is to examine, among other
matters, whether our actions comply with the law and orderly business procedure. Under the Companies Law, the internal auditor may be
an employee of the company but not an office holder (as defined in Item 10 below), nor an affiliate, nor a relative of an office holder
or affiliate, and he or she may not be our independent accountant or its representative. Yisrael Gewirtz of Fahn Kaneh Control Management
Ltd. (a subsidiary of Fahn Kanne Co. - Grant Thornton Israel) serves as our internal auditor.
D. Employees
The number of employees over the last three financial years is
set forth in the table below.
|
As of December 31, |
2020
|
2021
|
2022
|
|||||||||
|
Total Employees |
289 |
315 |
306 |
|||||||||
|
Marketing, Sales, Customer Services |
24 |
25 |
27 |
|||||||||
|
Research Development |
123 |
135 |
134 |
|||||||||
|
Manufacturing |
124 |
138 |
127 |
|||||||||
|
Corporate Operations and Administration |
18 |
17 |
18 |
|||||||||
As of March 31, 2023, we had 309 employees, including 27 in marketing,
sales and customer services, 136 in research and development, 129 in manufacturing, and 17 in corporate operations and administration.
All such employees, except for 25 employees of our subsidiary in the United States and 38 employees of our subsidiary in Denmark, are
based in Israel. We consider our relations with our employees excellent and have never experienced a labor dispute, strike or work stoppage.
None of our employees are represented by a labor union. We do not employ a significant number of temporary employees, but we do use temporary
employees from time to time, as necessary.
75
In Israel we are subject to certain labor statutes and national
labor court precedent rulings, as well as to certain provisions of the collective bargaining agreements between the Histadrut (General
Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations including the Industrialists' Associations. These
provisions of collective bargaining agreements are applicable to our Israeli employees by virtue of expansion orders issued in accordance
with relevant labor laws by the Israeli Ministry of Labor and Welfare, and which apply such agreement provisions to our employees even
though they are not directly part of a union that has signed a collective bargaining agreement. The laws and labor court rulings that
apply to our employees principally concern the minimum wage laws, procedures for dismissing employees, determination of severance pay,
leaves of absence (such as annual vacation or maternity leave), sick pay and other conditions for employment. The expansion orders which
apply to our employees principally concern the requirement for length of the work day and workweek, mandatory contributions to a pension
fund, annual recreation allowance, travel expenses payment and other conditions of employment. We generally provide our employees with
benefits and working conditions beyond the required minimums.
Israeli law generally requires severance pay, which may be funded
by managers' insurance and/or a pension fund described below, upon the retirement or death of an employee or termination of employment
without cause (as defined in the law). The payments to the managers' insurance and/or pension fund in respect of severance pay amount
to approximately 8.33% of an employee's wages, in the aggregate. Furthermore, Israeli employees and employers are required to pay predetermined
sums to the National Insurance Institute, which is similar to the United States Social Security Administration. Such amounts also include
payments for national health insurance. The payments to the National Insurance Institute (including payments for healthcare insurance)
are paid on a differential basis, such that with respect to the part of the employer's wage which is equal to up to 60% of the average
wage in Israel, the employer is required to pay an amount equal to 3.45% of such part of the employee's wage and the employee is required
to pay an amount equal to 3.50% of such part of the employee's wage, and for the remainder of the employee's wage, the employer is required
to pay an amount equal to 7.50% of such part of the employee's wage and the employee is required to pay an amount equal to 12% of such
part of the employee's wage.
As required by applicable law, we contribute to either a fund known
as managers' insurance or to a pension fund, or to a combination of both. Such practice was further reinforced in July 1, 2008, when we
entered into agreements with a majority of our employees in order to implement Section 14 to the Severance Pay Law ("Section 14"), according
to which the payment of monthly deposits by us into managers' insurance and/or pension fund are in respect of severance obligation to
such employees. See Note 11 of our consolidated financial statements. These funds provide a combination of savings plan, insurance and
severance pay benefits to the employee, giving the employee a lump sum payment upon retirement and securing the severance pay or part
of it, if legally entitled, upon termination of employment. Each employee contributes an aggregate amount equal to 6% of his or her base
salary to such funds, and we contribute, in the aggregate, an additional 14.83% to 15.83% of the employee's base salary, with such amount
including the 8.33% which is contributed as severance pay as noted above. The monthly contributions as mentioned above constitute a majority
of the required payment for severance pay. For employees without a Section 14 arrangement
as of their commencement date, the Company designates a separate portion of its funds and attributes them to its severance payment obligations.
Additionally, the Company makes provisions in its books concerning any additional severance payments liability.
76
E. Share
Ownership
The following table sets forth, as of April 15, 2023, the number
of shares owned by our office holders, directors and senior management. The percentages shown are based on 6,756,289 ordinary shares
outstanding as of March 31, 2023:
|
Name
|
Number of Shares and Options
Owned1
|
Percent of Outstanding Shares
|
||||||
|
Avi Eizenman |
344,916 |
4.96 |
% | |||||
|
Shaike Orbach |
* |
* |
||||||
|
Eli Doron |
* |
* |
||||||
|
Ayelet Aya Hayak |
* |
* |
||||||
|
Ilan Erez |
* |
* |
||||||
|
Liron Eizenman |
* |
* |
||||||
|
Eran Gilad |
* |
* |
||||||
|
All directors and office holders as a group |
376,915 |
5.42 |
% | |||||
| * |
Denotes ownership of less than 1% of the outstanding shares. |
| (1) |
The table above includes the number of shares and options that are exercisable within 60 days of April 15, 2023. Ordinary shares
subject to these options are deemed beneficially owned for the purpose of computing the ownership percentage of the person or group holding
these options, but are not deemed outstanding for purposes of computing the ownership percentage of any other person. Except where otherwise
indicated, and subject to applicable community property laws, based on information furnished to us by such owners or otherwise disclosed
in any public filings, to our knowledge, the persons and entities named in the table have sole voting and dispositive power with respect
to all shares shown as beneficially owned by them. |
See also "Item 6 – Directors and Senior Management – Compensation."
77
|
Item
7. |
MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
A.
Major Shareholders
The following table
sets forth, as of March 31, 2023, the number of Ordinary Shares, including options and warrants to purchase Ordinary Shares exercisable
within 60 days, owned by (i) all shareholders known to the Company to own more than five percent (5%) of the Company's Ordinary Shares
and (ii) all directors and officers as a group (based on 6,756,289 Ordinary Shares outstanding on that date). Each of our shareholders
has identical voting rights with respect to its shares. All of the information with respect to beneficial ownership of the Ordinary Shares
is given to the best of our knowledge. Except where otherwise indicated, and subject to applicable community property laws, we believe,
based on information furnished to us by such owners or otherwise disclosed in any public filings, that the beneficial owners of the Ordinary
Shares listed below have sole dispositive and voting power with respect to such Ordinary Shares.
|
Name
of Shareholder |
Number
of Shares and Options Owned(1) |
Percentage
of Outstanding Shares |
|
Wellington Management Group LLP(2)
|
618,848 |
9.16% |
|
Systemic Financial Management, LP(3)
|
591,091 |
8.75% |
|
First Wilshire Securities Management, Inc. (4)
|
558,510 |
8.28% |
| (1) |
The table above includes the number of shares and options that are exercisable within 60 days of March 31, 2023. Ordinary shares
subject to these options are deemed beneficially owned for the purpose of computing the ownership percentage of the person or group holding
these options, but are not deemed outstanding for purposes of computing the ownership percentage of any other person. Except where otherwise
indicated, and subject to applicable community property laws, based on information furnished to us by such owners or otherwise disclosed
in any public filings, to our knowledge, the persons and entities named in the table have sole voting and dispositive power with respect
to all shares shown as beneficially owned by them. All the information detailed in this table is as set forth in major shareholders' public
filings, unless stated otherwise. |
| (2) |
As reported on Schedule 13G/A filed by Wellington Management Group LLP, Wellington Group Holdings LLP, Wellington Investment Advisors
Holdings LLP and Wellington Management Company LLP with the SEC on February 6, 2023. The securities as to which the Schedule was filed
are owned of record by clients of one or more investment advisers, which are directly or indirectly owned by Wellington Management Group
LLP, the identities of which are set forth in Exhibit A of such Schedule 13G/A. |
Those clients have the right to receive, or the power to direct
the receipt of, dividends from, or the proceeds from the sale of, such securities. No such client is known to have such right or power
with respect to more than 5% of this class of securities, except for: Wellington Trust Company, NA (“Wellington”).
As reported on Schedule 13G filed by Wellington with the SEC on
February 6, 2023, those securities as to which the Schedule was filed by Wellington, in its capacity as investment adviser, are owned
of record by its clients. Those clients have the right to receive, or the power to direct the receipt of, dividends from, or the proceeds
from the sale of, such securities. No such client is known to have such right or power with respect to more than five percent of this
class of securities.
| (3) |
As reported on Schedule 13G filed by Systemic Financial Management, LP with the SEC on February 13, 2023. |
| (4) |
As reported on Schedules 13G/A filed by First Wilshire Securities Management, Inc. with the SEC on February 15, 2023. |
The Company's major shareholders do not have different voting rights.
As of March 31, 2023, there were five record holders of ordinary
shares, including three record holders in the United States. Collectively, these three record holders in the United States held less than
1% of the outstanding ordinary shares.
78
B. Related
Party Transactions
All related party transactions and arrangements (or modifications
of existing ones) with our related parties, transactions in which office holders of the Company have a personal interest, or transactions
which raise issues of such office holders' fiduciary duties, are subject to the applicable corporate approvals under the Companies Law.
Without giving effect to the buyback purchases described at Item 16E, the following transactions are considered "related party transactions"
for this Item 7B:
On July 22, 2002, our audit committee and the Board of Directors
approved an Indemnification Agreement with our directors and office holders. Our shareholders approved the terms of this agreement in
a General and Extraordinary Meeting held on January 7, 2004. In Amendment 3 to the Companies Law, effective as of 2005, the instances
in which a company may indemnify its office holders and directors were broadened. In December 2007, each of our audit committee and Board
of Directors approved a new form of Indemnification Agreement with our directors and office holders so as to reflect this amendment. Our
shareholders approved the terms of this new Indemnification Agreement in January 2008. According to Amendment 16 to the Israeli Securities
Law, and to a corresponding amendment to the Companies Law, both effective as of 2011, the ISA is authorized to impose administrative
sanctions against companies like ours and their office holders for certain violations of the Israeli Securities Law or the Companies Law.
These sanctions include monetary sanctions and certain restrictions on serving as a director or senior office holder of a public company
for certain periods of time. The Israeli Securities Law and the Companies Law provide that only certain types of such liabilities may
be reimbursed by indemnification and insurance. Specifically, legal expenses (including attorneys' fees) incurred by an individual in
the applicable administrative enforcement proceeding and certain compensation payable to injured parties for damages suffered by them
are permitted to be reimbursed via indemnification or insurance, provided that such indemnification and insurance are authorized by the
Company's Articles of Association, and receive the requisite corporate approvals. In January 2012, each of our audit committee and Board
of Directors approved a new form of Indemnification Agreement with our directors and office holders so as to reflect this amendment, and
our shareholders approved these amendments to the Articles of Association and a revised form of Indemnification Agreement for directors
at the Annual General Meeting of the Shareholders held on April 11, 2012.
The Indemnification Agreement provides that our directors and office
holders will be exempt from liability in certain circumstances. The Indemnification Agreement also provides for the indemnification by
the Company for certain obligations and expenses imposed on the office holder in connection with acts performed in his or her capacity
as an office holder of the Company. This right to indemnification is limited, and does not cover, among other things, a breach of an office
holder's duty of loyalty, a willful breach of an office holder's duty of care, or a reckless disregard for the circumstances or consequences
of a breach of a duty of care. The right to indemnification also does not cover acts that are taken intentionally to unlawfully realize
personal gain. The maximum amount of our liability under these Indemnification Agreements for any monetary obligation imposed on an office
holder or a director in favor of another person by a judgment is currently US$ 3,000,000 for each instance of a covered scenario. In addition,
we would be liable to indemnify the office holder or director for all reasonable litigation expenses with respect to certain proceedings.
We have maintained liability insurance for our directors and office holders. On September 23, 2007, our shareholders approved the procurement
of a policy, which provides for total coverage of up to US$ 4,000,000. All of our directors are parties to our Indemnification Agreements
and are covered by our directors and office holders' insurance policy.
As per Amendment 20, it was decided on July 31, 2013, at the Extraordinary
General Meeting of the Shareholders to adopt the Executive Compensation Policy of the Company, which was recommended by our Compensation
Committee and approved by our Board of Directors, and was re-approved by our Compensation Committee, Board of Directors and Shareholders.
Most recently on June 7, 2022 our shareholders failed to approve our amended Executive Compensation Policy, but thereafter, it was approved
by our Board of Directors on June 12, 2022 in accordance with the Companies Law and after determining that approval of the policy was
for the benefit of the Company. Our approved Executive Compensation Policy includes the above referenced form of Indemnification Agreement
to be entered into by the Company with our directors and office holders serving in such capacities from time to time, as well as the above
referenced directors and office holders liability insurance policy. Under the Executive Compensation Policy, any change to the Indemnification
Agreement or the insurance policy, including the cost and/or any changes which materially depart from the key terms of the current agreement
and/or insurance policy (provided that such changes apply equally to all executives of the Company, including directors) will be submitted
to the Company's compensation committee and the Board of Directors for their approval but shall not, unless required by law or the Company's
Articles of Association, be presented at a General Meeting of the Shareholders.
79
Compensation Package for Liron Eizenman, the
Company's President and Chief Executive Officer
In June 2022, following the approval of the Company's Compensation
Committee and Board of Directors, the Company's shareholders approved a compensation package for Liron Eizenman. The approved Compensation
Package consists of (i) an amendment to Liron Eizenman's compensation structure and (ii) a severance agreement, identical to the previous
CEO severance agreement. The principal terms of the compensation package, which commenced on July 1, 2022, are as follows:
| • |
Gross monthly base salary of NIS 70,000. |
| • |
Entitlement to the Chief Executive Officer annual bonus upon the terms and in accordance with the formula approved by the Company’s
shareholders at the Annual General Meeting held on June 8, 2016 (the “CEO Bonus”),
provided only that Mr. Liron Eizenman will only be entitled to 50% of the applicable CEO Bonus for 2022, as and when determined by the
Company's Compensation Committee and Board of Directors (with the remaining portion being payable to Mr. Shaike Orbach). |
| • |
Standard social benefits package applicable to all full-time employees of the Company. |
| • |
Severance/Termination provisions. |
In addition, at the June 2022 General Meeting,
our shareholders approved a grant to Liron Eizenman of 50,000 Plan Options to purchase Ordinary Shares of the Company, pursuant to the
Plan.
See also "Item 6 – Directors and Senior Management –
Compensation."
80
|
Item 8. |
FINANCIAL INFORMATION
|
A. Consolidated Statements and Other
Financial Information
Our consolidated financial statements and other financial information
are included herein on pages F-1 through F-44 [To confirm].
A1. See Item 18 for our consolidated
financial statements.
A2. See Item 18 for our consolidated
financial statements, which cover the last three financial years.
A3. See page F-3 for the audit report
of our accountants, entitled "Report of Independent Registered Public Accounting Firm."
A4. Not applicable.
A5. Not applicable.
A6. See Note 13A to our audited consolidated
financial statements included in Item 18 of this annual report for the geographic distribution of our sales based on the location of the
customer.
A7. Litigation
As of the date of this Annual Report, we are not a party to any
material litigation and we are not aware of any pending or threatened litigation that would have a material adverse effect on us or our
business.
A8. Dividend Policy
On January 14, 2013, we announced that our Board of Directors has
adopted a policy for distributing dividends, subject to all applicable laws. According to this policy, each year we will distribute a
dividend of up to 50% of our annual distributable profits. Our Board of Directors reserves the right to declare additional dividend distributions,
to change the rate of dividend distributions (either as a policy or on a one-time basis), to cancel a specific distribution or to cancel
the policy as a whole at any time, at its sole discretion. According to the said policy, the actual distribution of a dividend will be
subject to meeting the conditions required by applicable law, including the distribution tests set forth in Section 302 of the Companies
Law, and to the specific decision of the Company's Board of Directors for each distribution. On March 15, 2018, our Board of Directors
adopted a resolution to suspend the dividend policy until further notice.
B. Significant
Changes
Since the date of the annual financial statements included in this
Annual Report, no significant changes have occurred.
81
|
Item 9.
|
THE
OFFER AND LISTING |
A. Offer
and Listing Details
Markets and Share Price History
Following our delisting from trading on the TASE, the only trading
market for our ordinary shares is the NASDAQ Global Select Market, where our shares have been listed and traded under the symbol SILC
since January 2, 2014. Prior thereto, our shares were listed and traded on the NASDAQ Global Market (previously NASDAQ National Market)
under the symbol SILC (previously SILCF) from February 11, 2008. Prior thereto, our shares were listed and traded on the NASDAQ Capital
Market (previously known as the NASDAQ Small-Cap).
The table below sets forth the high and low reported sales prices
in Dollars of our ordinary shares, as reported by NASDAQ during the indicated periods:
|
PERIOD |
LOW |
HIGH |
||||||
|
March 2023 |
35.25 |
39.25 |
||||||
|
February 2023 |
37.55 |
42.53 |
||||||
|
January 2023 |
40.81 |
50.00 |
||||||
|
December 2022 |
40.75 |
46.94 |
||||||
|
November 2022 |
41.91 |
46.00 |
||||||
|
October 2022 |
34.36 |
45.78 |
||||||
|
FINANCIAL QUARTERS DURING THE PAST TWO YEARS |
||||||||
|
First Quarter 2023 |
35.25 |
50.00 |
||||||
|
Fourth Quarter 2022 |
34.36 |
46.94 |
||||||
|
Third Quarter 2022 |
32.30 |
44.47 |
||||||
|
Second Quarter 2022 |
31.30 |
39.57 |
||||||
|
First Quarter 2022 |
35.79 |
51.66 |
||||||
|
Fourth Quarter 2021 |
36.02 |
52.75 |
||||||
|
Third Quarter 2021 |
40.25 |
46.11 |
||||||
|
Second Quarter 2021 |
38.97 |
47.51 |
||||||
|
FIVE MOST RECENT FULL FINANCIAL YEARS |
||||||||
|
2022 |
31.30 |
51.66 |
||||||
|
2021 |
36.02 |
59.27 |
||||||
|
2020 |
20.93 |
42.55 |
||||||
|
2019 |
28.59 |
40.36 |
||||||
|
2018 |
32.00 |
77.95 |
||||||
On December 27, 2005, our shares commenced trading on the TASE
in Israel under the symbol "SILC." On October 26, 2015, our Board of Directors resolved to act to delist the Company's shares from trading
on the TASE. The last trading day in our shares on the TASE was January 26, 2016, and on January 28, 2016, our shares were delisted from
trading on the TASE.
82
|
Item 10. |
ADDITIONAL INFORMATION
|
A. Share
Capital
Not applicable.
B. Memorandum
and Articles of Association
Articles of Association
Our shareholders approved our amended and restated Articles of
Association on January 24, 2008, as well as certain additional amendments to the Articles of Association on April 11, 2012, June 8, 2016
and June 7, 2022. Our objective as stated in the Articles of Association is to carry on any business and perform any act which is not
prohibited by law.
We currently have only one class of outstanding shares, our Ordinary
Shares, having a nominal value of NIS 0.01 per share. Holders of Ordinary Shares have one vote per share, and are entitled to participate
equally in the payment of dividends and share distributions and, in the event of a liquidation of the Company, in the distribution of
assets after satisfaction of liabilities to creditors. No preferred shares are currently authorized.
Our Articles of Association require that we hold our annual general
meeting of shareholders each year no later than 15 months from the last annual meeting, at a time and place, either within or without
the State of Israel, determined by the board of directors, upon 21 days' prior notice to our shareholders or 35 days' prior notice to
the extent required with respect to certain matters as required under the regulations to the Companies Law. In general, no business may
be commenced at a general meeting until a quorum of two or more shareholders holding at least 33 1/3% of the voting rights is present
in person or by proxy. Shareholders may vote in person or by proxy.
In general, a simple majority is required to amend our Articles
of Association.
Pursuant to the Companies Law, resolutions regarding the following matters must be
passed at a general meeting of shareholders:
| • |
Appointment or termination of our auditors; |
| • |
Appointment and dismissal of external directors, unless the company elects to opt-in to the exemptions promulgated under the Amendment
to the Relief Regulations as detailed above, under which there is no requirement to appoint external directors; |
83
| • |
Approval of interested party acts and transactions requiring general meeting approval as provided in Sections 255 and 268 to 275
of the Companies Law; |
| • |
A merger as provided in Section 320(a) of the Companies Law; |
| • |
The exercise of the powers of the board of directors, if the board of directors is unable to exercise its powers and the exercise
of any of its powers is vital for our proper management, as provided in Section 52(a) of the Companies Law; |
| • |
Amendments to our Articles of Association; and |
| • |
Approval of an increase or decrease of the registered share capital. |
An extraordinary general meeting may be convened by demand of two
directors or by written request of one or more shareholders holding at least 5% of our issued share capital and 1% of the voting rights
or one or more shareholders holding at least 5% of the voting rights. Shareholders requesting a special meeting must include in their
request all relevant information, including the reason that such subject is proposed to be brought before the special meeting.
Our ordinary shares may generally be freely transferred under our
amended and restated Articles of Association, unless the transfer is restricted or prohibited by applicable law or the rules of the stock
exchange on which the shares are traded. The ownership or voting of our ordinary shares by non-residents of Israel is not restricted in
any way by our amended and restated Articles of Association or the laws of the State of Israel, except under certain circumstances for
ownership by nationals of certain countries that are, or have been, in a state of war with Israel.
The Companies Law
We are subject to the provisions of the Companies Law. The Companies
Law codifies the fiduciary duties that "office holders", including directors and executive office holders, owe to a company. An office
holder, as defined in the Companies Law, is a general manager (also referred to as the "chief executive officer"), chief business manager,
deputy general manager, vice general manager, executive Vice-President, Vice-President, any other person assuming the responsibilities
of any of the foregoing positions without regard to such person's title, as well as a director, or another manager directly subordinate
to the general manager. Each person listed in the table in "Item 6 – Directors, Senior Management and Employees" above is an office
holder of Silicom.
The Companies Law requires that an office holder of a company promptly
disclose, no later than the first board meeting in which such transaction is discussed, any personal interest that he or she may have
and all related material information known to him or her, in connection with any existing or proposed transaction by the company. In addition,
if the transaction is an extraordinary transaction, the office holder must also disclose any personal interest held by the office holder's
relative (which includes for these purposes any members of his/her (or his/her spouse's) immediate family or the spouses of any such members
of his or her (or his/her spouse's) immediate family), or by any corporation in which the office holder or the office holder's relative
is a 5% or greater shareholder, holder of 5% or more of the voting power, director or general manager or in which he or she has the right
to appoint at least one director or the general manager. An extraordinary transaction is defined as a transaction not in the ordinary
course of business, not on market terms, or that is likely to have a material impact on the company's profitability, assets or liabilities.
84
In the case of a transaction in which an office holder of the company
has a personal interest and which is not an extraordinary transaction, after the office holder complies with the above disclosure requirement,
board approval is required unless the articles of association of the company provide otherwise. The transaction must be for the benefit
of the company. If the transaction is an extraordinary transaction, then, in addition to any approval required by the articles of association,
it must also be approved by the audit committee and by the board of directors, and, under specified circumstances, by a meeting of the
shareholders, as well.
Subject to certain exceptions provided for in the regulations to
the Companies Law, agreements regarding directors' terms of compensation require the approval of the compensation committee, board of
directors and the shareholders of the company. The transaction must be for the benefit of the company.
In matters concerning an extraordinary transaction in which a person
has a personal interest, as well as matters concerning his or her terms of compensation, he or she shall not be permitted to vote on the
matter or be present in the audit committee or board of directors meeting in which the matter is considered, however, with respect to
an office holder, he/she may be present at the meeting discussions if the chairman determines that the presence of the office holder is
necessary in order to present the matter. However, if a majority of the audit committee or of the board of directors has a personal interest
in the matter then:
| • |
All of the directors are permitted to vote on the matter and attend the meeting in which the matter is considered; and |
| • |
The matter requires approval of the shareholders at a general meeting. |
According to the Companies Law, the personal interest disclosure
requirements discussed above also apply to a "controlling shareholder" of a public company. Such requirements also apply to certain shareholders
of a public company who have a personal interest in the adoption by the shareholders of certain proposals with respect to (i) certain
private placements that will increase their relative holdings in the company, (ii) certain special tender offers or forced bring along
share purchase transactions, (iii) election of external directors, (iv) approval of a compensation policy governing the terms of employment
and compensation of office holders, (v) approval of the terms of employment and compensation of the general manager, (vi) approval of
the terms of employment and compensation of office holders of the company when such terms deviate from the compensation policy previously
approved by the company's shareholders, and (vii) approving the appointment of either (1) the chairman of the board or his/her relative
as the chief executive officer of the company, or (2) the chief executive officer or his/her relative as the chairman of the board of
directors of the company. If any shareholder casting a vote at a shareholders meeting in connection with such proposals as aforesaid does
not notify the company if he, she or it has a personal interest with respect to such proposal, his, her or its vote with respect to the
proposal will be disqualified.
85
The term "controlling shareholder" is defined as a shareholder
who has the ability to direct the activities of a company, other than if this power derives solely from the shareholder's position on
the board of directors or any other position with the company, and the definition of "controlling shareholder" in connection with matters
governing: (i) extraordinary transactions with a "controlling shareholder" or in which a "controlling shareholder" has a personal interest,
(ii) certain private placements in which the "controlling shareholder" has a personal interest, (iii) certain transactions with a "controlling
shareholder" or relative with respect to services provided to or employment by the company, (iv) the terms of employment and compensation
of the general manager, and (v) the terms of employment and compensation of office holders of the company when such terms deviate from
the compensation policy previously approved by the company's shareholders, also includes shareholders that hold 25% or more of the voting
rights if no other shareholder owns more than 50% of the voting rights in the company (and the holdings of two or more shareholders which
each have a personal interest in such matter will be aggregated for the purposes of determining such threshold).
In general, extraordinary transactions with a "controlling shareholder"
or in which a "controlling shareholder" has a personal interest, and agreements relating to non-office holder employment and compensation
terms of a "controlling shareholder" (or a relative of such) or to the provision of services to the company by such "controlling shareholder"
(or relative of such), require the approval of the audit committee, the board of directors and the shareholders of the company. Agreements
relating to the terms of office and employment of a "controlling shareholder" (or relative of such) as an office holder in the company
require the approval of the compensation committee, the board of directors and the shareholders of the company.
The shareholder approval for such matters requiring shareholder
disclosure of a personal interest as noted above, generally must either include at least a majority of the shares held by non-controlling
and disinterested shareholders who actively participate in the voting process (without taking abstaining votes into account), or, alternatively,
the total shareholdings of the non-controlling and disinterested shareholders who vote against the transaction must not represent more
than two percent of the voting rights in the company. The shareholder approval for approving the appointment of either (1) the chairman
of the board or his/her relative as the chief executive officer of the company, or (2) the chief executive officer or his/her relative
as the chairman of the board of directors of the company, must either include at least two-thirds of the shares held by non-controlling
and disinterested shareholders who actively participate in the voting process (without taking abstaining votes into account), or, alternatively,
the total shareholdings of the non-controlling and disinterested shareholders who vote against the transaction must not represent more
than two percent of the voting rights in the company. Agreements and extraordinary transactions with a "controlling shareholder" or in
which a "controlling shareholder" has a personal interest, or agreements relating to any employment terms of a "controlling shareholder"
(or relative if such) or to the provision of services to the company by such "controlling shareholder" (or relative if such), as aforesaid,
with duration exceeding three years, are subject to re-approval once every three years by the audit committee (or compensation committee,
as applicable), the board of directors and the shareholders of the company. Extraordinary transactions with a "controlling shareholder"
or in which a "controlling shareholder" has a personal interest may be approved in advance for a period exceeding three years if the audit
committee determines such approval reasonable under the circumstances. In addition, agreements and extraordinary transactions with duration
exceeding three years which were approved prior to Amendment 16 to the Companies Law, which was passed by the Israeli legislature, the
Knesset, in March 2011, and which came into effect gradually during the year 2011 ("Amendment 16"), will need to be re-approved by the
proper corporate actions at the later of (i) the first general meeting held after May 14, 2011, (ii) November 14, 2011, or (iii) the expiration
of three years from the date on which they were originally approved, even though they were properly approved prior to the passing of the
Amendment 16.
86
The board of directors of an Israeli company whose shares or debentures
are publicly traded is obligated to adopt a compensation policy governing the terms of office and employment of office holders, after
considering the recommendations of the compensation committee. The final adoption of the compensation policy is subject to the approval
of the shareholders of the company. Such shareholder approval is subject to certain special majority requirements, as set forth in the
Companies Law, pursuant to which the shareholder majority approval must also either include at least a majority of the shares held by
non-controlling and disinterested shareholders who actively participate in the voting process (without taking abstaining votes into account),
or, alternatively, the total shareholdings of the non-controlling and disinterested shareholders who voted against the transaction must
not represent more than two percent of the voting rights in the company.
Nonetheless, even if the shareholders of the company do not approve
the proposed compensation policy, the board of directors of a company may approve the proposed compensation policy, provided that the
compensation committee and, thereafter, the board of directors resolved, based on detailed, documented, reasons and after a second review
of the compensation policy, that the approval of such compensation policy is for the benefit of the company.
Pursuant to the Companies Law, the terms of office and employment
of an office holder in a public company should be in accordance with the company's compensation policy. Nonetheless, provisions were established
in the Companies Law that allow a company, under special circumstances, to approve terms of office and employment that are not in line
with the approved compensation policy.
Terms of office and employment of office holders who are neither
directors nor the general manager and which comply with the company's compensation policy require approval by the (i) compensation committee;
and (ii) the board of directors. Approval of terms of office and employment for such office holders which do not comply with the compensation
policy may nonetheless be approved subject to two cumulative conditions: (i) the compensation committee and thereafter the board of directors,
approved the terms after having taken into account the various policy considerations and mandatory requirements set forth in the Companies
Law with respect to office holder compensation, and (ii) the shareholders of the company approved the terms of office and employment for
such office holders by means of the special majority required for approving the compensation policy (as detailed above). Following the
Amendment to the Affiliation Regulations, non-material changes to the terms of compensation of office holders who are subordinated to
the company general manager will require only general manager approval, provided that the company's compensation policy includes a reasonable
range for such non-material changes.
87
Terms of office and employment of the general manager which comply
with the company's compensation policy require approval by the (i) compensation committee; (ii) the board of directors; and (iii) the
shareholders of the company by means of the special majority required for approving the compensation policy (as detailed above). Approval
of terms of office and employment for the general manager which do not comply with the compensation policy may nonetheless be approved
subject to two cumulative conditions: (i) the compensation committee and thereafter the board of directors, approved the terms after having
taken into account the various policy considerations and mandatory requirements set forth in the Companies Law with respect to office
holder compensation, and (ii) the shareholders of the company approved the terms of office and employment for the general manager which
deviate from the compensation policy by means of the special majority required for approving the compensation policy (as detailed above).
Notwithstanding the foregoing, a company may be exempted from receiving shareholder approval with respect to the terms of office and employment
of a proposed candidate for general manager if such candidate meets certain independence criteria, the terms of office and employment
are in line with the compensation policy, and the compensation committee has determined for specified reasons that presenting the matter
for shareholder approval would thwart the proposed engagement. In addition, following the Amendment to the Affiliation Regulations, the
terms of compensation of the general manager will not require shareholders' approval when extending or re-approving the company's engagement
with its general manager, provided that such terms are not more beneficial compared to his previous compensation terms approved by the
shareholders pursuant to the Companies Law and provided that such terms comply with the company's compensation policy.
Terms of office and employment of office holders (including the
general manager) that are not directors may nonetheless be approved by the company despite shareholder rejection, provided that a company's
compensation committee and thereafter the board of directors have determined to approve such terms of office and employment based on detailed
reasoning, after having re-examined the proposed terms of office and employment, and having taken the shareholder rejection into consideration.
Terms of office and employment of directors which comply with the
company's compensation policy require approval by the (i) compensation committee; (ii) the board of directors and (iii) the shareholders
of the company. Approval of terms of office and employment for directors of a company which do not comply with the compensation policy
may nonetheless be approved subject to two cumulative conditions: (i) the compensation committee and thereafter the board of directors,
approved the terms after having taken into account the various policy considerations and mandatory requirements set forth in the Companies
Law with respect to office holder compensation, and (ii) the shareholders of the company have approved the terms by means of the special
majority required for approving the compensation policy (as detailed above).
88
Private placements in a public company require approval by a company's
board of directors and shareholders in the following cases:
| 1. |
A private placement that meets all of the following conditions: |
| • |
The private placement will increase the relative holdings of a shareholder that holds five percent or more of the company's outstanding
share capital, assuming the exercise of all of the securities convertible into shares held by that person, or that will cause any person
to become, as a result of the issuance, a holder of more than five percent of the company's outstanding share capital. |
| • |
20 percent or more of the voting rights in the company prior to such issuance are being offered. |
| • |
All or part of the consideration for the offering is not cash or registered securities, or the private placement is not being offered
at market terms. |
| 2. |
A private placement which results in anyone becoming a "controlling shareholder" of the public company. |
In addition, under the Companies Law, certain transactions or
a series of transactions are considered to be one private placement. A private placement that meets all of the above conditions, and which
must be approved by the shareholders, must also be for the benefit of the company.
Any placement of securities that does not fit the above description
may be issued at the discretion of the board of directors.
Under the Companies Law, a shareholder has a duty to act in
good faith towards the company and other shareholders when exercising his or her rights and refrain from abusing his power in the company,
including, among other things, voting in the general meeting of shareholders on the following matters:
| • |
Any amendment to the articles of association; |
| • |
An increase of the company's authorized share capital; |
| • |
A merger; or |
| • |
Approval of interested party acts and transactions that require general meeting approval as provided in Sections 255 and 268 to 275
of the Companies Law. |
Furthermore, the Companies Law requires that a shareholder refrain
from acting in a discriminatory manner towards other shareholders.
The Companies Law does not describe the substance of the aforementioned
duties of shareholders, but provides that laws applicable to a breach of contract, adjusted according to the circumstances shall apply
to a breach of such duties. With respect to the obligation to refrain from acting discriminatorily, a shareholder that is discriminated
against can petition the court to instruct the company to remove or prevent the discrimination, as well as provide instructions with respect
to future actions.
In addition, any "controlling shareholder", any shareholder who
knows that it possesses power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of a
company's articles of association, has the power to appoint or prevent the appointment of an office holder in the company is under a duty
to act with fairness towards the company. The breach of such duty is governed by Israeli contract laws. The Companies Law does not describe
the substance of this duty to act with fairness, but provides that laws applicable to a breach of contract, adjusted according to the
circumstances, and taking into account the status within the company of such shareholder, shall apply to a breach of such duty.
89
The Companies Law requires that specified types of transactions,
actions and arrangements be approved as provided for in a company's articles of association and in some circumstances by the audit committee
or compensation committee, by the board of directors and by the general meeting of the shareholders.
In addition, the Companies Law includes a code of recommended corporate
governance practices, which was added to the Companies Law following the enactment of Amendment 16. In the explanatory notes to Amendment
16, the Knesset noted that an "adopt or disclose non-adoption" regulation would be issued by the ISA with respect to such code. As of
the date of this Annual Report, the ISA has issued reporting instructions with respect to this code which are applicable only to publicly
traded companies whose securities are traded solely on the Tel Aviv Stock Exchange and which report solely to the ISA.
The ISA is authorized to impose fines on any person or company
performing a violation, in connection with a publicly traded company which reports to the ISA, and specifically designated as a violation
under Amendment 16.
Although we expect to be in compliance with the Companies Law,
there is no assurance that we will not be required to adjust our current corporate governance practices, as discussed in this annual report,
pursuant to the provisions of the Companies Law.
The Israeli Securities Law
The Israeli Securities Law includes provisions relating to administrative
enforcement procedure which are applicable to Israeli public companies, including companies which are listed for trading on the NASDAQ
Global Market, which are designated to enable the ISA to enhance the efficacy of enforcement in the securities market in Israel. The administrative
enforcement procedure may be applied to any company or person (including director, office holder or shareholder of a company) performing
any of the actions specifically designated as breaches of law under the Securities Law.
Furthermore, the Securities Law requires that the chief executive
officer of a company supervise and take all reasonable measures to prevent the company or any of its employees from breaching the Securities
Law.
Under the Securities Law, a company cannot obtain insurance against
or indemnify a third party (including its office holders and/or employees) for any administrative procedure and/or monetary fine (other
than for certain legal expenses and payments of damages to an injured party). The Securities Law permits insurance and/or indemnification
for expenses related to an administrative procedure, such as reasonable legal fees, provided that it is permitted under the company's
articles of association. In January 2012, each of our audit committee and Board of Directors approved a new form of Indemnification Agreement
with our directors and office holders serving in such positions from time to time so as to reflect this amendment, subject to approval
of our shareholders to the relevant changes required to our Articles. Our shareholders approved these amendments to the Articles of Association
and a revised form of Indemnification Agreement for directors serving in such capacity from time to time, at the Annual General Meeting
of the Shareholders held on April 11, 2012. As per Amendment 20, it was decided on July 31, 2013, at the Extraordinary General Meeting
of the Shareholders to adopt the Executive Compensation Policy of the Company, which had been recommended by our Compensation Committee
and approved by our Board of Directors. The Policy was re-approved by our shareholders at the Annual General Meeting which took place
on June 8, 2016. Our approved Executive Compensation Policy includes the above referenced form of Indemnification Agreement to be entered
into by the Company with our directors and office holders serving in such capacities from time to time.
90
We periodically review all of our internal policies and procedures
in order to ensure compliance with all the securities laws to which we are subject. There is no assurance that we will not be required
to take certain actions in order to enhance our compliance with the securities laws to which we are subject, such as adopting and implementing
an internal enforcement plan as well as additional internal policies and procedures in order to reduce our exposure to potential breaches
of the Securities Law.
NASDAQ Listing Rules and Home Country Practices
Below is a concise summary of the significant ways in which our
corporate practices, which are in accordance with Israeli law and practice, including the provisions of the Companies Law, differ from
the requirements which may be applicable to domestic U.S. listed companies:
| • |
Distribution of annual and quarterly reports to shareholders –
Under Israeli law we are not required to distribute annual and quarterly reports directly to shareholders and the generally accepted business
practice in Israel is not to distribute such reports to shareholders. We do however make our audited financial statements available to
our shareholders prior to our annual general meeting and furnish our quarterly and annual financial results with the SEC on Form 6-K.
|
| • |
Independence, Nomination and Compensation of Directors –
A majority of our board of directors may not necessarily be comprised of independent directors as defined in NASDAQ Listing Rule 5605(a)(2).
Our board of directors contains two external directors in accordance with the provisions of the Companies Law. Israeli law does not require,
nor do our external directors conduct, regularly scheduled meetings at which only they are present. In addition, with the exception of
our external directors, our directors are elected to our board of directors in accordance with the provisions set forth in our amended
and restated Articles of Association, as approved by our shareholders on the Annual General Meeting which took place on June 8, 2016.
According to our amended and restated Articles of Association, directors are divided into three groups, Group A, Group B and Group C.
Each group is brought for re-election once every three years, on a rotating basis, such that at each annual general meeting of the shareholders
a given group of directors is brought for election, to serve on a continuous basis for a three-year term, until the third annual general
meeting following the meeting on which such group was elected for service and until their respective successors are duly elected, at which
point their term in office shall expire. At each annual general meeting, the annual general meeting shall be entitled to elect directors
to replace the directors whose three-year term in office has expired, and so on ad infinitum, so that each year, the term in office of
one group of directors shall expire. The nominations for director which are presented to our shareholders are generally made by our board
of directors. One or more shareholders of a company holding at least one percent of the voting power of the company may nominate a currently
serving external director for an additional three-year term. Israeli law does not require the adoption of, and our board has not adopted,
a formal written charter or board resolution addressing the nomination process and related matters. Compensation of our directors and
other office holders of the Company is determined in accordance with Israeli law. |
91
| • |
Audit Committee – Our audit committee
does not meet with all the requirements of NASDAQ Listing Rule 5605. We are of the opinion that the members of our audit committee comply
with the requirements of NASDAQ Listing Rule 5605(c)(3) and Rule 10A-3(b) of the general rules and regulations promulgated under the Securities
Act of 1933 and all requirements under Israeli law. Our audit committee has not adopted a formal written audit committee charter specifying
the items enumerated in NASDAQ Listing Rule 5605(c)(1). |
| • |
Compensation Committee – We follow
the provisions of the Companies Law with respect to matters in connection with the composition and responsibilities of our compensation
committee, office holder compensation, and any required approval by the shareholders of such compensation. Israeli law, and our amended
and restated Articles of Association, do not require that a compensation committee composed solely of independent members of our board
of directors determine (or recommend to the board of directors for determination) an executive officer's compensation, as required under
NASDAQ's listing standards related to compensation committee independence and responsibilities; nor do they require that the Company adopt
and file a compensation committee charter. Instead, our compensation committee has been established and conducts itself in accordance
with provisions governing the composition of and the responsibilities of a compensation committee as set forth in the Companies Law. Furthermore,
the compensation of office holders is determined and approved by our compensation committee and our Board of Directors, and in certain
circumstances by our shareholders, either in consistency with our previously approved Executive Compensation Policy or, in special circumstances
in deviation therefrom, taking into account certain considerations set forth in the Companies Law. The requirements for shareholder approval
of any office holder compensation, and the relevant majority or special majority for such approval, are all as set forth in the Companies
Law. Thus, we will seek shareholder approval for all corporate actions with respect to office holder compensation requiring such approval
under the requirements of the Companies Law, including seeking prior approval of the shareholders for the Executive Compensation Policy
and for certain office holder compensation, rather than seeking approval for such corporate actions in accordance with NASDAQ Listing
Rules. |
92
| • |
Quorum – Under Israeli law a company
is entitled to determine in its articles of association the number of shareholders and percentage of holdings required for a quorum at
a shareholders meeting. Our Articles of Association provide that a quorum of two or more shareholders, present in person or by proxy,
holding shares conferring in the aggregate more than thirty-three and a third (33 1/3 %) percent of the voting power of the Company is
required for commencement of business at a general meeting. |
| • |
Approval of Related Party Transactions –
All related party transactions are approved in accordance with the requirements and procedures for approval of interested party acts and
transactions, set forth in Sections 268 to 275 of the Companies Law. |
| • |
Shareholder Approval – We seek
shareholder approval for all corporate action requiring such approval, in accordance with the requirements of the Companies Law.
|
| • |
Equity Compensation Plans – We
do not necessarily seek shareholder approval for the establishment of, and amendments to, stock option or equity compensation plans (as
set forth in NASDAQ Listing Rule 5635(c)), as such matters are not subject to shareholder approval under Israeli law. We will attempt
to seek shareholder approval for our stock option or equity compensation plans (and the relevant annexes thereto) to the extent required
in order to ensure they are tax qualified for our employees in the United States. However, even if such approval is not received, then
the stock option or equity compensation plans will continue to be in effect, but the Company will be unable to grant options to its U.S.
employees that qualify as Incentive Stock Options for U.S. federal tax purpose. Our stock option or other equity compensation plans are
also available to our non-U.S. employees, and provide features necessary to comply with applicable non-U.S. tax laws. |
C.
Material Contracts
All of our commercial contracts over the past two years have been
entered into in the ordinary course of business.
Information regarding our real property leases is provided in "Item
4.D. – Information on the Company – Property, Plant and Equipment" and "Item 19 – Exhibits."
For information on the engagement terms of our new President and
CEO, see Item 7B “Related Party Transactions.”
D.
Exchange Controls
Under current Israeli laws and regulations, any dividends or other
distributions paid in respect of our ordinary shares purchased by nonresidents of Israel with certain non-Israeli currencies (including
U.S. Dollars) and any amounts payable upon the dissolution, liquidation or winding up of our affairs, as well as the proceeds of any sale
in Israel of our securities to an Israeli resident, will be freely repatriable in such non-Israeli currencies, provided that Israeli income
tax has been paid on (or withheld from) such payments.
93
There are currently no Israeli currency control restrictions on
remittances of dividends on our ordinary shares, proceeds from the sale of the shares or interest or other payments to non-residents of
Israel, except under certain circumstances, for shareholders who are subjects of countries that are, or have been, in a state of war with
Israel.
E.
Taxation
The following is a summary of some of the current tax law applicable
to companies in Israel, with special reference to its effect on us. The following also contains a discussion of specified Israeli tax
consequences to our shareholders and government programs from which we benefit. To the extent that the discussion is based on tax legislation
(including the legislation passed as part of the recent tax reform in Israel) that has not been subject to judicial or administrative
interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax authorities or courts.
The discussion is not intended, and should not be construed, as
legal or professional tax advice and is not exhaustive of all possible tax considerations.
Holders of our ordinary shares should consult
their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of our ordinary
shares, or receipt of any dividend distributions made to our shareholders, including, in particular, the effect of any foreign, state
or local taxes, including pursuant to the Tax Act (as defined below), and of any taxes withheld at source by the Company.
General Corporate Tax
Israeli companies are subject to corporate tax at the rate of 25%
as of 2016, 24% as of 2017, and 23% as from 2018. However, the effective tax rate payable by a company which derives income from a "Benefited
Enterprise", or from a "Preferred Enterprise" or from "Preferred Technological Enterprise" (as further discussed below) may be considerably
less.
In 2006, transfer pricing regulations came into force, following
the introduction of Section 85A of the Israeli Income Tax Ordinance (New Version), 5721-1961, referred to herein as the Israeli Tax
Ordinance, under Amendment 132. In principal, the transfer pricing rules require that cross-border transactions between related parties
be carried out implementing an arms' length principle and reported and taxed accordingly.
In 2008, an amendment to the Income Tax Law (Inflationary Adjustments),
1985 was enacted which limits the scope of the law starting in 2008 and thereafter. Starting in 2008, the revenues for tax purposes are
measured in nominal values, excluding certain adjustments for changes in the Israeli Consumer Price Index carried out in the period up
to December 31, 2007. The amended law includes, among other provisions, the elimination of the inflationary additions and deductions
and the additional deduction for depreciation for the period starting in 2008.
94
The Encouragement of Capital Investments Law, 1959 (the
"Investment Law")
Pursuant to the Investment Law, a "Preferred Enterprise" is entitled
to a reduced corporate flat tax rate of 16% with respect to income that qualifies as “Preferred Technological Income” as defined
in the Investment Law, unless the "Preferred Enterprise" is located in a certain development zone, in which case the rate will be 7.5%.
Such corporate tax rates are 12% and 7.5% with respect to Preferred Technological Income. Income derived by a "Special Preferred Enterprise"
(as such term is defined in the Investment Law) are entitled, during a benefits period of 10 years, to further reduced tax rates of 8%,
or to 5% if the "Special Preferred Enterprise" is located in a certain development zone. Under the Investment Law, most of the tax incentives
offered are not dependent on minimum qualified investments or on foreign ownership. Companies may be able to enjoy both government grants
and tax benefits concurrently.
"Preferred Enterprise" is
defined as an Industrial Enterprise (including, inter alia, an enterprise which develops software, an enterprise which provides approved
RD services to foreign residents and an enterprise which the IIA confirmed is carrying out RD in the field of alternative energy),
which inter-alia, generally more than 25% of its business income is from export to market consisting more than 14 million residents.
Chapter B2 of the Investment Law determines the conditions and
limitations applying to the tax benefits offered to a "Special Preferred Enterprise." Chapter B2 determines that a "Special Preferred
Enterprise" is entitled to benefited corporate income tax rate: of 5% if located in a preferred zone and 8% if not.
"Special Preferred Enterprise"
is defined as a "Preferred Enterprise" which meets all of the following conditions: (a) its Preferred Income is equal to or exceeds NIS
1 billion; (b) the total income of the company which owns the "Preferred Enterprise" or which operates in the same field of the "Preferred
Enterprise" and which consolidates in its financial reports the company that owns the "Preferred Enterprise" equals or exceeds NIS 10
billion; and (c) its business plan was approved by the authorities as significantly benefitting the Israeli economy, either by an investment
of at least NIS 400 - 800 million in assets; Annual growth of 100 - 150 million NIS in RD (or half of this amount if the average
annual RD is above NIS 500 million) compared to the average RD in the three tax years prior to the year of approval; or the
employment of at least 250 to 500 new employees, for preferred zones and regular zones, respectively.
Dividends paid out of income attributed to a "Preferred Enterprise"
are generally subject to withholding tax at source at a rate of 20% (15% until 2014) or such lower rate as may be provided in an applicable
tax treaty, subject to the submission and approval of a request submitted on behalf of the recipient of such dividends to the Israel Tax
Authority. However, if such dividends are paid to an Israeli company no tax will be withheld.
The Company elected in 2014 to be taxed as a "Preferred Enterprise"
under the Investment Law, commencing with the 2014 fiscal year.
There can be no assurance that we will comply with the conditions
of the Investment Law in the future or that we will be entitled to any additional benefits under the Investment Law and whether the influence
of any changes to the Investment Law will be beneficial to the Company or not.
95
On January 6, 2011 the Israeli Parliament (the "Knesset") enacted
the Economic Policy Law for 2011 and 2012 (legislative amendments), 2011 in which the Investment Law was also amended (the “2011
Amendment”). The 2011 Amendment introduced new benefits for income generated by a “Preferred Company” through its “Preferred
Enterprise” (as such terms are defined in the Investment Law) as of January 1, 2011.
The definition of a “Preferred Company” includes a
company incorporated in Israel that is not fully owned by a governmental entity, and that has, among other things, a “Preferred
Enterprise” and is controlled and managed from Israel. Pursuant to the 2011 Amendment, beginning in 2014 and in each year thereafter
until 2016, a Preferred Company may only be entitled to a reduced corporate tax rate of 16% with respect to its preferred 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%.
On December 29, 2016 the Knesset enacted the "Economic Efficiency
Law (Legislative Amendments for Achieving Budget Objectives in the Years 2017 and 2018) – 2016" in which the Investment Law was
amended again (hereinafter: “the 2017 Amendment”). The 2017 Amendment added new tax benefit tracks for a “preferred
technological enterprise” and a “special preferred technological enterprise” which award reduced tax rates to a technological
industrial enterprise for the purpose of encouraging activity relating to the development of qualifying intangible assets. In addition,
the corporate tax rate for Preferred Enterprise which is located in a specified development zone will be 7.5%.
The benefits will be awarded to a “preferred company”
that has a “preferred technological enterprise” or a “special preferred technological enterprise” with respect
to taxable “preferred technological income” per its definition in the Investment Law.
Preferred technological income that meets the conditions required
in the law, will be subject to a reduced corporate tax rate of 12%, and if the preferred technological enterprise is located in "Development
Area A" in Israel - to a reduced tax rate of 7.5%. A company that owns a special preferred technological enterprise will be subject to
a reduced corporate tax rate of 6% regardless of the development area in which the enterprise is located. The 2017 Amendment is effective
as from January 1, 2017.
Income derived by a Preferred Company from a “Special Preferred
Enterprise” (as such term is defined in the Investment Law) would be entitled, during a benefit period of ten years, to further
reduced tax rates of 8%, or 5% if the Special Preferred Enterprise is located in a certain development zone.
On June 14, 2017 the Knesset Finance Committee approved "Encouragement
of Capital Investment Regulations (Preferred Technological Income and Capital Gain of Technological Enterprise) – 2017" (hereinafter:
“the Regulations”), which provides rules for applying the “preferred technological enterprise” and “special
preferred technological enterprise” tax benefit tracks, including the Nexus formula that provides the mechanism for allocating the
technological income eligible for the benefits.
96
Should the Company derive income from sources other than the “preferred
technological enterprise”, such income will be taxable at the "Preferred Company" tax rate (for manufacturing activity in Israel)
or regular corporate tax rates for the applicable year.
On November 15, 2021, the Knesset Finance approved Economic Efficiency
Law (Legislative Amendments for Achieving Budget Objectives in the Years 2021 and 2022) – 2021 (“the 2021 Amendment”).
The 2021 Amendment stipulated rules with respect to “Accumulated income” which was generated by a company until December 31,
2020.
“Accumulated Income” is defined as an income including
capitalized income that was exempt from corporation tax on the year in which it was generated, according to the Investment Law provisions,
and the company did not pay any corporation tax except for tax payments made regarding a distribution made to a subsidiary or which was
attributed to the subsidiary directly or indirectly.
The tax rate that will be imposed on the Selected Accumulated Income
shall be at the corporation tax rate which would have applied to that income under section 47 provisions, in the year it was generated,
multiplied by the tax coefficient (according to the definition of this term under the Investment Law provisions), and not less than 6%.
The company shall pay the tax within 30 days and will not be able to regret it. The rest of the Accumulated Income which is not the Selected
Accumulated Income will be taxed according to the provisions of the Investment Law.
The company shall be entitled to pay tax regarding its Accumulated
Income, in whole or in part, in accordance with its choice by written notice to the ITA (“Selected Accumulated Income” and
“Selection Date” respectively). After paying the corporate tax, the Investment Law provisions stipulate that the company shall
invest in its Industrial Enterprise, during the 5 years starting on the Selection Date for at least one of the following: (1) purchase
of productive assets according to the definition of this term and excluding buildings; (2) investment in research and development in Israel;
or (3) payment of salaries to new employees in the company compared to the employees employed by the company at the end of the tax year
2020, and excluding salaries to company’s officers (as defined under the Investment Law). The investment amount will be calculated
according to the Investment Law Provisions. Subject to additional conditions stipulated by the Investment Law provisions, the company
will be able to distribute Its Selected Accumulated income as a dividend, after withholding 15% tax from the distributed amount. The 2021
Amendment is effective as from January 1, 2022.
As a result of the aforesaid legislation, starting 2021 the Company
has implemented the “preferred technological enterprise” tax benefit track.
Law for the Encouragement of Research, Development and Technological
Innovation in Industry, 1984
Programs approved by the Research Committee of the IIA are eligible
for grants or loans if they meet certain criteria, generally in return for the payment of royalties from the sale of the product or services
developed in accordance with the program and subject to other restrictions. Once a project is approved, the IIA award grants generally
of up to 50% of the project's expenditures in return for royalties, usually at the rate of 3% of sales of products developed with such
grants. For projects approved after January 1, 1999, the amount of royalties payable is up to a dollar-linked amount equal to 100% of
such grants plus interest at LIBOR or other applicable interest rate.
97
The terms of these grants prohibited the manufacture outside of
Israel of the product developed in accordance with the program without the prior consent of the Research Committee of the IIA. Such approval,
if granted, was generally subject to an increase in royalty rates, as well as in the total amount to be repaid to the IIA to between 120%
and 300% of the amount granted, depending on the extent of the manufacturing to be conducted outside of Israel.
The RD Law also provides that know-how from the research and
development, which is used to develop or produce produce the product, may not be transferred to Israeli third parties without the approval
of the Research Committee. The RD Law stresses that it is not just transfer of know-how that is prohibited, but also transfer of
any rights in such know-how. Such restriction does not apply to exports from Israel of final products developed with such technologies.
It is possible to receive approval of the transfer only if the transferee undertakes to abide by all of the provisions of the RD
Law and regulations promulgated thereunder, including the restrictions on the transfer of know-how and the obligation to pay royalties.
Generally, royalty payments by the transferor are required in connection with the transfer to an Israeli third party. There is no assurance
that such consent, if requested, would be granted. For additional information regarding the RD Law, see "Item 4.B. – Information
on the Company – Business Overview – Governmental Regulation Affecting the Company."
Tax Benefits for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction
in the year incurred for expenditures (including capital expenditures) in scientific research and development projects, if the expenditures
are approved by the relevant Israeli Government Ministry (determined by the field of research) and the research and development is for
the promotion of the enterprise and is carried out by or on behalf of the company seeking such deduction. Such expenditures not so approved
are required to be deducted over a three-year period.
Law for the Encouragement of Industry (Taxes), 1969
Under the Law for the Encouragement of Industry (Taxes), 1969 (the
"Industry Encouragement Law"), Industrial Companies (as defined below) are entitled to the following tax benefits:
| (a) |
Amortization of expenses incurred in connection with certain public securities issuances over a three-year period; and |
| (b) |
Accelerated depreciation rates on know-how, patents and/or right to use a patent or certain other intangible property rights.
|
Eligibility for benefits under the Industry Encouragement Law is
not subject to receipt of prior approval from any governmental authority. Under the Industry Encouragement Law, an "Industrial Company"
is defined as a company which is an Israeli resident and incorporated in Israel, at least 90% of the income of which, in any tax year,
determined in Israeli currency, exclusive of income from government loans, is derived from an "Industrial Enterprise" owned by it and
located in Israel or in the “Area” as defined in the Israeli Tax Ordinance. An "Industrial Enterprise" is defined as an enterprise
whose major activity in a given tax year is industrial production activity.
We believe that we currently qualify as an "Industrial Company"
within the definition of the Industry Encouragement Law. No assurance can be given that we will continue to qualify as an "Industrial
Company" or that the benefits described above will be available in the future.
98
Calculation of Results for Tax Purposes
The Israeli Income Tax Regulations (Rules for Maintaining Accounting
Records of Foreign Investors' Companies and Certain Partnerships and Determining Their Taxable Income), 1986, provide that as a "Foreign
Investors' Company" (as defined in the Investment Law described above) is eligible to calculate its taxable income in accordance with
these regulations, and therefore, if we elect to follow such regulations, our taxable income or loss is to be calculated in US Dollars.
We have elected to apply these regulations and accordingly our taxable income or loss is calculated in US Dollars in the manner set forth
in such regulations.
Taxation of our Shareholders
Capital Gains Taxes Applicable to Israeli Resident
Shareholders.
In general, an individual is subject to a 25% tax rate on real
capital gains derived from the sale of shares, as long as the individual is not a "substantial shareholder" in the company issuing the
shares. A "substantial shareholder" is generally a person who alone, or together with his relative or another person who collaborates
with him on a permanent basis, holds, directly or indirectly, at least 10% of any of the "Means of control" of the corporation. "Means
of control" generally include the right to vote, receive profits, nominate a director or an office holder, receive assets upon liquidation,
or order someone who holds any of the aforesaid rights how to act, and all regardless of the source of such right.
A "substantial shareholder" will be subject to a withholding tax
rate of 30% in respect of real capital gains derived from the sale of shares issued by a company in which he or she is a "substantial
shareholder." The determination of whether the individual is a "substantial shareholder" will be made on the date on which the securities
are sold. In addition, the individual will be deemed to be a "substantial shareholder" if at any time during the 12 months preceding the
date of sale, he or she was a "substantial shareholder."
Capital Gains Taxes Applicable to Non-Israeli Resident
Shareholders.
Shareholders that are not Israeli residents are generally exempt
from Israeli capital gains tax on any gains derived from the sale, exchange or disposition of our shares, provided that such share is
not traded on the TASE on the day of the sale and such gains were not derived from a permanent establishment or business activity of such
shareholders in Israel. However, non-Israeli corporations will not be entitled to the foregoing exemptions if an Israeli resident(s) (i)
have a controlling interest of more than 25% 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.
99
In addition, under the U.S.-Israel Income Tax Treaty, 1995, or
the U.S.-Israel Tax Treaty, the sale, exchange or disposition of our shares by a shareholder who is a U.S. resident (for purposes of the
U.S.-Israel Tax Treaty) holding the shares as a capital asset is exempt from Israeli capital gains tax unless either (i) the shareholder
holds, directly or indirectly, shares representing 10% or more of our voting capital during any part of the 12-month period preceding
such sale, exchange or disposition; or (ii) the capital gains arising from such sale are attributable to a permanent establishment of
the shareholder located in Israel; or (iii) the shareholder, being an individual, was present in Israel for a period of time or several
periods of time, which aggregate to a total of 183 days or more, during a single taxable year. In either case, the sale, exchange, or
disposition of the shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, the 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. The U.S.-Israel Tax Treaty does not relate
to U.S. state or local taxes.
Shareholders may be required to demonstrate that they are exempt
from tax on their capital gains in order to avoid withholding of tax at source at the time of sale.
Taxation of Israeli Shareholders on Receipt of Dividends.
Residents of Israel who are individuals are generally subject to
Israeli income tax on the receipt of dividends paid on our shares at the rate of 25%, which tax will be withheld at the source. With respect
to a person who is a "substantial shareholder" at the time of receiving the dividend or on any date within the 12 months preceding such
date, the applicable tax rate is 30%.
Israeli resident corporations are generally exempt from Israeli
tax for dividends paid on our shares.
In case of dividends paid out of the profits of a "Preferred Enterprise"
or "Preferred Technological Enterprise", the applicable tax rate is 20% for an individual and 0% for an Israeli corporation.
Taxation of Non-Israeli Shareholders on Receipt of
Dividends.
Non-residents of Israel are generally subject to Israeli income
tax on the receipt of dividends paid on our shares at the rate of 25% or 30%, if such person (including a non-Israeli corporation) is
a "substantial shareholder" at the time of recipient of the dividend or on any date in the 12 months preceding such date, which tax will
be withheld at the source, unless a different rate is provided in a tax treaty between Israel and the shareholder's country of residence.
Under the U.S.-Israel Tax Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our ordinary shares who
is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) is 25% or 15% for a US corporation in the case of dividends paid out of
the profits of an "Approved Enterprise" (as such term is defined in the Investment Law), subject to certain conditions. However, generally,
the maximum rate of withholding tax on dividends that are paid to a U.S. corporation holding 10% or more of our outstanding voting capital
throughout the tax year in which the dividend is distributed as well as the previous tax year and the dividend is not paid from the profits
of an "Approved Enterprise", the Israeli tax withheld may not exceed 12.5%, subject to certain conditions. A non-resident of Israel who
receives dividends from which tax was withheld is generally exempt from the duty to file returns in Israel in respect of such income,
provided such income was not derived from a business conducted in Israel by the taxpayer, and the taxpayer has no other taxable sources
of income in Israel.
100
In case of dividends paid out of the profits of a "Preferred Enterprise"
or "Preferred Technological Enterprise", the applicable tax rate is 20% for individuals and 15% for a US corporations holding 10% or more
of our outstanding voting capital throughout the tax year in which the dividend is distributed as well as the previous tax year, subject
to certain conditions.
Residents of the United States will generally have taxes in Israel
withheld at source.
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 NIS 698,281, including, but not limited to, dividends, interest and capital
gains.
Passive Foreign Investment Company Status under U.S. Federal Income
Tax Law
In general, a non-U.S. corporation will be classified for U.S.
tax purposes as a passive foreign investment company (hereafter also referred to as a "PFIC") in any taxable year in which either (i)
75% or more of its gross income (including the pro-rata gross income of any company (U.S. or foreign) in which it is considered to own
25% or more of the ordinary shares by value) for the taxable year is passive income, or (ii) at least 50% of the average value of all
of its gross assets (including the pro-rata fair market value of the assets of any company in which it is considered to own 25% or more
of the ordinary shares by value) during the taxable year, calculated quarterly by value, produce, or are held for the production of, passive
income. Passive income for these purposes includes items such as dividends, interest, royalties, rents and gains from commodities and
securities transactions.
If we are classified as a passive foreign investment
company, highly complex rules will apply to our U.S. shareholders. Accordingly, U.S. shareholders are urged to consult their tax advisors
regarding the application of such rules.
If a corporation is a passive foreign investment company, a U.S.
shareholder will be subject to one of three alternative taxing regimes:
"QEF" regime - If the shareholder elects to treat the PFIC
as a QEF, then each year the shareholder includes in its gross income a proportionate share of the PFIC's ordinary income and net capital
gain. We do not currently intend to prepare or provide the information that would enable you to make a Qualified Election Fund election.
A second regime may be elected if the PFIC stock is "marketable." The U.S. shareholder may elect to "mark the stock to market" each year.
At the end of each taxable year, the shareholder recognizes gain equal to the excess of the fair market value of the PFIC stock over the
shareholder's tax basis in the stock. Losses may also be recognized to the extent of previously recognized gains.
101
A U.S. shareholder making neither of these elections is subject
to the "excess distribution" regime. The tax is triggered when the shareholder receives an "excess distribution" from the PFIC. An "excess
distribution" is either (1) a distribution with respect to stock that is greater than 125% of the average of such distributions over the
preceding three years, or (2) 100% of the gain from the disposition of shares in the PFIC.
An "excess distribution" is subject to special tax rules. In most
cases, only a portion of it is included in the gross income of the U.S. shareholder and taxed at normal rates. The remainder is never
so included, but is used as the basis for calculating a "deferred tax amount", which is simply added to the shareholder's tax liability.
The deferred tax amount is computed as follows. The "excess distribution"
is first ratably allocated, share by share, to each day of the shareholder's holding period. Portions allocated to the current year, and
to any pre-PFIC years (that is, years before 1987, when there were no PFICs, or years before the first year in which the company was a
PFIC with respect to that shareholder), are included in ordinary income for the current year. Portions allocated to prior PFIC years are
hypothetically taxed at the highest marginal rate in effect for those years (without regard to the shareholder's actual rate or to any
deductions or credits for those years). To this hypothetical tax is added the interest that the shareholder would have paid if it were
simply paying that tax late for that year. The sum of the tax and the interest charge is the deferred tax amount, which cannot be offset
or otherwise affected by current net operating losses or other deductions.
A U.S. person who inherits shares in a foreign corporation that
was a PFIC in the hands of the decedent (other than a decedent who was a nonresident alien at all times during his holding period in the
shares) who did not make either of the elections described above, is denied the otherwise available step-up in the tax basis of such shares
to fair market value at the date of death. The U.S. person steps into the shoes of the decedent and will be subject to the rules described
above.
Although a determination as to a corporation's PFIC status is made
annually, an initial determination that a corporation is a PFIC for any taxable year generally will cause the above-described consequences
to apply for all future years as to U.S. shareholders who held shares in the corporation at any time during the PFIC taxable year and
who made neither a valid QEF election with respect to such shares nor a valid election to mark such shares to market. This will be true
even if the corporation loses its PFIC status in later years. However, with respect to a PFIC that does not make any distributions or
deemed distributions, the above tax treatment would apply only to gains realized on the disposition of such shares by a U.S. shareholder.
If we are classified as a PFIC, complicated rules will apply to
our U.S. shareholders. Our status in future years will depend on our assets and activities in those years, although shareholders will
be treated as continuing to own an interest in a passive foreign investment company if we are a passive foreign investment company in
any year in which a shareholder owns our shares, unless certain elections are made.
102
This discussion does not address all aspects of U.S. federal income
taxation that may be relevant to a U.S. shareholder in light of his or her particular circumstances or to a U.S. shareholder subject to
special treatment under U.S. federal income tax law. We do not currently intend to prepare or provide the information that would enable
you to make a Qualified Election Fund election. U.S. shareholders are urged to consult their tax advisors about the U.S. federal income
taxation rules to which they will be subject, as well as the PFIC rules, including the advisability, procedure and timing of making a
mark-to-market election, in connection with their holding of our shares, including warrants or rights to acquire our shares.
Certain Reporting Requirements
Certain U.S. investors are required to file IRS Form 926, Return
by U.S. Transferor of Property to a Foreign Corporation, and certain U.S. Investors may be required to file IRS Form 5471, Information
Return of U.S. Persons with Respect to Certain Foreign Corporations, reporting transfers of cash or other property to us and information
relating to the U.S. investor and us. Substantial penalties may be imposed upon a U.S. investor that fails to comply. Each U.S. investor
should consult its own tax advisor regarding these requirements.
In addition, legislation imposes reporting requirements for the
holder of certain foreign financial assets, including equity of foreign entities, if the aggregate value of all of these assets exceeds
certain thresholds. Our shares are expected to be subject to these new reporting requirements unless the shares are held in an account
at a domestic financial institution. Penalties may apply to any failure to comply with such reporting requirements. U.S. investors should
consult their own tax advisors regarding the application of this legislation.
Backup Withholding Tax and Information Reporting Requirements
Generally, information reporting requirements will apply to distributions
with respect to our shares or proceeds on the disposition of our shares paid within the United States (and, in certain cases, outside
the United States) to U.S. investors other than certain exempt recipients, such as corporations. Furthermore, backup withholding (currently
at 24%) may apply to such amounts if the U.S. investor fails to (i) provide a correct taxpayer identification number, (ii) report interest
and dividends required to be shown on its U.S. federal income tax return, or (iii) make other appropriate certifications in the required
manner. U.S. investors who are required to establish their exempt status generally must provide such certification on IRS Form W-9.
Backup withholding is not an additional tax. Amounts withheld as
backup withholding from a payment may be credited against a U.S. investor's U.S. federal income tax liability and such U.S. investor may
obtain a refund of any excess amounts withheld by filing the appropriate claim for refund with the IRS and furnishing any required information
in a timely manner.
103
Tax Assessment
The company and its subsidiaries file income tax returns in Israel,
U.S.A and Denmark.
The Israeli tax returns of the Company are open for examination
by the Israeli Tax Authority for tax years beginning in 2018.
The Federal tax returns of our U.S. subsidiary are open for examination
by the Federal Tax Authorities for tax years beginning in 2019. The New Jersey state tax returns of the U.S. subsidiary are open for examination
by the New Jersey State Tax Authority for the tax years beginning in 2018. The California State Tax returns of the U.S. subsidiary are
open for examination by the California State Tax Authority for tax years beginning in 2018. The Virginia State Tax returns of the U.S.
subsidiary are open for examination by the Virginia State Tax Authority for tax periods beginning in 2020. The Tennessee, New Mexico and
New York State Tax returns of the U.S. subsidiary are open for examination by the respective jurisdiction tax authorities for tax years
beginning in 2020. The Texas State Tax returns of the U.S. subsidiary are open for examination by the Texas State tax authorities for
tax years beginning in 2018. The Illinois State Tax returns of the U.S. subsidiary are open for examination by the by the Illinois State
tax authorities for tax years beginning in 2020.
The Danish tax returns of our Danish subsidiary are open for examination
by the Danish Tax Authority for tax years beginning on January 1, 2017.
F.
Dividends and Paying Agents
Not applicable.
G.
Statement by experts
Not applicable.
H.
Documents on Display
We are required to file reports and other information with the
SEC under the Securities Exchange Act of 1934 (the "Exchange Act") and the regulations thereunder applicable to foreign private issuers.
Although as a foreign private issuer we are not required to file periodic information as frequently or as promptly as United States companies,
we generally do publicly announce our quarterly and year-end results promptly and file periodic information with the SEC under cover of
Form 6-K. We are also exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements and our
office holders, directors and principal shareholders are exempt from the reporting and other provisions in Section 16 of the Exchange
Act.
104
You may review a copy of our filings with the SEC, including any
exhibits and schedules, at the SEC's public reference room at 100 F Street N.E., Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330
for further information on the public reference room. As a foreign private issuer, all documents which were filed after November 4, 2002
on the SEC's EDGAR system will be available for retrieval on the SEC's website at www.sec.gov. The documents referred to in this document
may be inspected at the Company's offices, located at 14 Atir Yeda Street, Kfar Sava, Israel 4464323.
Any statement in this annual report about any of our contracts
or other documents is not necessarily complete. If the contract or document is filed as an exhibit to the annual report the contract or
document is deemed to modify the description contained in this annual report. We urge you to review the exhibits themselves for a complete
description of the contract or document.
Our website is http://www.silicom.co.il. We do not intend for any
information contained on our internet website to be considered part of this annual report, and we have included our website address in
this annual report solely as an inactive textual reference. We will post on our website any materials required to be posted on such
website under applicable corporate or securities laws and regulations, including posting any XBRL interactive financial data required
to be filed with the SEC, and any notices of general meetings of our shareholders.
I. Subsidiary
information
Not applicable.
|
Item
11. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market risk is the risk of loss related to changes in market prices,
including interest rates and foreign exchange rates, of financial instruments that may adversely impact our consolidated financial position,
results of operations or cash flows. Our primary market risk exposures relate to our investment portfolio and fluctuation of the exchange
rate of the US Dollar, which is the primary currency in which we conduct our operations, against the NIS with respect to the Company's
Israeli operations, and against the DKK and Euro with respect to Danish operations.
Interest Rate Risk
As of December 31, 2022, our investment portfolio consisted of
approximately US$ 19.2 million invested in corporate and government debt securities. These securities are classified as "held to maturity."
All of the Company's investments are in fixed-rate instruments.
We may be required to adjust the carrying value of our investment
securities due to a default, lack of liquidity or other event. For that matter we are required to use of forward-looking information to
calculate credit loss estimates
As of December 31, 2022, we were not required to adjust the
carrying value of our investment securities.
105
For quantitative information on the Company's marketable securities,
please see Note 4 to our consolidated financial statements included elsewhere in this annual report.
As of December 31, 2022, we did not have any short or long term
interest bearing loans or debts, hence with respect to the Company's business operations, we do not have any exposure to interest rate
risk.
Foreign Currency Exchange Risk
Most of our revenues are generated in U.S. Dollars. In addition,
most of our costs are denominated and determined in U.S. Dollars and NIS. According to the salient economic factors indicated in ASC 830
"Foreign Currency Matters" (formerly SFAS No. 52), "Foreign Currency Translation", our cash flow, sale price, sales market, expense, financing
and inter-company transactions, and arrangement indicators, are predominantly denominated in U.S. Dollars, and so, the U.S. dollar is
the primary currency of the economic environment in which we operate. Thus, the U.S. dollar is our functional and reporting currency.
In our balance sheet, we re-measure into U.S. Dollars all monetary accounts (principally cash and cash equivalents and liabilities) that
are maintained in other currencies. For this re-measurement, we use the relevant foreign exchange rate at the balance sheet date. Any
gain or loss that results from this re-measurement is reflected in the statement of operations as appropriate. We measure and record non-monetary
accounts in our balance sheet in U.S. Dollars. For this measurement, we use the U.S. dollar value in effect at the date that the asset
or liability was initially recorded in our balance sheet (the date of the transaction).
As of December 31, 2022, we had accounts receivable in NIS or in
funds linked thereto in the amount of US$ 6,047 thousand. Market risk was estimated as the potential decrease in balance resulting from
a hypothetical 10% increase in the year-end Dollar exchange rate. Assuming such increase in the Dollar exchange rate, the balance of our
accounts receivable would decrease by US$550 thousand. As of December 31, 2022, we had accounts payable in NIS or linked thereto in the
amount of US$ 13,885 thousand. Market risk was estimated as the potential increase in balance resulting from a hypothetical 10% decrease
in the year-end Dollar exchange rate. Assuming such decrease in the Dollar exchange rate, the balance of our accounts payable would increase
by US$ 1,543 thousand.
In 2022, there was an increase of 13.15% in the Dollar exchange
rate to the NIS which resulted in an aggregate decrease in the fair value of our assets of US$ 1,671 thousand and an aggregate decrease
in the fair value of our liabilities of US$ 2,320 thousand.
Inflation in Israel and the Israeli currency as well as U.S. Dollar
exchange rate fluctuations may have only a limited effect on our accounts payable as well as on our accounts receivable, as described
above.
Inflation in Denmark and the Danish currency as well as U.S. Dollar
exchange rate fluctuations do not have a significant effect on our accounts receivable as well as on our accounts payable.
106
Our operating expenses may be affected by fluctuations in the value
of the U.S. dollar as it relates to the NIS. By way of example, a hypothetical 10% weakening in the value of the U.S. Dollar relative
to the NIS in 2022 would have resulted in an increase in operating expenses of approximately US$ 2,166 thousand for the year ended December
31, 2022. In addition, our operating expenses may be affected by fluctuations in the value of the U.S. Dollar as it relates to the DKK.
By way of example, a hypothetical 10% weakening in the value of the U.S. dollar relative to the DKK in 2022, would have resulted in an
increase in operating expenses of approximately US$ 589 thousand for the year ended December 31, 2022.
As of December 31, 2022, all of our investments, other than a portion
of our cash and cash equivalents comprising a small portion of our overall investment portfolio, consisted of investments denominated
in U.S. Dollars, and our portfolio is therefore not subject to significant exposure to foreign currency exchange risk.
As of December 31, 2022, we were not engaged in any hedging or
other transactions intended to manage the risks relating to foreign currency exchange rate or interest rate fluctuations.
Credit Risk
Our investment portfolio includes "held to maturity" marketable
securities. These securities include investments issued by highly rated corporations. As of December 31, 2022, the rating of the securities
in our portfolio was at least A-. Nonetheless, these investments are subject to general credit and counterparty risks (such as that the
counterparty to a financial instrument fails to meet its contractual obligations), which were exacerbated by the recent turmoil that has
affected the financial markets and the global economy and caused credit issues for a number of reputable financial institutions. Any changes
in fair value of our investment securities due to credit risk do not affect our profit or loss unless there is other than temporary impairment
(see Note 2X to our financial statements for the year ended December 31, 2022). For additional information see "Item 3.D. Key Information
– Risk Factors."
As of December 31, 2022, we were not required to adjust the carrying
value of our investment securities.
Our top four ultimate customers accounted for approximately 33%
of our revenues in 2022. We expect that a small number of customers will continue to account for a significant portion of our revenues
for the foreseeable future. Difficulties in the fulfillment of the financial obligations of one or more of such customers may expose us
to credit risk and may have a material adverse effect on our business and our financial condition and results. For additional information
see "Item 3.D. Key Information – Risk Factors". Difficulties in the fulfillment of financial obligations of one or more of our customers
may have an adverse effect on our ability to consummate the collection of consideration payable under purchase orders placed by, or invoiced
to, such customers under one or more Design Wins in relation to which such customers operate. See Note 2.X (2) of our consolidated financial
statements.
107
|
Item
12. |
DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES |
Not Applicable.
PART
II.
|
Item
13. |
DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES |
None.
|
Item
14. |
MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
None.
|
Item
15. |
CONTROLS
AND PROCEDURES |
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our Chief Executive
Officer and Chief Financial Officer to allow timely decisions regarding required disclosure. Our management, including our Chief Executive
Officer and Chief Financial Officer, conducted an evaluation of our disclosure controls and procedures, as defined under Exchange Act
Rule 13a-15(e) and Rule 15d-15(e), as of the end of the period covered by this Annual Report on Form 20-F. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were
effective.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide
reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes
in accordance with U.S. generally accepted accounting principles.
Management assessed our internal control over financial reporting
as of December 31, 2022, the end of our fiscal year. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control — Integrated Framework (2013)."
Based on our assessment, management has concluded that our internal
control over financial reporting was effective as of December 31, 2022, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted
accounting principles. We reviewed the results of management's assessment with the audit committee of our Board of Directors.
108
This annual report includes, on page F-4 of this form 20-F, an
attestation report of the Company's registered public accounting firm on management's assessment of the Company's internal control over
financial reporting.
Inherent Limitations on Effectiveness of Controls
Internal control over financial reporting has inherent limitations.
Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment
and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper
management override. Because of such limitation, there is a risk that material misstatements will not be prevented or detected on a timely
basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting
process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Changes in Internal Control over Financial Reporting
There was no change in our internal controls over financial reporting
that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect,
our internal controls over financial reporting.
|
Item
15A. |
CONTROLS
AND PROCEDURES |
Not Applicable.
|
Item
16. |
Reserved. |
|
Item
16A. |
AUDIT
COMMITTEE FINANCIAL EXPERT |
Our board of directors had determined that both Ms. Ayelet Aya
Hayak and Mr. Ilan Erez were our audit committee financial experts.
|
Item
16B. |
CODE
OF ETHICS |
Our company has adopted a code of ethics, which applies to all
our employees, office holders and directors, including our Chief Executive Officer, our Chief Financial Officer, our VP Finance, Director
of Finance and our Corporate Controller.
109
|
Item
16C. |
PRINCIPAL
ACCOUNTANT FEES AND SERVICES |
The following table presents fees for professional services for
the audit of the Company's consolidated annual financial statements for the years ended December 31, 2022 and 2021, audit-related
services and tax services rendered by Somekh Chaikin, a member firm of KPMG International, and Kesselman Kesselman Certified Public
Accountants (Isr.) PwC Israel.
|
2022 |
2021 |
|||||||||||||||
|
PWC |
KPMG |
PWC |
KPMG |
|||||||||||||
|
Audit Fees(1)
|
$ |
120,000 |
$ |
20,000 |
$ |
120,000 |
$ |
20,000 |
||||||||
|
Audit-Related Fees(2)
|
$ |
7,500 |
$ |
5,757 |
- |
- |
||||||||||
|
Tax Fees(3)
|
$ |
50,128 |
$ |
27,534 |
$ |
2,800 |
$ |
56,744 |
||||||||
| (1) |
Audit Fees consist of fees for professional services rendered for the audit of the Company's annual consolidated financial statements
and services normally provided by the independent auditor in connection with statutory and regulatory filings or engagements. |
| (2) |
Audit-Related Fees consist of accounting consultation and consultation on financial accounting standards, not arising as part of
the audit, as well as procedures performed over registration statements. |
| (3) |
Tax Fees are the aggregate fees billed for professional services rendered for tax compliance, transfer pricing studies, and tax advice
other than in connection with the Audit. Tax compliance involves audit of original and amended tax returns, tax planning and tax advice.
|
Audit committee's pre-approval policies and procedures
We are required to obtain the approval of our audit committee (and
subsequently the consent of the Board of Directors and shareholders) before engaging our independent auditors, Kesselman Kesselman
Certified Public Accountants (Isr.) PwC Israel, to audit our consolidated financial statements, as well as to provide other audit or permitted
non-audit services to us. This policy, which is designed to assure that such engagements do not impair the independence of our auditors,
requires pre-approval from the audit committee on an annual basis for the various audit and non-audit services that may be performed by
our auditors. Our audit committee is not permitted to approve the engagement of our auditors for any services that would be inconsistent
with maintaining the auditor's independence or that are not permitted by applicable law.
110
|
Item
16D. |
EXEMPTIONS
FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
Not Applicable.
|
Item
16E. |
PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
|
Period
|
Total Number of Shares Purchased |
Average Price Paid per Share (US$) |
Total Number of Shares Purchased as Part of
Publicly Announced Plan |
Approximate Dollar Value that May Yet Be Purchased
Under the Plan (US$) |
||||||||||||
|
January 1, 2022 - January 31, 2022(1)
|
25,767 |
46.797 |
1,104,003 |
4,754,032 |
||||||||||||
|
February 1, 2022 - February 28, 2022 |
21,554 |
43.280 |
1,125,557 |
3,821,184 |
||||||||||||
|
March 1, 2022 - March 31, 2022 |
30,499 |
39.330 |
1,156,056 |
2,621,661 |
||||||||||||
|
April 1 2022 - April 30, 2022 |
2,300 |
39.154 |
1,158,356 |
2,531,605 |
||||||||||||
(1) On April 29, 2021, our Board of Directors determined that it was in the Company's
best interest to pursue a new repurchase plan of Ordinary Shares from the Company's shareholders, for a total amount not exceeding $15,000,000,
upon similar terms to the prior plan, and which shall be in effect for a one-year period commencing on May 3, 2021, unless otherwise determined
by the Board of Directors.
111
|
Item
16F. |
CHANGE
IN REGISTRANT'S CERTIFYING ACCOUNTANT |
Following a resolution of our Board of Directors on March 15, 2021, Somekh Chaikin,
Certified Public Accountants (Israel), a member of KPMG International (“KPMG”), declined to be reelected as our independent
accountant.
KPMG audited our financial statements as of and for the fiscal
years ended December 31, 2020 and 2019. The reports of KPMG on the financial statements of the Company for the fiscal years ended December
31, 2020 and 2019, did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles
During the period between January 1, 2020 and the cessation of
their engagement on March 15, 2021, there were no disagreements between us and KPMG on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG, would
have caused KPMG to make reference to the subject matter of the disagreements in connection with its audit reports on our financial statements.
During the period between January 1, 2020 to March 15, 2021, KPMG
did not advise the Company of any reportable events specified in Item 304(a)(1)(v) of Regulation S-K with respect to us.
Kesselman Kesselman Certified Public Accountants (Isr.) PwC
Israel (“PwC”) was initially appointed as our independent registered public accounting firm following the Company’s
Annual General Meeting on June 3, 2021, and were reappointed at the Company’s Annual General Meeting on June 7, 2022.
Through the period prior to the engagement of PwC, we did not consult
KPMG regarding (i) the application of accounting principles to any specified transaction, either completed or proposed; (ii) the type
of audit opinion that might be rendered on our financial statements, and either a written report was provided to the registrant or oral
advice was provided that the new accountant concluded was an important factor considered by the registrant in reaching a decision as to
the accounting, auditing or financial reporting issue; or (iii) any matter that was either the subject of a disagreement (as defined in
Item 16F(a)(1)(iv) and the related instructions to this Item) or a reportable event (as defined in Item 16F(a)(1)(v)).
|
Item
16G. |
CORPORATE
GOVERNANCE |
Our corporate governance practices differ from those followed by
domestic companies as required under the listing standards of the NASDAQ Global Market, due to an exemption that we obtained from NASDAQ
as foreign private issuer which enables us to comply with our home country laws of the State of Israel, including the provisions of the
Companies Law, in lieu of NASDAQ Listing Rules. Below is a concise summary of the significant ways in which our corporate governance practices
differ from the corporate governance requirements of NASDAQ applicable to domestic U.S. listed companies:
112
| • |
We are not required to distribute annual and quarterly reports directly to shareholders, but we do make our audited financial statements
available to our shareholders prior to our annual general meeting and furnish our quarterly and annual financial results with the SEC
on Form 6-K; |
| • |
A majority of our Board of Directors may not necessarily be comprised of independent directors as defined in the NASDAQ Listing Rules,
however, a majority of our audit committee are independent directors in accordance with NASDAQ Listing Rule 5605(a)(2). Our directors
are elected to our Board of Directors in accordance with the new directors voting mechanism approved by our shareholders on the Annual
General Meeting which took place on June 8, 2016. According to said directors voting mechanism, directors are divided into three groups,
Group A, Group B and Group C. Each group is brought for re-election once every three years, on a rotating basis, such that at each annual
general meeting of the shareholders a given group of directors is brought for election, to serve on a continuous basis for a three-year
term, until the third annual general meeting following the meeting on which such group was elected for service and until their respective
successors are duly elected, at which point their term in office shall expire. At each annual general meeting, the annual general meeting
shall be entitled to elect directors to replace the directors whose three-year term in office has expired, and so on ad infinitum, so
that each year, the term in office of one group of directors shall expire. The nominations for director which are presented to our shareholders
are generally made by our board of directors. Pursuant to the Companies Law, one or more shareholders of a company holding at least one
percent of the voting power of the company may nominate a currently serving external director for an additional three-year term. Israeli
law does not require the adoption of, and our board has not adopted, a formal written charter or board resolution addressing the nomination
process and related matters. Compensation of our directors and other office holders of the Company is determined in accordance with Israeli
law; |
| • |
Our audit committee has not adopted a formal written audit committee charter specifying the items enumerated in NASDAQ Listing Rule
5605(c)(1). We believe that the members of our audit committee comply with the requirements of the Israeli law, as well as NASDAQ Listing
Rule 5605(c)(3) and Rule 10A-3(b) of the general rules and regulations promulgated under the Securities Act of 1933. For a detailed discussion
please refer to "Item 6 – Directors, Senior Management and Employees – Audit Committee"; |
| • |
As opposed to NASDAQ Listing Rule 5620(c)(3), which sets forth a minimum quorum for a shareholders meeting, under Israeli law a company
is entitled to determine in its articles of association the number of shareholders and percentage of holdings required for a quorum at
a shareholders meeting. Our current Articles of Association provide that a quorum of two or more shareholders, present in person or by
proxy, holding shares conferring in the aggregate more than thirty-three and a third (33 1/3 %) percent of the voting power of the Company
is required; |
| • |
All related party transactions are approved in accordance with the requirements and procedures for approval of interested party acts
and transactions set forth in the Companies Law, and are not subject to the review process set forth in NASDAQ Listing Rule 5630. For
a detailed discussion please refer to "Item 10 – Additional Information – the Companies Law"; |
113
| • |
We seek shareholder approval for all corporate action requiring such approval in accordance with the requirements of the Companies
Law rather than under the requirements of the NASDAQ Marketplace Rules, including (but not limited to) the appointment or termination
of auditors, appointment and dismissal of directors, approval of interested party acts and transactions requiring general meeting approval
as discussed above and a merger; |
| • |
We follow the provisions of the Companies Law with respect to matters in connection with the composition and responsibilities of
our compensation committee, office holder compensation, and any required approval by the shareholders of such compensation. Israeli law,
and our amended and restated Articles of Association, do not require that a compensation committee composed solely of independent members
of our board of directors determine (or recommend to the board of directors for determination) an executive officer's compensation, as
required under NASDAQ listing standards related to compensation committee independence and responsibilities; nor do they require that
the Company adopt and file a compensation committee charter. Instead, our compensation committee has been established and conducts itself
in accordance with provisions governing the composition of and the responsibilities of a compensation committee as set forth in the Companies
Law. Furthermore, the compensation of office holders is determined and approved by our compensation committee and our board of directors,
and in certain circumstances by our shareholders, either in consistency with our previously approved Executive Compensation Policy or,
in special circumstances in deviation therefrom, taking into account certain considerations set forth in the Companies Law. The requirements
for approval by the shareholders for any office holder compensation, and the relevant majority or special majority for such approval,
are all as set forth in the Companies Law. Thus, we will seek shareholder approval for all corporate actions with respect to office holder
compensation requiring such approval under the requirements of the Companies Law, including seeking prior approval of the shareholders
for the Executive Compensation Policy and for certain office holder compensation, rather than seeking approval for such corporate actions
in accordance with NASDAQ Listing Rules; and |
| • |
We do not necessarily seek shareholder approval for the establishment of, and amendments to, stock option or equity compensation
plans (as set forth in NASDAQ Listing Rule 5635(c)), as such matters are not subject to shareholder approval under Israeli law. We will
attempt to seek shareholder approval for our stock option or equity compensation plans (and the relevant annexes thereto) to the extent
required in order to ensure they are tax qualified for our employees in the United States. However, if such approval is not received,
then the stock option or equity compensation plans will continue to be in effect, but the Company will be unable to grant options to its
U.S. employees that qualify as Incentive Stock Options for U.S. federal tax purpose. Our stock option or other equity compensation plans
are also available to our non-U.S. employees, and provide features necessary to comply with applicable non-U.S. tax laws. |
114
| • |
Our Board of Directors determined that the Company meets all of the requirements of the Israeli Companies Regulations (Relief for
Companies Whose Shares Are Registered for Trading Outside of Israel), 2000 (the "Regulations"),
pursuant to which Israeli companies which meet all of the following conditions may opt-out of certain Israeli regulations governing the
appointment of external directors and the composition of the audit and compensation committees (the "Israeli
Dahatz Rules"): (1) the Company's shares are listed on a foreign stock exchange which is referenced in Section 5A(c) of the Regulations,
which includes, among others, the New York Stock Exchange (NYSE); NASDAQ Global Select Market; and NASDAQ Global Market; (2) the Company
does not have a controlling shareholder; and (3) the Company complies with the requirements of the foreign securities laws and stock exchange
regulations relating to appointment of independent directors and composition of the audit and compensation committees as applicable to
companies which are incorporated under the laws of such foreign countries. The Board of Directors approved the opt-out of the Israeli
Dahatz Rules and follow the requirements of the NASDAQ Listing Rules and the rules under the Securities Act relating to appointment of
independent directors and composition of the audit and compensation committees which are applicable to companies which are incorporated
under the laws of the United States, effective July 29, 2020. |
|
Item
16H. |
MINE
SAFETY DISCLOSURE |
Not Applicable.
|
Item
16I. |
DISCLOSURE
REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS |
Not Applicable.
PART
III.
|
Item
17. |
FINANCIAL
STATEMENTS |
Not Applicable.
|
Item
18. |
FINANCIAL
STATEMENTS |
See pages F-1 to F-49
115
|
Item
19. |
EXHIBITS
|
| 1.1 |
| 4.1 |
| 4.2 |
| 4.3 |
| 4.4 |
| 4.5 |
| 4.6 |
| 4.7 |
| 4.10 |
| 8.1 |
| 11.1 |
| 12.1 |
| 12.2 |
| 13.1 |
| 13.2 |
| 15.1 |
| 15.2 |
| (*) |
Filed herewith. |
116
SIGNATURES
The Registrant hereby certifies that
it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual
report on its behalf.
| SILICOM LIMITED | |||
|
By: |
/s/ Liron Eizenman | ||
| Liron Eizenman | |||
| Chief Executive Officer | |||
April 27, 2023
117
Silicom Ltd.
and its Subsidiaries
Consolidated
Financial Statements
As of and for the year ended
December 31, 2022
Silicom Ltd. and its Subsidiaries
|
Consolidated Financial Statements as of December 31, 2022
|
Contents
|
Page
|
||
|
Report of Independent Registered Public Accounting Firm (PCAOB id:
|
F-2
|
|
|
Report of Independent Registered Public Accounting Firm (PCAOB id:
|
F-4
|
|
|
F-5
|
||
|
F-7
|
||
|
F-8
|
||
|
F-9
|
||
|
F-10
|
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Silicom Ltd.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Silicom Ltd. and subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Form 6-K. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
F - 2
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Capitalized internally developed software costs
As described in Note 2P to the consolidated financial statements, the Company has internally developed software costs of $9.1 million as of December 31, 2022. Management applied significant judgment in determining which software projects and activities within those projects qualify for capitalization, and the timing of establishing technological feasibility. In addition, management applied judgment in determining when to cease the capitalization of costs related to internal use software that will be placed in service.
The principal considerations for our determination that performing procedures relating to capitalized internally developed software costs is a critical audit matter are (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to capitalized internally developed software costs due to the significant amount of judgment by management when developing the estimates; (ii) significant audit effort was required in evaluating the significant assumptions relating to the estimates, such as the software projects qualification for capitalization, timing of establishing technological feasibility and time to cease capitalization;
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included testing the effectiveness of controls relating to capitalized internally developed software costs, including controls over the software projects qualification for capitalization, timing of establishing technological feasibility and time to cease capitalization. These procedures also included, among others, (i) inspection of the products documentation; (ii) testing management’s process for estimating the capitalized internally developed software costs; and (iii) testing management’s identification of accumulated time and costs, both internal and external, associated with internal software development activities and the Company's controls over when internal use software is placed in service and amortization started.
|
/s/
|
|
Certified Public Accountants (Isr.)
|
|
A member firm of PricewaterhouseCoopers International Limited
|
|
|
|
March 20, 2023
|
We have served as the Company’s auditor since 2021
F - 3
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Silicom Ltd.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of operations, changes in shareholders’ equity, and cash flows of Silicom Ltd. and subsidiaries (the Company) for the year ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of the Company’s operations and its cash flows for the year ended December 31, 2020 in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
|
/s/
|
|
Member Firm of KPMG International
We have served as the Company’s auditor since 1997 to 2021.
|
|
|
|
March 15, 2021
|
F - 4
Silicom Ltd. and its Subsidiaries
|
Consolidated Balance Sheets as of December 31
|
|
2021
|
2022
|
|||||||||||
|
Note
|
US$ thousands
|
US$ thousands
|
||||||||||
|
Assets
|
||||||||||||
|
Current assets
|
||||||||||||
|
Cash and cash equivalents
|
3
|
|
|
|||||||||
|
Marketable securities
|
2F, 4
|
|
|
|||||||||
|
Accounts receivable:
|
||||||||||||
|
Trade, net
|
2G
|
|
|
|||||||||
|
Other
|
5
|
|
|
|||||||||
|
Inventories
|
6
|
|
|
|||||||||
|
Total current assets
|
|
|
||||||||||
|
Marketable securities
|
2F, 4
|
|
|
|||||||||
|
Assets held for employees' severance benefits
|
11
|
|
|
|||||||||
|
Deferred tax assets
|
15G
|
|
|
|||||||||
|
Property, plant and equipment, net
|
7
|
|
|
|||||||||
|
Intangible assets, net
|
8
|
|
|
|||||||||
|
Operating leases right-of-use, net
|
10
|
|
|
|||||||||
|
Goodwill
|
|
|
||||||||||
|
Total assets
|
|
|
||||||||||
|
Avi Eizenman
|
Liron Eizenman
|
Eran Gilad
|
||
|
Chairman of the Board of Directors
|
Chief Executive Officer
|
Chief Financial Officer
|
Kfar-Saba, Israel
March 20, 2023
The accompanying notes are an integral part of these consolidated financial statements.
F - 5
Silicom Ltd. and its Subsidiaries
|
Consolidated Balance Sheets as of December 31 (Continued)
|
|
2021
|
2022
|
|||||||||||
|
Note
|
US$ thousands
|
US$ thousands
|
||||||||||
|
Liabilities and shareholders' equity
|
||||||||||||
|
Current liabilities
|
||||||||||||
|
Trade accounts payable
|
|
|
||||||||||
|
Other accounts payable and accrued expenses
|
9
|
|
|
|||||||||
|
Operating lease liabilities
|
10
|
|
|
|||||||||
|
Total current liabilities
|
|
|
||||||||||
|
Long-term liabilities
|
||||||||||||
|
Operating lease liabilities
|
10
|
|
|
|||||||||
|
Liability for employees' severance benefits
|
11
|
|
|
|||||||||
|
Deferred tax liabilities
|
15G
|
|
|
|||||||||
|
Total liabilities
|
|
|
||||||||||
|
Shareholders' equity
|
12
|
|||||||||||
|
Ordinary shares, ILS
|
||||||||||||
|
|
|
|
||||||||||
|
Additional paid-in capital
|
|
|
||||||||||
|
Treasury shares (at cost)
|
(
|
)
|
(
|
)
|
||||||||
|
Retained earnings
|
|
|
||||||||||
|
Total shareholders' equity
|
|
|
||||||||||
|
Total liabilities and shareholders’ equity
|
|
|
||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 6
Silicom Ltd. and its Subsidiaries
|
Consolidated Statements of Operations for the Year Ended December 31
|
|
2020
|
2021
|
2022
|
||||||||||||||
|
US$ thousands
|
||||||||||||||||
|
Note
|
Except for share and per share data
|
|||||||||||||||
|
Sales
|
2N, 13
|
|
|
|
||||||||||||
|
Cost of sales
|
|
|
|
|||||||||||||
|
Gross profit
|
|
|
|
|||||||||||||
|
Operating expenses
|
||||||||||||||||
|
Research and development
|
|
|
|
|||||||||||||
|
Sales and marketing
|
|
|
|
|||||||||||||
|
General and administrative
|
|
|
|
|||||||||||||
|
Total operating expenses
|
|
|
|
|||||||||||||
|
Operating income
|
|
|
|
|||||||||||||
|
Financial income, net
|
14
|
|
(
|
)
|
|
|||||||||||
|
Income before income taxes
|
|
|
|
|||||||||||||
|
Income taxes
|
15
|
|
|
|
||||||||||||
|
Net income
|
|
|
|
|||||||||||||
|
Income per share:
|
||||||||||||||||
|
Basic income per ordinary share (US$)
|
2U
|
|
|
|
|
|||||||||||
|
Diluted income per ordinary share (US$)
|
|
|
|
|||||||||||||
|
Weighted average number of ordinary shares used to compute basic income per share (in thousands)
|
|
|
|
|||||||||||||
|
Weighted average number of ordinary shares used to compute diluted income per share (in thousands)
|
|
|
|
|||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 7
Silicom Ltd. and its Subsidiaries
|
Consolidated Statements of Changes in Shareholders' Equity
|
|
Ordinary shares
|
Additional paid-in capital
|
Treasury shares(3)
|
Retained earnings
|
Total shareholders’ equity
|
||||||||||||||||||||
|
Number
of shares(1)
|
US$ thousands
|
|||||||||||||||||||||||
|
Balance at January 1, 2020
|
|
|
|
(
|
)
|
|
|
|||||||||||||||||
|
Exercise of options and RSUs(2)
|
|
*
|
|
|
|
|
||||||||||||||||||
|
Purchase of treasury shares
|
(
|
)
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||
|
Share-based compensation
|
-
|
|
|
|
|
|
||||||||||||||||||
|
Net income
|
-
|
|
|
|
|
|
||||||||||||||||||
|
Balance at December 31, 2020
|
|
|
|
(
|
)
|
|
|
|||||||||||||||||
|
Purchase of treasury shares
|
(
|
)
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||
|
Reissuance of treasury shares under share-based compensation plan
|
|
*
|
|
|
|
|
||||||||||||||||||
|
Share-based compensation
|
-
|
|
|
|
|
|
||||||||||||||||||
|
Net income
|
-
|
|
|
|
|
|
||||||||||||||||||
|
Balance at December 31, 2021
|
|
|
|
(
|
)
|
|
|
|||||||||||||||||
|
Purchase of treasury shares
|
(
|
)
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||
|
Reissuance of treasury shares under share-based compensation plan
|
|
|
(
|
)
|
|
(
|
)
|
|
||||||||||||||||
|
Share-based compensation
|
-
|
|
|
|
|
|
||||||||||||||||||
|
Net income
|
-
|
|
|
|
|
|
||||||||||||||||||
|
Balance at December 31, 2022
|
|
|
|
(
|
)
|
|
|
|||||||||||||||||
|
(1)
|
|
||||||
|
(2)
|
|
||||||
|
(3)
|
Company shares held by the Company. Presented as a reduction of equity at their cost to the Company.
The treasury shares have no rights.
|
||||||
|
*
|
|
||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 8
Silicom Ltd. and its Subsidiaries
|
Consolidated Statements of Cash Flows for the Year Ended December 31
|
|
2020
|
2021
|
2022
|
||||||||||
|
US$ thousands
|
||||||||||||
|
Cash flows from operating activities
|
||||||||||||
|
Net income
|
|
|
|
|||||||||
|
Adjustments required to reconcile net income to net cash provided by (used in) operating activities:
|
||||||||||||
|
Depreciation and amortization
|
|
|
|
|||||||||
|
Impairment of intangible assets
|
|
|
|
|||||||||
|
Write-down of obsolete inventory
|
|
|
|
|||||||||
|
Changes in marketable securities
|
|
|
|
|
(
|
)
|
||||||
|
Share-based compensation expense
|
|
|
|
|||||||||
|
Deferred taxes, net
|
(
|
)
|
|
|
||||||||
|
Changes in assets and liabilities:
|
||||||||||||
|
Accounts receivable - trade
|
|
(
|
)
|
|
||||||||
|
Accounts receivable - other
|
(
|
)
|
|
|
||||||||
|
Change in liability for employees' severance benefits, net
|
|
|
|
|||||||||
|
Inventories
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Trade accounts payable
|
(
|
)
|
|
(
|
)
|
|||||||
|
Other accounts payable and accrued expenses
|
|
|
(
|
)
|
||||||||
|
Net cash provided by (used in) operating activities
|
|
|
(
|
)
|
||||||||
|
Cash flows from investing activities
|
||||||||||||
|
Proceeds from short term bank deposits, net
|
|
|
|
|||||||||
|
Purchase of property, plant and equipment
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Investment in intangible assets
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Proceeds from maturity of marketable securities
|
|
|
|
|||||||||
|
Purchases of marketable securities
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Other
|
||||||||||||
|
Net cash provided by investing activities
|
|
|
|
|||||||||
|
Cash flows from financing activities
|
||||||||||||
|
Exercise of options
|
|
|
|
|||||||||
|
Purchase of treasury shares
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Proceeds from reissuance of treasury shares upon exercise of options
|
|
|
|
|||||||||
|
Net cash used in financing activities
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Effect of exchange rate changes on cash balances held
|
|
|
(
|
)
|
||||||||
|
Increase in cash and cash equivalents
|
|
|
|
|||||||||
|
Cash and cash equivalents at beginning of year
|
|
|
|
|||||||||
|
Cash and cash equivalents at end of year
|
|
|
|
|||||||||
|
Supplementary cash flow information
|
||||||||||||
|
A. Non-cash transactions:
|
||||||||||||
|
Recognition of right of use assets and lease liabilities
|
|
|
|
|||||||||
|
Investments in property, plant and equipment
|
|
|
|
|||||||||
|
|
|
|
||||||||||
|
B. Cash paid (received) during the year for:
|
||||||||||||
|
Income taxes
|
|
|
(
|
)
|
||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 9
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 1 - General
Silicom Ltd. is an Israeli corporation engaged in designing, manufacturing, marketing and supporting high performance networking and data infrastructure solutions for a broad range of servers, server based systems and communications devices.
The Company's shares have been traded in the United States on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") since February 1994. Since January 2, 2014 the Company's shares have been traded on the NASDAQ Global Select Market (prior thereto they were traded on the NASDAQ Global Market).
In these financial statements the terms "Company" or "Silicom" refer to Silicom Ltd. and its wholly owned subsidiaries, Silicom Connectivity Solutions, Inc. (hereinafter - "Silicom Inc.") and Silicom Denmark A/S (Fiberblaze A/S) (hereinafter – "Silicom Denmark"), whereas the term "subsidiaries" refers to Silicom Inc. and Silicom Denmark.
U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine. In February 2022, Russia launched a full-scale military invasion of Ukraine. Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets. Additionally, Russia’s prior annexation of Crimea, recent recognition of two separatist republics in the Donetsk and Luhansk regions of Ukraine and subsequent military interventions in Ukraine have led to sanctions and other penalties being levied by the United States, European Union and other countries against Russia, Belarus, the Crimea Region of Ukraine, the so-called Donetsk People’s Republic, and the so-called Luhansk People’s Republic, including agreement to remove certain Russian financial institutions from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment system. Additional potential sanctions and penalties have also been proposed and/or threatened. Russian military actions and the resulting sanctions could adversely affect the global economy and financial markets and lead to instability and lack of liquidity in capital markets. Any of the abovementioned factors could affect our business, financial condition, and operating results. The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict.
Note 2 - Summary of Significant Accounting Policies
The significant accounting policies, which are applied consistently throughout the periods presented, are as follows:
| A. |
Financial statements in US dollars
|
Substantially all sales of the Company are made outside of Israel (see Note 13A regarding geographical distribution), in US dollars ("dollars"). Most purchases of materials and components, and a significant part of the marketing costs are made or incurred, primarily in dollars. Therefore, the dollar is the currency that represents the principal economic environment in which the Company operates and is thus its functional currency.
Transactions and balances originally denominated in dollars are presented at their original amounts. Balances in non-dollar currencies are translated into dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions reflected in the statement of income (loss), the transaction date exchange rates are used. Depreciation, amortization and other changes deriving from non-monetary items are based on historical exchange rates. The resulting transaction gains or losses are recorded as net financial income or expenses.
|
B. |
Basis of presentation |
The accompanying consolidated financial statements have been prepared with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
F - 10
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of significant Accounting Policies (cont’d)
| C. |
Estimates and assumptions |
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include revenue recognition over time, credit loss, income taxes, impairment of inventories, marketable securities, impairment of goodwill, intangible assets and the assumptions used to estimate the fair value of share-based compensation.
| D. |
Cash and cash equivalents |
The Company considers highly liquid investments with original maturities of three months or less from the date of deposit to be cash equivalents.
| E. |
Short-term bank deposits |
Short term bank deposits consist of bank deposits with original maturities of more than three months and up to twelve months.
| F. |
Marketable securities |
The Company classifies its marketable securities as held-to-maturity as they are debt securities in which the Company has the intent and ability to hold to maturity. Held-to-maturity (HTM) debt securities are recorded at amortized cost adjusted for the amortization or accretion of premiums or discounts.
Premiums and discounts on debt securities are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective interest method. Such amortization and accretion are included in the "Financial income, net" line item in the consolidated statements of operations.
The Company recognizes current expected credit losses for financial assets held at amortized cost. The Company uses forward-looking information to calculate credit loss estimates.
F - 11
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of significant Accounting Policies (cont’d)
| G. |
Trade accounts receivable, net |
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows.
The Company presents accounts receivable in the consolidated balance sheets net of allowance for expected credit losses for potential uncollectible amounts. The Company estimates the collectability of accounts receivable balances and adjust the allowance for expected credit losses based on the Company's assessment of collectability by reviewing accounts receivable on an aggregated basis where similar characteristics exist and on an individual basis when it identifies specific customers with known disputes or collectability issues. The Company also considers a number of factors to assess collectability, including the past due status, creditworthiness of the specific customer, payment history and reasonable and supportable forecasts of future economic conditions.
As of December 31, 2021 and 2022, allowance for credit losses amounted to US$ 20
| H. |
Inventories
|
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the "weighted average-cost" method.
The Company writes down obsolete or slow moving inventory to its net realizable value.
| I. |
Assets held for employees’ severance benefits
|
Assets held for employees’ severance benefits represent contributions to severance pay funds and cash surrender value of insurance policies. The assets are recorded at their current cash redemption value.
| J. |
Property, plant and equipment |
Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets at the following annual rates:
|
|
%
|
|
Machinery and equipment
|
|
|
Office furniture and equipment
|
|
|
Leasehold improvements
|
|
|
*
|
Over the shorter term of the lease or the useful life of the asset
|
F - 12
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of significant Accounting Policies (cont’d)
| K. |
Goodwill and other intangible assets |
Goodwill reflects the excess of the purchase price of business acquired over the fair value of net assets acquired. Goodwill is not amortized but instead is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
The Company operates in one operating segment and this segment comprises one reporting unit.
The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company performs a qualitative assessment and concludes that it is more likely than not that the fair value of a reporting unit exceeds its carrying value, goodwill is not considered impaired and the impairment test is not required. However, if the Company concludes otherwise, it is then required to perform a quantitative assessment for goodwill impairment.
The Company performs its quantitative goodwill impairment test by comparing the fair value of its reporting unit with its carrying value. If the reporting unit’s carrying value is determined to be greater than its fair value, an impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit’s fair value. If the fair value of the reporting unit is determined to be greater than its carrying amount, the applicable goodwill is not impaired.
Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting policy results in amortization of such intangible assets in the straight-line method.
For the years ended December 31, 2020, 2021 and 2022, no impairment losses were recorded.
| L. |
Impairment of long-lived assets |
In accordance with Impairment or Disposal of long-lived assets Subsections of FASB ASC Subtopic 360-10, Property, Plant, and Equipment – Overall. Long-lived assets, such as property, plant, equipment and purchased intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or an asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third party independent appraisals, as considered necessary.
F - 13
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of significant Accounting Policies (cont’d)
| M. |
Leases |
The Company elected the short-term lease recognition exemption for all leases with a term shorter than 12 months. This means that for those leases, the Company does not recognize right-of-use ("ROU") assets or lease liabilities, but recognizes lease expenses over the lease term on a straight-line basis.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.
Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
As of December 31, 2022, all of the company's leases are operating leases.
On the commencement date, the lease payments shall include variable lease payments that depend on an index (such as the Consumer Price Index), initially measured using the index at the commencement date. The Company does not remeasure the lease liability for changes in future lease payments arising from changes in an index unless the lease liability is remeasured for another reason. Therefore, after initial recognition, such variable lease payments are recognized in profit or loss as they are incurred.
Variable payments that depends on use of the underlying asset are not included in the lease payments. Such variable payments are recognized in profit or loss in the period in which the event or condition that triggers the payment occurs.
The Company’s incremental borrowing rate for a lease is the rate of interest that it would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
After lease commencement, the Company measures the lease liability at the present value of the remaining lease payments using the discount rate determined at lease commencement (as long as the discount rate hasn’t been updated as a result of a reassessment event). The Company subsequently measures the ROU asset at the present value of the remaining lease payments, adjusted for the remaining balance of any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term.
The Company’s lease agreements have remaining lease terms of
F - 14
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of significant Accounting Policies (cont’d)
| N. |
Revenue recognition
|
The Company derives revenues primarily from the sale of networking and data infrastructure solutions.
The Company recognizes revenue upon transfer of control of the promised goods in a contract with a customer in an amount that reflects the consideration the Company expects to receive in exchange for those products. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment or once delivery and risk of loss has transferred to the customer. The Company accounts for a contract with customer when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Each of the Company's contracts includes one type of performance obligation. The Company evaluates each distinct performance obligation within a contract, whether it is satisfied at a point in time or over time. Most of the Company's revenues are recognized at a point in time. Revenue is recognized over time for sales of goods manufactured to unique customer specifications, in which the Company’s performance does not create an asset with an alternative use to the Company and the Company has an enforceable right to payment for performance completed to date if the customer were to terminate the contract. Revenue recognized over time is measured by the costs incurred to date relative to the estimated total direct costs to fulfill each contract. Incurred costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, materials and overhead.
| O. |
Cost of sales
|
Cost of sales consist primarily of production costs of finished goods manufactured by the company, with assistance of sub-contractors, from (i) components purchased from third parties, and (ii) sub-assemblies manufactured by sub-contractors under the Company’s directions and supervision as well as employee-related expenses and overhead expenses of the Company’s production lines.
| P. |
Research and development costs and capitalized software development costs
|
Software development costs (mainly salary) related to programmable components incorporated into the Company's products, are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. The Company has determined that technological feasibility for its software components of hardware products is reached after all high-risk development issues have been resolved through coding and testing. Amortization begins once the software is ready for its intended use, generally based on the pattern in which the economic benefits will be consumed. The amortization of these costs is included in cost of revenue over the estimated life of the products. Other costs incurred in the research and development of the Company’s products are expensed as incurred.
F - 15
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of significant Accounting Policies (cont’d)
| Q. |
Allowance for product warranty |
The Company grants assurance-type warranties related to certain products to end-users. The Company estimates its obligation for such warranties to be immaterial on the basis of historical experience. Accordingly, these financial statements do not include an accrual for warranty obligations.
| R. |
Treasury shares |
Treasury shares are recorded at cost and presented as a reduction of shareholders' equity. The Company reissues treasury shares under the Global Share Incentive Plan (2013), upon exercise of options and upon vesting of restricted stock units ("RSU"). Reissuance of treasury shares, based on the Company's policy of first-in, first-out (FIFO), is accounted for in accordance with ASC 505-30 whereby gains are credited to additional paid-in capital and losses are charged to additional paid-in capital to the extent that previous net gains are included therein and otherwise to retained earnings.
| S. |
Income taxes |
Deferred taxes are accounted for under the asset and liability method based on the estimated future tax effects of temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are presented as non-current assets and liabilities and measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date. The Company recognizes the effect of uncertain tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured as the largest amount that is greater than 50 percent likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Taxes which would apply in the event of disposal of investments in foreign subsidiaries have not been taken into account in computing the deferred taxes, as the Company's intention is to hold, and not to realize the investments. As of December 31, 2022, the cumulative amount of earnings of foreign subsidiaries upon which deferred taxes have not been provided is approximately US$ 16.3 million. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.
| T. |
Share-based compensation |
The Company recognizes compensation expense based on estimated grant date fair value in accordance with ASC Topic 718, Compensation -Stock Compensation as follows:
When portions of an award vest in increments during the requisite service period (graded-vesting award), the Company’s accounting policy is to recognize compensation cost for the award over the requisite service period for each separately vesting portion of the award.
Equity awards granted to employees are accounted for using the grant date fair value method. The grant date fair value is determined as follows: for stock options using the Binomial option-pricing model and for restricted stock units (“RSUs”) based on the market value of the Company’s stock on the date of grant, less an estimate of dividends that will not accrue to RSUs holders prior to vesting. The fair value of share based payment awards is recognized as an expense over the vesting period. The expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market. For awards with only market conditions, compensation expense is not reversed if the market conditions are not satisfied.
F - 16
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of significant Accounting Policies (cont’d)
| U. |
Basic and diluted earnings per share |
Basic income per ordinary share is calculated by dividing the net income attributable to ordinary shares, by the weighted average number of ordinary shares outstanding (net of treasury shares). Diluted income per ordinary share calculation is similar to basic income per ordinary share except that the weighted average of ordinary shares outstanding is increased to include outstanding potential ordinary shares during the period if dilutive. Potential ordinary shares arise from stock options and RSUs, and the dilutive effect is reflected by the application of the treasury stock method.
The following table summarizes information related to the computation of basic and diluted income per ordinary share for the years indicated.
|
|
|
Year ended December 31
|
|
|||||||||
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|||
|
Net income attributable to ordinary shares (US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ordinary shares outstanding used in basic income per ordinary share calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add of outstanding dilutive potential ordinary shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ordinary shares outstanding
used in diluted income per ordinary share calculation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per ordinary shares (US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per ordinary shares (US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares related to options and RSUs excluded from
the diluted earnings per share calculation because of anti-dilutive effect
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 17
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (cont’d)
| V. |
Comprehensive Income |
For the years ended December 31, 2020, 2021 and 2022, comprehensive income equals net income.
| W. |
Fair Value Measurements |
The Company's financial instruments consist mainly of cash and cash equivalents, marketable securities, trade and other receivables and trade accounts payable. The carrying amounts of these financial instruments, except for marketable securities, approximate their fair value because of the short maturity of these investments. The fair value of marketable securities is presented in Note 4 to these consolidated financial statements. Assets held for severance benefits are recorded at their current cash redemption value.
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
F - 18
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (cont’d)
| X. |
Concentrations of risks |
(1) Credit risk
Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of cash and cash equivalents, marketable securities, trade receivables and assets held for employees’ severance benefits. Cash and cash equivalents balances of the Company, which are subject to credit risk, consist of cash accounts held with major financial institutions. Marketable securities consist of held to maturity marketable securities issued by highly rated corporations. As of December 31, 2021 and 2022, the ratings of the securities in the Company's portfolio was at least A-. Nonetheless, these investments are subject to general credit and counterparty risks (such as that the counterparty to a financial instrument fails to meet its contractual obligations). The Company closely monitors extensions of credit and has never experienced significant credit losses.
(2) Significant customers
The Company's top four ultimate customers accounted for approximately 33 % of its revenues in 2022. The Company expects that a small number of customers will continue to account for a significant portion of its revenues for the foreseeable future. See Note 13.
|
Y. |
Liabilities for loss contingencies |
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
Note 3 - Cash and Cash Equivalents
|
|
|
December 31
|
|
|||||
|
|
|
2021
|
|
|
2022
|
|
||
|
|
|
US$ thousands
|
|
|||||
|
|
|
|
|
|
|
|
||
|
Cash
|
|
|
|
|
|
|
|
|
|
Cash equivalents *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
F - 19
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 4 - Marketable Securities
The Company's investment in marketable securities as of December 31, 2021 and 2022 are classified as ''held-to-maturity'' and consist of the following:
|
Gross
|
Gross
|
|||||||||||||||
|
unrealized
|
unrealized
|
|||||||||||||||
|
Amortized
|
holding
|
holding
|
Aggregate
|
|||||||||||||
|
cost basis**
|
gains
|
(losses)
|
fair value*
|
|||||||||||||
|
US$ thousands
|
||||||||||||||||
|
At December 31, 2022
|
||||||||||||||||
|
Held to maturity:
|
||||||||||||||||
|
Corporate debt securities and government debt securities
|
||||||||||||||||
|
Current
|
|
|
(
|
)
|
|
|||||||||||
|
Non-Current (1 to 3 years)
|
|
|
(
|
)
|
|
|||||||||||
|
|
|
(
|
)
|
|
||||||||||||
|
At December 31, 2021
|
||||||||||||||||
|
Held to maturity:
|
||||||||||||||||
|
Corporate debt securities and government debt securities
|
||||||||||||||||
|
Current
|
|
|
(
|
)
|
|
|||||||||||
|
Non-Current (1 to 4 years)
|
|
|
(
|
)
|
|
|||||||||||
|
|
|
(
|
)
|
|
||||||||||||
|
*
|
|
|
**
|
|
|
|
The accrued interest is presented as part of other receivables on the balance sheet.
|
F - 20
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 4 - Marketable Securities (Cont’d)
|
Activity in marketable securities in 2022
|
US$ thousands
|
|||
|
Balance at January 1, 2021
|
|
|||
|
Purchases of marketable securities
|
|
|||
|
Changes in marketable securities, net |
(
|
)
|
||
|
Proceeds from maturity of marketable securities
|
(
|
)
|
||
|
Balance at January 1, 2022
|
|
|||
|
Purchases of marketable securities
|
|
|||
|
Changes in marketable securities, net |
(
|
)
|
||
|
Proceeds from maturity of marketable securities
|
(
|
)
|
||
|
Balance at December 31, 2022
|
|
|||
The following table summarizes the gross unrealized losses or gains on investment securities and the fair value of those securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss or gain position, at December 31, 2022:
|
Less than 12 months
|
12 months or more
|
Total
|
||||||||||||||||||||||
|
Unrealized Losses
|
Fair value
|
Unrealized Losses
|
Fair value
|
Unrealized Losses
|
Fair value
|
|||||||||||||||||||
|
Held to maturity:
|
||||||||||||||||||||||||
|
Corporate debt securities and government debt securities
|
(
|
)
|
|
(
|
)
|
|
(
|
)
|
|
|||||||||||||||
The unrealized losses or gains on the investments were caused by changes in interest rate. The Company has the ability and intent to hold these investments until maturity and it is more likely than not that the Company will not be required to sell any of the securities before recovery.
F - 21
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 5 - Other Receivables
|
|
|
December 31
|
|
|||||
|
|
|
2021
|
|
|
2022
|
|
||
|
|
|
US$ thousands
|
|
|||||
|
|
|
|
|
|
|
|
||
|
Advances to suppliers
|
|
|
|
|
|
|
|
|
|
Government authorities
|
|
|
|
|
|
|
|
|
|
Prepaid expense
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6 - Inventories
|
|
|
December 31
|
|
|||||
|
|
|
2021
|
|
|
2022
|
|
||
|
|
|
US$ thousands
|
|
|||||
|
|
|
|
|
|
|
|
||
|
Raw materials and components
|
|
|
|
|
|
|
|
|
|
Products in process
|
|
|
|
|
|
|
|
|
|
Finished products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the years ended December 31, 2020, 2021 and 2022, the Company recorded inventory write-downs in the amount of US$
Note 7 - Property, Plant and Equipment, Net
|
|
|
December 31
|
|
|||||
|
|
|
2021
|
|
|
2022
|
|
||
|
|
|
US$ thousands
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
|
|
|
|
|
|
|
|
Office furniture and equipment
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and equipment, net
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2020, 2021 and 2022 were US$
F - 22
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 8 - Intangible Assets
|
December 31
|
||||||||||||
|
2021
|
2022
|
|||||||||||
|
Useful life
|
US$ thousands
|
|||||||||||
|
Original cost:
|
||||||||||||
|
Capitalization of software development costs
|
|
|
|
|||||||||
|
Licenses
|
|
|
|
|||||||||
|
|
|
|||||||||||
|
Accumulated amortization:
|
||||||||||||
|
Capitalization of software development costs
|
|
|
||||||||||
|
Licenses
|
|
|
||||||||||
|
|
|
|||||||||||
|
Intangible assets, net:
|
||||||||||||
|
Capitalization of software development costs
|
|
|
||||||||||
|
Licenses
|
|
|
||||||||||
|
|
|
|||||||||||
Amortization expense for the years ended December 31, 2020, 2021 and 2022 were US$ 378 thousand, US$ 428 thousand and US$ 207 thousand, respectively. The estimates amortization of capitalized software development costs in relation to developments that were available for general release to customers, as of December 31, 2022, are US$ 260 thousand in 2023 and US$ 247 thousand in each of the years 2024 through 2027.
|
Note 9 - Other accounts payable and accrued expenses
|
|
December 31
|
||||||||
|
2021
|
2022
|
|||||||
|
US$ thousands
|
||||||||
|
Accrued expenses
|
|
|
||||||
|
Employee benefits
|
|
|
||||||
|
Government authorities
|
|
|
||||||
|
Other payables
|
|
|
||||||
|
|
|
|||||||
F - 23
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 10 - Leases
|
A.
|
The components of operating lease cost for the year ended December 31, 2020, 2021 and 2022 were as follows:
|
|
Year ended
December 31
|
||||||||||||
|
2020
|
2021
|
2022
|
||||||||||
|
US$ thousands
|
||||||||||||
|
Operating lease costs (mainly plant and offices)
|
|
|
|
|||||||||
|
Variable lease payments not included in the lease liability
|
|
|
|
|||||||||
|
Short-term lease cost
|
|
|
|
|||||||||
|
Total operating lease cost
|
|
|
|
|||||||||
|
B.
|
Supplemental cash flow information related to operating leases was as follows:
|
|
Year ended
December 31
|
||||||||||||
|
2020
|
2021
|
2022
|
||||||||||
|
US$ thousands
|
||||||||||||
|
Cash paid for amounts included in the measurement of lease liabilities:
|
||||||||||||
|
Operating cash flows from operating leases
|
|
|
|
|||||||||
|
Right-of-use assets obtained in exchange for lease liabilities (non-cash):
|
||||||||||||
|
Operating leases
|
|
|
|
|||||||||
C. Supplemental balance sheet information related to operating leases was as follows:
|
|
|
December 31
|
|
|||||
|
|
|
2021
|
|
|
2022
|
|
||
|
|
|
US$ thousands
|
|
|||||
|
Operating leases:
|
|
|
|
|
|
|
|
|
|
Operating leases right-of-use
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current operating lease liabilities
|
|
|
|
|
|
|
|
|
|
Non-current operating lease liabilities
|
|
|
|
|
|
|
|
|
|
Total operating lease liabilities
|
|
|
|
|
|
|
|
|
F - 24
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 10 - Leases (cont’d)
D. Supplemental balance sheet information related to operating leases was as follows (cont’d):
|
|
|
December 31
|
|
|||||
|
|
|
2021
|
|
|
2022
|
|
||
|
|
|
US$ thousands
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
|
%
|
|
|
|
%
|
E. Future lease payments under non-cancellable leases as of December 31, 2022 were as follows:
|
|
|
December 31,
2022
|
|
|
|
|
|
US$ thousands
|
|
|
|
|
|
|
|
|
|
2023
|
|
|
|
|
|
2024
|
|
|
|
|
|
2025
|
|
|
|
|
|
2026
|
|
|
|
|
|
After 2026
|
|
|
|
|
|
Total operating lease payments
|
|
|
|
|
|
Less: imputed interest
|
|
|
(
|
)
|
|
Present value of lease liabilities
|
|
|
|
|
F - 25
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 11 - Assets Held and Liability for Employees' Severance Benefits
| A. |
Under Israeli law and labor agreements, Silicom is required to make severance payments to retired or dismissed employees and to employees leaving employment in certain other circumstances.
|
In respect of the liability to the employees, individual insurance policies are purchased and deposits are made with recognized severance pay funds.
The liability for severance pay is calculated on the basis of the latest salary paid to each employee multiplied by the number of years of employment. The liability is covered by the amounts deposited including accumulated income thereon as well as by the unfunded provision.
| B. |
According to Section 14 to the Severance Pay Law ("Section 14") the payment of monthly deposits by a company into recognized severance and pension funds or insurance policies releases it from any additional severance obligation to the employees that have entered into agreements with the company pursuant to such Section 14. Commencing July 1, 2008, the Company has entered into agreements with a majority of its employees in order to implement Section 14. Therefore, as of that date, the payment of monthly deposits by the Company into recognized severance and pension funds or insurance policies releases it from any additional severance obligation to those employees that have entered into such agreements and therefore the Company incurs no additional liability since that date with respect to such employees. Amounts accumulated in the pension funds or insurance policies pursuant to Section 14 are not supervised or administrated by the Company and therefore neither such amounts nor the corresponding accrual are reflected in the balance sheet.
|
| C. |
Consequently, the assets held for employees' severance benefits reported on the balance sheet, in respect of deposits for those employees who have signed agreements pursuant to Section 14, represent the redemption value of deposits made through June 30, 2008. The liability for employee severance benefits, with respect to those employees, represents the liability of the Company for employees' severance benefits as of June 30, 2008.
|
As a result of the implementation of Section 14, as described above, the liability with respect to those employees is calculated on the basis of number of years of employment as of June 30, 2008, multiplied by the latest salary paid. The liability is covered by the amounts deposited, including accumulated income thereon, as well as by the unfunded provision. Such liability will be removed, either upon termination of employment or retirement.
| D. |
Expenses recorded with respect to employees' severance payments for the years ended December 31, 2020, 2021 and 2022, mainly attributed to Section 14, were US$
|
F - 26
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 12 - Shareholders' Equity
Capital and reserves
On May 2, 2019, the Company's Board of Directors authorized and began implementation of a one-year share repurchase plan to repurchase up to $15 million of the Company's ordinary shares. On April 30, 2020 the Company's Board of Directors authorized another one-year share repurchase plan allowing the Company to invest up to $15 million to repurchase its ordinary shares. This plan has begun as the previously announced $15 million one-year share repurchase plan was completed. On April 29, 2021 the Company's Board of Directors authorized another one-year share repurchase plan allowing the Company to invest up to $15 million to repurchase its ordinary shares. This plan has begun as the previously announced $15 million one-year share repurchase plan was completed. Repurchases may be made in the open market and will be in accordance with applicable securities laws and regulations. The timing and amount of each repurchase transaction may depend on a variety of factors. The share repurchase plan does not obligate the Company to acquire any specific number of ordinary shares and may be suspended or terminated at any time at management’s discretion.
Share based compensation
|
A. |
On October 21, 2013 the Board resolved to adopt the Global Share Incentive Plan (2013) (the "2013 Plan") and to reserve up to
|
|
|
B. |
Options or RSUs granted to Israeli residents may be granted under Section 102 of the Israeli Income Tax Ordinance pursuant to which the awards of options, or the ordinary shares issued upon their exercise, must be deposited with a trustee for at least two years following the date of grant. Under Section 102, any tax payable by an employee from the grant or exercise of the awards is deferred until the transfer of the awards or ordinary shares by the trustee to the employee or upon the sale of the awards or ordinary shares.
|
|
|
Capital gains on awards granted under the plans are subjected to tax of
|
||
|
Gains which are not capital gains on awards under the plans are subjected to regular tax rates on individuals, and the Company is entitled to a tax deduction for such gains.
|
F - 27
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 12 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
|
C. |
During 2017, 2020 and 2022, the Company granted
|
| 1. |
The vesting period of the RSUs ranges between
|
|
| 2. |
The fair value of RSUs is estimated based on the market value of the Company’s stock on the date of grant, less an estimate of dividends that will not accrue to RSUs holders prior to vesting. |
|
| 3. |
The Company recognizes compensation expenses on these RSUs based on estimated grant date fair value, with the following assumptions:
|
|
2017
|
2020
|
2022 | |
|
Expected dividend yield
|
|
|
F - 28
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 12 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
| D. |
On January 31, 2019, the Company granted, in the aggregate,
|
| 1. |
The exercise price for the options (per ordinary share) was US$
|
|
| 2. |
The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions: |
|
Average Risk-free interest rate (a)
|
|
|
Expected dividend yield
|
|
|
Average expected volatility (b)
|
|
|
Termination rate |
|
|
Suboptimal factor (c)
|
|
|
(a)
|
Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
|
|
(b)
|
Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
|
|
(c)
|
Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.
|
F - 29
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 12 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
| E. |
On June 8, 2020, the Company granted, in the aggregate,
|
| 1. |
The exercise price for the options (per ordinary share) was US$
|
|
| 2. |
The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions: |
|
Average Risk-free interest rate (a)
|
|
|
Expected dividend yield
|
|
|
Average expected volatility (b)
|
|
|
Termination rate |
|
|
Suboptimal factor (c)
|
|
|
(a)
|
Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
|
|
(b)
|
Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
|
|
(c)
|
Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.
|
F - 30
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 12 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
| F. |
On June 3, 2021, the Company granted, in the aggregate,
|
| 1. |
The exercise price for the options (per ordinary share) was US$
|
|
| 2. |
The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:
|
|
Average Risk-free interest rate (a)
|
|
|
Expected dividend yield
|
|
|
Average expected volatility (b)
|
|
|
Termination rate |
|
|
Suboptimal factor (c)
|
|
|
(a)
|
Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
|
|
(b)
|
Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
|
|
(c)
|
Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.
|
F - 31
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 12 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
| G. |
On January 27, 2022, the Company granted, in the aggregate,
|
| 1. |
The exercise price for the options (per ordinary share) was US$
|
|
| 2. |
The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Monte Carlo option-pricing model with the following assumptions:
|
|
Average Risk-free interest rate (a)
|
|
|
Expected dividend yield
|
|
|
Average expected volatility (b)
|
|
|
Termination rate |
|
|
Suboptimal factor (c)
|
|
|
(a)
|
Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
|
|
(b)
|
Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
|
|
(c)
|
Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.
|
F - 32
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 12 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
| H. |
On June 7, 2022, the Company granted, in the aggregate,
|
| 1. |
The exercise price for the options (per ordinary share) was US$
|
|
| 2. |
The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Monte Carlo option-pricing model with the following assumptions:
|
|
Average Risk-free interest rate (a)
|
|
|
Expected dividend yield
|
|
|
Average expected volatility (b)
|
|
|
Termination rate |
|
|
Suboptimal factor (c)
|
|
|
(a)
|
Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
|
|
(b)
|
Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
|
|
(c)
|
Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.
|
F - 33
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 12 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
| I. |
On July 1, 2022, the Company granted, in the aggregate, |
| 1. |
The exercise price for the options (per ordinary share) was US$ |
|
| 2. |
The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Monte Carlo option-pricing model with the following assumptions:
|
|
|
Average Risk-free interest rate (a)
|
|
|
Expected dividend yield
|
|
|
Average expected volatility (b)
|
|
|
Termination rate |
|
|
Suboptimal factor (c)
|
|
|
(a)
|
Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
|
|
(b)
|
Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
|
|
(c)
|
Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.
|
F - 34
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 12 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
| J. |
The following table summarizes information regarding stock options as at December 31, 2022: |
|
Options outstanding
|
Options exercisable
|
||||||||||||||||
|
Weighted average
|
Weighted average
|
||||||||||||||||
|
remaining
|
remaining
|
||||||||||||||||
|
Exercise price
|
Number
|
contractual life
|
Number
|
contractual life
|
|||||||||||||
|
US$
|
of options
|
(in years)
|
of options
|
(in years)
|
|||||||||||||
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|||||||||||||
|
|
|
||||||||||||||||
The aggregate intrinsic value of options outstanding as of December 31, 2021 and 2022 is US$
The aggregate intrinsic value of options exercisable as of December 31, 2021 and 2022 is US$
The total intrinsic value of options exercised during the year ended December 31, 2021 and 2022, is US$
F - 35
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 12 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
| K. |
The stock option activity under the abovementioned plans is as follows: |
|
Weighted
|
||||||||||||
|
Weighted
|
average
|
|||||||||||
|
Number
|
average
|
grant date
|
||||||||||
|
of options
|
exercise price
|
fair value
|
||||||||||
|
US$
|
US$
|
|||||||||||
|
Balance at January 1, 2020
|
|
|||||||||||
|
Granted
|
|
|
|
|||||||||
|
Exercised
|
(
|
)
|
|
|
||||||||
|
Forfeited
|
(
|
)
|
|
|
||||||||
|
Balance at December 31, 2020
|
|
|||||||||||
|
Granted
|
|
|
|
|||||||||
|
Exercised
|
(
|
)
|
|
|
||||||||
|
Forfeited
|
(
|
)
|
|
|
||||||||
|
Balance at December 31, 2021
|
|
|||||||||||
|
Granted
|
|
|
|
|||||||||
|
Exercised
|
(
|
)
|
|
|
||||||||
|
Forfeited
|
(
|
)
|
|
|
||||||||
|
Balance at December 31, 2022
|
|
|||||||||||
|
Exercisable at December 31, 2022
|
|
|||||||||||
F - 36
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 12 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
| L. |
The Restricted Share Units activity under the abovementioned plans is as follows: |
|
Weighted
|
||||||||
|
Number of
|
average
|
|||||||
|
Restricted
|
grant date
|
|||||||
|
Share Units
|
fair value
|
|||||||
|
US$
|
||||||||
|
Balance at January 1, 2020
|
|
|||||||
|
Granted
|
|
|
||||||
|
Vested
|
(
|
)
|
|
|||||
|
Balance at December 31, 2020
|
|
|||||||
|
Granted
|
|
|
||||||
|
Vested
|
|
|
||||||
|
Balance at December 31, 2021
|
|
|||||||
|
Granted
|
|
|
||||||
|
Forfeited
|
(
|
)
|
|
|||||
|
Vested
|
(
|
)
|
|
|||||
|
Balance at December 31, 2022
|
|
|||||||
The aggregate intrinsic value of RSUs outstanding as of December 31, 2021 and December 31, 2022 is US$ 4,438 thousand and US$ 2,403 thousand, respectively.
F - 37
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 12 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
| M. |
During 2020, 2021 and 2022, the Company recorded share-based compensation expenses. The following summarizes the allocation of the stock-based compensation expenses: |
|
Year ended December 31
|
||||||||||||
|
2020
|
2021
|
2022
|
||||||||||
|
US$ thousands
|
||||||||||||
|
Cost of sales
|
|
|
|
|||||||||
|
Research and development costs
|
|
|
|
|||||||||
|
Selling and marketing expenses
|
|
|
|
|||||||||
|
General and administrative expenses
|
|
|
|
|||||||||
|
|
|
|
||||||||||
As of December 31, 2022, there were US$ 3,994 thousand of unrecognized compensation costs related to outstanding stock options and RSUs to be recognized over a weighted average period of 1.2 years.
The total tax benefit recognized in the consolidated statements of operations related to share based compensation expenses amounted to US$ 42 thousand and US$ 40 thousand for the year ended December 31, 2021 and December 31, 2022.
F - 38
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 13 - Geographic areas and major customers
|
A.
|
Information on sales by geographic distribution:
|
|
The Company has one operating segment.
|
|
Sales are attributed to geographic distribution based on the location of the ultimate customer:
|
|
Year ended December 31
|
||||||||||||
|
2020
|
2021
|
2022
|
||||||||||
|
US$ thousands
|
||||||||||||
|
USA
|
|
|
|
|||||||||
|
North America - other
|
|
|
|
|||||||||
|
Israel
|
|
|
|
|||||||||
|
Europe
|
|
|
|
|||||||||
|
Asia-Pacific
|
|
|
|
|||||||||
|
|
|
|
||||||||||
B. Sales to single ultimate customers exceeding 10% of sales (US$ thousands):
|
|
|
Year ended December 31
|
|
|||||||||
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|||
|
|
|
US$ thousands
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Customer "A"
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer "B"
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer "C"
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 39
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 13 - Geographic areas and major customers (cont'd)
C. Information on Long-Lived Assets - Property, Plant and Equipment and ROU assets by geographic areas:
The following table presents the locations of the Company’s long-lived assets as of December 31, 2021 and 2022:
|
|
|
Year ended December 31
|
|
|||||
|
|
|
2021
|
|
|
|
2022
|
|
|
|
|
|
US$ thousands
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
|
|
|
|
|
|
|
Israel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 40
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 14 - Financial Income (Expenses), Net
|
Year ended December 31
|
||||||||||||
|
2020
|
2021
|
2022
|
||||||||||
|
US$ thousands
|
||||||||||||
|
Interest income
|
|
|
|
|||||||||
|
Changes in marketable securities, net |
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Exchange rate differences, net
|
(
|
)
|
(
|
)
|
|
|||||||
|
Bank charges
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
|
(
|
)
|
|
|||||||||
F - 41
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 15 - Taxes on Income
| A. |
Measurement of results for tax purposes under the Israeli Income Tax Regulations (Rules for Maintaining Accounting Records of Foreign Invested Companies and Certain Partnerships and Determining Their Taxable Income) - 1986
|
|
|
As a "foreign invested company" (as defined in the Israeli Law for the Encouragement of Capital Investments-1959), the taxable income or loss and the tax basis of assets and liabilities of the Company’s Israeli operations are denominated in US Dollars.
|
||
| B. |
Corporate tax rate in Israel
|
|
|
The regular corporate tax rate applied to taxable income of Israeli companies is
|
||
| C. |
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter - the "Law")
|
| 1. |
On December 29, 2010 the Knesset approved the Economic Policy Law for 2011-2012, which includes an amendment to the Law for the Encouragement of Capital Investments – 1959 (hereinafter – "the Amendment to the Law"). The Amendment to the Law is effective from January 1, 2011 and its provisions will apply to preferred income derived or accrued in 2011 and thereafter by a Preferred Company, per the definition of these terms in the Amendment to the Law.
|
|
|
Companies can choose to not be included in the scope of the Amendment to the Law and to stay in the scope of the law before its amendment until the end of the benefits period.
Under the Amendment to the Law, upon an irrevocable election made by a company, a uniform corporate tax rate will apply to all preferred income of such company. The Company elected to apply the uniform corporate tax rate as of 2014. From 2017 onwards, the uniform tax rate is to be
Should the Company derive income from sources other than the Preferred Company, such income will be taxable at the regular corporate tax rates for the applicable year.
|
F - 42
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 15 - Taxes on Income (cont’d)
| C. |
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter - the "Law") (cont'd)
|
|
On December 29, 2016 the Israeli Parliament (the "Knesset") enacted the "Economic Efficiency Law (Legislative Amendments for Achieving Budget Objectives in the Years 2017 and 2018) – 2016" in which the Law was also amended (hereinafter: “the Amendment”). The Amendment added new tax benefit tracks for a “preferred technological enterprise” and a “special preferred technological enterprise” which award reduced tax rates to a technological industrial enterprise for the purpose of encouraging activity relating to the development of qualifying intangible assets.
The benefits will be awarded to a “preferred company” that has a “preferred technological enterprise” or a “special preferred technological enterprise” with respect to taxable “preferred technological income” per its definition in the Law.
Preferred technological income that meets the conditions required in the law, will be subject to a reduced corporate tax rate of
On June 14, 2017 the Knesset Finance Committee approved "Encouragement of Capital Investment Regulations (Preferred Technological Income and Capital Gain of Technological Enterprise) – 2017" (hereinafter: “the Regulations”), which provides rules for applying the “preferred technological enterprise” and “special preferred technological enterprise” tax benefit tracks, including the Nexus formula that provides the mechanism for allocating the technological income eligible for the benefits.
Should the Company derive income from sources other than the “preferred technological enterprise”, such income will be taxable at the "Preferred Company" tax rate (for manufacturing activity in Israel) or regular corporate tax rates for the applicable year.
As a result of the aforesaid legislation, starting 2021 the Company implement the “preferred technological enterprise” tax benefit track.
|
F - 43
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 15 - Taxes on Income (cont’d)
| C. |
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter - the "Law") (cont'd)
|
|
2.
|
In the event of distribution by the Company of dividends out of its retained earnings that were generated prior to the 2014 tax year and were tax exempt under the "Approved Enterprise" or "Benefited Enterprise" status, the Company would be subjected to a maximum of
|
|
|
Out of the Company’s retained earnings as of December 31, 2022, approximately US$
|
||
|
On November 15, 2021, the Israeli Parliament released its 2021-2022 Budget Law (“2021 Budget Law”). The 2021 Budget Law introduces a new dividend ordering rule that apportions every dividend between previously tax-exempt and previously taxed income. Consequently, distributions (including deemed distributions as per Section 51(h)/51B of the Investment Law) may entail additional corporate tax liability to the distributing company. Effective August 15, 2021, dividend distributions will be treated as if made on a pro-rata basis from all types of earnings, including Exempt Profits. If such tax-exempt income is distributed, it would be taxed at the reduced corporate tax rate applicable to such income. |
F - 44
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 15 - Taxes on Income (cont’d)
| D. |
Taxation of the subsidiaries |
| 1. |
The subsidiary Silicom Inc. files tax returns with US federal tax authorities and with state tax authorities in the states of New Jersey, California, Virginia, New York, New Mexico, Tennessee, Texas and Illinois.
The federal corporate income tax rate is
|
|
| 2. |
The subsidiary Silicom Denmark is taxed according to the tax laws in Denmark, subject to corporate tax of |
|
| 3. |
The Company has not provided for Israeli income tax and foreign withholding taxes on US$
The Company currently has no plans to repatriate those funds and intends to indefinitely reinvest them in its non-Israeli operations. The unrecognized deferred tax liability associated with these temporary differences was approximately US$
|
| E. |
Tax assessments |
| 1. |
For the Israeli jurisdiction the Company has final tax assessments for all years up to and including the tax year ended December 31, 2017.
|
|
| 2. |
For the US federal jurisdiction, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2018. For the New Jersey and California state jurisdictions, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2017. For the Virginia, Tennessee, New York and New Mexico state jurisdictions, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2019. For the Texas state jurisdiction, Silicom Inc. has open tax assessments for the years 2018 through 2022. For the Illinois state jurisdiction, Silicom Inc. has open tax assessments for the years 2020 through 2022.
|
|
| 3. |
For the Danish jurisdiction, Silicom Denmark has final tax assessments for all years up to and including the tax year ended December 31, 2016.
|
F - 45
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 15 - Taxes on Income (cont’d)
| F. |
Income before income taxes and income taxes expense (benefit) included in the consolidated statements of operations |
|
Year ended December 31
|
||||||||||||
|
2020
|
2021
|
2022
|
||||||||||
|
US$ thousands
|
||||||||||||
|
Income before income taxes:
|
||||||||||||
|
Israel
|
|
|
|
|||||||||
|
Foreign jurisdictions
|
|
|
|
|||||||||
|
|
|
|
||||||||||
|
Current taxes:
|
||||||||||||
|
Israel
|
|
|
|
|||||||||
|
Foreign jurisdictions
|
|
|
|
|||||||||
|
|
|
|
||||||||||
|
Current tax (benefits) expenses relating to prior years:
|
||||||||||||
|
Israel
|
|
(
|
)
|
(
|
)
|
|||||||
|
Foreign jurisdictions
|
(
|
)
|
(
|
)
|
|
|||||||
|
(
|
)
|
(
|
)
|
(
|
)
|
|||||||
|
Deferred taxes:
|
||||||||||||
|
Israel
|
|
|
|
|||||||||
|
Foreign jurisdictions
|
(
|
)
|
(
|
)
|
|
|||||||
|
(
|
)
|
|
|
|||||||||
|
Income tax expense
|
|
|
|
|||||||||
F - 46
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 15 - Taxes on Income (cont’d)
| G. |
Deferred tax assets and liabilities |
The tax effects of significant items comprising the Company’s deferred tax assets and liabilities are as follows:
|
December 31
|
December 31
|
|||||||
|
2021
|
2022
|
|||||||
|
US$ thousands
|
US$ thousands
|
|||||||
|
Deferred tax assets:
|
||||||||
|
Accrued employee benefits
|
|
|
||||||
|
Research and development costs
|
|
|
||||||
|
Share based compensation
|
|
|
||||||
|
Intangible assets
|
|
|
||||||
|
Operating lease liabilities
|
|
|
||||||
|
Other
|
|
|
||||||
|
Total deferred tax assets
|
|
|
||||||
|
Deferred tax liabilities:
|
||||||||
|
Intangible assets
|
(
|
)
|
(
|
)
|
||||
|
Goodwill*
|
(
|
)
|
(
|
)
|
||||
|
Operating leases right-of-use, net
|
(
|
)
|
(
|
)
|
||||
|
Other
|
(
|
)
|
|
|||||
|
Total deferred tax liabilities
|
(
|
)
|
(
|
)
|
||||
|
Net deferred tax assets
|
|
|
||||||
|
In Israel
|
|
|
||||||
|
Foreign jurisdictions
|
(
|
)
|
(
|
)
|
||||
|
Net deferred tax assets
|
|
|
||||||
|
Non-current deferred tax assets
|
|
|
||||||
|
Non-current deferred tax liabilities
|
(
|
)
|
(
|
)
|
||||
* The recognized goodwill is deductible for income tax purposes for 10 years.
F - 47
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 15 - Taxes on Income (cont’d)
| H. |
Reconciliation of the statutory tax expense to actual tax expense |
|
Year ended December 31
|
||||||||||||
|
2020
|
2021
|
2022
|
||||||||||
|
US$ thousands
|
||||||||||||
|
Income before income taxes
|
|
|
|
|||||||||
|
Statutory tax rate in Israel
|
|
%
|
|
%
|
|
%
|
||||||
|
|
|
|
||||||||||
|
Increase (decrease) in taxes resulting from:
|
||||||||||||
|
Non-deductible operating expenses
|
|
|
|
|||||||||
|
Prior years adjustments
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Tax effect due to "Preferred Enterprise" status
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Statutory rate differential
|
|
(
|
)
|
|
||||||||
|
Other
|
(
|
)
|
(
|
)
|
|
|||||||
|
Income tax expense
|
|
|
|
|||||||||
F - 48
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 15 - Taxes on Income (cont’d)
| I. |
Accounting for uncertainty in income taxes The accounting literature clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The standards prescribe a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position.
During 2020, 2021 and 2022 the Company and its subsidiaries did not have any significant unrecognized tax benefits and thus, no related interest and penalties were accrued.
In addition, the Company and its subsidiaries do not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months.
|
Note 16 - Subsequent Events
In March 2023, the Company’s compensation committee and board of directors, respectively, has approved the grant of a total of 137,911 options and 86,000 RSUs under the Global Share Incentive Plan (2013), of which options and RSUs granted to directors and office holders are subject to the approval of the Annual General Meeting, which is currently scheduled to convene no later than June 2023, as prescribed under the Israeli Companies Law, 1999 and the Company's Amended and Restated Articles of Association.
F - 49
TABLE OF CONTENTS
Part IItem 1. Identity Of Directors, Senior Management, and AdvisersItem 2. Offer Statistics and Expected TimetableItem 3. Key InformationItem 4. Information on The CompanyItem 4A. Unresolved Staff CommentsItem 5. Operating and Financial Review and ProspectsItem 6. Directors, Senior Management and EmployeesItem 7. Major Shareholders and Related Party TransactionsItem 8. Financial Information A. Consolidated Statements and Other Financial InformationItem 8. Financial InformationItem 9. The Offer and ListingItem 10. Additional InformationItem 11. Quantitative and Qualitative Disclosures About Market RiskItem 12. Description Of Securities Other Than Equity SecuritiesPart IIItem 13. Defaults, Dividend Arrearages and DelinquenciesItem 14. Material Modifications To The Rights Of Security Holders and Use Of ProceedsItem 15. Controls and ProceduresItem 15A. Controls and ProceduresItem 16. ReservedItem 16A. Audit Committee Financial ExpertItem 16B. Code Of EthicsItem 16C. Principal Accountant Fees and ServicesItem 16D. Exemptions From The Listing Standards For Audit CommitteesItem 16E. Purchases Of Equity Securities By The Issuer and Affiliated PurchasersItem 16F. Change in Registrant's Certifying AccountantItem 16G. Corporate GovernanceItem 16H. Mine Safety DisclosureItem 16I. Disclosure Regarding Foreign Jurisdictions That Prevent InspectionsPart IIIItem 17. Financial StatementsItem 18. Financial StatementsItem 19. ExhibitsNote 1 - GeneralNote 2 - Summary Of Significant Accounting PoliciesNote 2 - Summary Of Significant Accounting Policies (cont D)Note 3 - Cash and Cash EquivalentsNote 4 - Marketable SecuritiesNote 4 - Marketable Securities (cont D)Note 5 - Other ReceivablesNote 6 - InventoriesNote 7 - Property, Plant and Equipment, NetNote 8 - Intangible AssetsNote 9 - Other Accounts Payable and Accrued ExpensesNote 10 - Leases A. The Components Of Operating Lease Cost For The Year Ended December 31, 2020, 2021 and 2022 Were As Follows:Note 10 - LeasesNote 10 - Leases (cont D)Note 11 - Assets Held and Liability For Employees' Severance BenefitsNote 12 - Shareholders' EquityNote 12 - Shareholders' Equity (cont'd)Note 13 - Geographic Areas and Major CustomersNote 13 - Geographic Areas and Major Customers (cont'd)Note 14 - Financial Income (expenses), NetNote 15 - Taxes on IncomeNote 15 - Taxes on Income (cont D)Note 16 - Subsequent Events