UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
FORM 20-F
o☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Or
x☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2015 2023 |
Or
Or
o☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o☐ | 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………………..report....................
For the transition period from to |
Commission File number: 000-23288
SILICOM LTD.
(Exact name of Registrant as specified in its charter and as translated into English)
ISRAEL |
(Jurisdiction of incorporation or organization) |
14 Atir Yeda Street,
Kfar Sava 4464323, Israel
(Address(Address of principal executive offices)
Mr. Eran Gilad, CFO and Company Secretary
Telephone: +972-9-764-4555
E-mail: erang@silicom.co.il
14 Atir Yeda Street,
Kfar Sava 4464323, Israel
(Name,(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 |
Ordinary Shares, NIS 0.01 nominal value per share | | NASDAQ GLOBAL SELECT MARKET |
SILC
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer’sissuer's classes of capital or common stock as of the close of the period covered by the annual report:
7,311,563
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o☐ No x☒
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 o☐ No x☒
Note—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.
Yes x☒ No o☐
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):
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated"accelerated filer and large accelerated filer”filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o☐ | Accelerated filer ☒ | | AcceleratedNon-accelerated filer x☐
| | Non-accelerated filer oEmerging growth company ☐
|
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this fling:filing:
US GAAPx ☒ International Financial Reporting Standards as issued by the International Accounting Standards Board o☐ Other o☐
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 o☐ Item 18 o☐
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 ☒
Yes o No x
(APPLICABLE(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 o☐ No o☐
This annual report on Form 20-F includes certain “forward-looking”"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”"projects", "expects", "may", "plans", or “intends”"intends", or words of similar import, identifies a statement as “forward-looking.”"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"Risk Factors.”"
As used herein or in any document incorporated by reference hereto, the “Company”"Company", “Silicom"Silicom Ltd.”", “Silicom”"Silicom", “Registrant”"Registrant", “we”"we", “us”"us", or “our”"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”"dollars", "US$", or “$”"$" are to United States dollars, and all references to “Shekels”"Shekels" or “NIS”"NIS" are to New Israeli Shekels.
Table of Contents
| | 6
|
| | 6
|
| | 76
|
| | 76
|
A.Selected Financial Data | [Reserved] | 76
|
B. | Capitalization and indebtedness | 116
|
C. | Reason for the offer and use of proceeds | 116
|
D. | Risk Factors | 6
|
D. Risk Factors
| 11 |
| 2733
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A. | History and Development of the Company | | 2733
|
B. | Business Overview | | 2934
|
Principal Markets | 3237
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Manufacturing and Suppliers | 3238
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Marketing Channels | 3539
|
Patents and Licenses | 3741
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Competition | 3842
|
Governmental Regulation Affecting the Company | 3943
|
C. | Organizational Structure | 44
|
| UNRESOLVED STAFF COMMENTS
| 4045
|
D. Property, Plant and Equipment
| | 40 |
| 41 |
| 41 |
Critical Accounting Policies | 42 |
A. Operating Results | 45
|
Impact of Inflation and Currency Fluctuations on Results of Operations, Liabilities and Assets | 49 |
B. Liquidity and Capital Resources | 4950
|
C. | Research and development, patents and licenses, etc. | 51 |
D. Trend Information | 5352 |
E. Off-Balance Sheet Arrangements | Critical Accounting Estimates | 54
|
F. Tabular disclosure of contractual obligations
| 55 |
| 56 |
A. | Directors and Senior Management | 56
|
B. | Compensation | 59 |
C. Board Practices | 62
|
Board of Directors | 6465
|
External Directors | 6465
|
Audit Committee | 6870
|
Compensation Committee | 70 |
Internal Auditor | 7571
|
D. | Employees | 7577
|
E. | Share Ownership | 79
|
E. Share Ownership
| 77 |
| 7880
|
A. | Major Shareholders | 7880
|
B. | Related Party Transactions | 81
|
ITEM 8. | | 83
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A. | Consolidated Statements and Other Financial Information | 83
|
B. | Significant Changes | 83
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B. Related Party Transactions
| 79 |
| 84
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A. | Offer and listing detailsListing Details | 84
|
Markets and Share Price History | 84
|
| 84 |
| 115107
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Interest Rate Risk | 115107
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Foreign Currency Exchange Risk | 116108
|
| | 118109
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| 118110
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| | 118110
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| | 118110
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| | 118110
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Disclosure Controls and Procedures | 118110
|
Management's Annual Report on Internal Control over Financial Reporting | 118110
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Inherent Limitations on Effectiveness of Controls | 119111
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Changes in Internal Control over Financial Reporting | 119111
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| | 119111
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| 119 | 111
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| | 119111
|
| | 120111
|
| | 120112
|
Audit committee's pre-approval policies and procedures | 112
|
| | 120113
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| | 121113
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| | 121114
|
| | 121114
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| | 123117
|
| | 117
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Item 16K.
| | 117 |
| 123 | 118
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| | 123118
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| | 123118
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| 123 | 118
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Item 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, AND ADVISERS
Not Applicable.
Item 2.OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
Item 3.KEY INFORMATION
A. Selected Financial Data
The selected data presented below under the captions “Consolidated Statements of Operations Data” and “Consolidated Balance Sheets Data” for and as of the end of each of the years in the five-year period ended December 31, 2015, are derived from our audited consolidated financial statements. The consolidated financial statements as of December 31, 2015, and for each of the years in the three-year period ended December 31, 2015, and the report thereon, are included elsewhere in this annual report. The selected data set forth below should be read in conjunction with our consolidated financial statements and the notes thereto, which are set forth in Item 18 – “Financial Statements” and the other financial information appearing elsewhere in this annual report.[Reserved]
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
| | 2011 | | | 2012 | | | 2013 | | | | 2014 | | | | 2015 | |
Sales | | $ | 39,633 | | | $ | 48,729 | | | $ | 73,298 | | | $ | 75,622 | | | $ | 82,738 | |
Cost of sales | | | 22,430 | | | | 28,849 | | | | 43,865 | | | | 44,835 | | | | 48,659 | |
Gross profit | | | 17,203 | | | | 19,880 | | | | 29,433 | | | | 30,787 | | | | 34,079 | |
Research and development costs | | | 4,165 | | | | 4,401 | | | | 5,465 | | | | 6,480 | | | | 9,702 | |
Sales and marketing expenses | | | 2,677 | | | | 3,081 | | | | 3,818 | | | | 4,418 | | | | 5,651 | |
General and administrative expenses | | | 1,890 | | | | 2,369 | | | | 2,572 | | | | 2,798 | | | | 3,611 | |
Contingent consideration expense (benefit) | | | 0 | | | | 0 | | | | 0 | | | | 45 | | | | (3,090 | ) |
Total operating expenses | | | 8,732 | | | | 9,851 | | | | 11,855 | | | | 13,741 | | | | 15,874 | |
Operating income | | | 8,471 | | | | 10,029 | | | | 17,578 | | | | 17,046 | | | | 18,205 | |
Financial income, net | | | 439 | | | | 752 | | | | 404 | | | | 263 | | | | 220 | |
Income before income taxes | | | 8,910 | | | | 10,781 | | | | 17,982 | | | | 17,309 | | | | 18,425 | |
Income tax expenses | | | 667 | | | | 910 | | | | 905 | | | | 2,704 | | | | 1,905 | |
Net income(1) | | | 8,243 | | | | 9,871 | | | | 17,077 | | | | 14,605 | | | | 16,520 | |
Net income per share | | | | | | | | | | | | | | | | | | | | |
Basic income per ordinary share | | $ | 1.195 | | | $ | 1.424 | | | $ | 2.404 | | | $ | 2.033 | | | $ | 2.273 | |
Diluted income per ordinary share | | $ | 1.178 | | | $ | 1.417 | | | $ | 2.357 | | | $ | 1.996 | | | $ | 2.242 | |
Weighted average number of ordinary shares used to compute basic income per share (in thousands) | | | 6,896 | | | | 6,934 | | | | 7,103 | | | | 7,184 | | | | 7,269 | |
Weighted average number of ordinary shares used to compute diluted income per share (in thousands) | | | 6,995 | | | | 6,968 | | | | 7,246 | | | | 7,319 | | | | 7,368 | |
(1) Net income is after deduction of taxes on income, which have been reduced by virtue of tax benefits to which the Company is entitled in its capacity as an "Approved Enterprise, "Benefited Enterprise" or "Preferred Enterprise", as applicable with respect to each of the years indicated above, under Israeli law. As such, the Company was required to pay taxes at a reduced effective rate. The Company selected the 2004 tax year (for which the tax benefits ended at the end of 2013), the 2006 tax year, the 2009 tax year and the 2012 tax year as its Year of Election under its capacity as Approved Enterprise or Benefited Enterprise for each of the Years of Election. In 2014 the Company elected to be taxed under its capacity as a Preferred Enterprise, following which its benefits under the Investment Law under its capacities as Approved Enterprise or Benefited Enterprise, as applicable, were ceased. As of 2014, the benefits under the Investment Law under the Company's capacity as a Preferred Enterprise commenced. See Note 14C to the Financial Statements and “Item 10” - Additional Information - Taxation.”
CONSOLIDATED BALANCE SHEET DATA
| | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | |
Total assets | | $ | 72,865 | | | $ | 89,033 | | | $ | 105,257 | | | $ | 122,436 | | | $ | 139,998 | |
Total current liabilities | | $ | 6,438 | | | $ | 11,789 | | | $ | 11,948 | | | $ | 19,006 | | | $ | 19,814 | |
Long-term liability | | $ | 2,153 | | | $ | 2,278 | | | $ | 2,618 | | | $ | 2,698 | | | $ | 7,350 | |
Shareholders' equity | | $ | 64,274 | | | $ | 74,966 | | | $ | 90,691 | | | $ | 100,732 | | | $ | 112,834 | |
Capital stock | | $ | 20 | | | $ | 21 | | | $ | 21 | | | $ | 21 | | | $ | 21 | |
Number of ordinary shares issued(1) | | | 6,940,059 | | | | 7,022,397 | | | | 7,154,984 | | | | 7,233,604 | | | | 7,299,315 | |
(1) Including 14,971 held by one of our subsidiaries - Silicom Connectivity Solutions, Inc. Under the Israeli Companies Law 5759-1999 (the "Companies Law") these shares held by such subsidiary are non-voting shares.
The following table sets forth information regarding the exchange rates of U.S. dollars per NIS for the periods indicated. Average rates are calculated by using the daily representative rates as reported by the Bank of Israel on the last day of each month during the periods presented.
| | NIS per U.S. $ | |
Year Ended December 31, | | High | | | Low | | | Average | | | Period End | |
2015 | | | 4.053 | | | | 3.761 | | | | 3.887 | | | | 3.902 | |
2014 | | | 3.994 | | | | 3.402 | | | | 3.577 | | | | 3.889 | |
2013 | | | 3.728 | | | | 3.471 | | | | 3.601 | | | | 3.471 | |
2012 | | | 4.028 | | | | 3.715 | | | | 3.844 | | | | 3.733 | |
2011 | | | 3.821 | | | | 3.395 | | | | 3.582 | | | | 3.821 | |
The following table sets forth the high and low daily representative rates for the NIS as reported by the Bank of Israel for each of the prior six months.
| | NIS per U.S. $ | |
Month | | High | | | Low | | | Average | | | Period End | |
March 2016 | | | 3.912 | | | | 3.766 | | | | 3.868 | | | | 3.766 | |
February 2016 | | | 3.964 | | | | 3.871 | | | | 3.908 | | | | 3.91 | |
January 2016 | | | 3.983 | | | | 3.913 | | | | 3.950 | | | | 3.951 | |
December 2015 | | | 3.905 | | | | 3.855 | | | | 3.881 | | | | 3.902 | |
November 2015 | | | 3.921 | | | | 3.868 | | | | 3.889 | | | | 3.877 | |
October 2015 | | | 3.923 | | | | 3.816 | | | | 3.863 | | | | 3.867 | |
The NIS to U.S. Dollar exchange rate on March 31, 2016, as published by the Bank of Israel, was NIS 3.766.
Dividends
Prior to 2013, we had not paid dividends to our shareholders. On January 14, 2013, we announced that our Board of Directors 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. As part of the stated policy, the Company's 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. 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. Future dividend policies will be reviewed by the Board of Directors based upon conditions then existing, including our earnings, financial condition, capital requirements and other factors. Our ability to pay cash dividends may be restricted by instruments governing any of our obligations.
Dividends paid by an Israeli resident company to non-Israeli shareholders are generally subject to withholding tax in Israel at a rate of up to 25% (or 30% if such non-Israeli shareholder is a “substantial shareholder”), but the actual withholding rate may be lower or higher than 25% depending upon the type of shareholder. In our case, the applicable withholding tax rate will also depend on the particular Israeli production facilities that have generated the earnings that are the source of the specific dividend and, accordingly, the applicable withholding rate may change from time to time.
On March 18, 2013 our Board of Directors declared a dividend of US $0.55 (NIS 2.03 according to the NIS-USD exchange rate as of March 18, 2013, as reported by the Bank of Israel) per share payable on April 17, 2013 to shareholders of record as of April 4, 2013, and in the aggregate amount of approximately US $3.9 million (approximately NIS 14.4 million according to the NIS-USD exchange rate as of March 18, 2013, as reported by the Bank of Israel) for 2012. Taxes were withheld at source by the Company as required pursuant to Israeli law.
On March 18, 2014 our Board of Directors declared a continuing dividend for 2013 of US $1.00 (NIS 3.462 according to the NIS-USD exchange rate as of March 18, 2014, as reported by the Bank of Israel) per share payable on April 17, 2014 to shareholders of record at the close of the NASDAQ Global Select Market on April 3, 2014, and in the aggregate amount of approximately US $7.2 million (approximately 24.9 million according to the NIS-USD exchange rate as of March 18, 2014, as reported by the Bank of Israel) for 2013. Taxes were withheld at source by the Company as required pursuant to Israeli law.
On March 23, 2015 our Board of Directors declared a continuing dividend for 2014 of US $1.00 (NIS 4.018 according to the NIS-USD exchange rate as of March 23, 2015, as reported by the Bank of Israel) per share payable on April 21, 2015 to shareholders of record at the close of the NASDAQ Global Select Market on April 6, 2015, and in the aggregate amount of approximately US $7.3 million (approximately 29.3 million according to the NIS-USD exchange rate as of March 23, 2015, as reported by the Bank of Israel) for 2014. Taxes were withheld at source by the Company as required pursuant to Israeli law.
On March 21, 2016 our Board of Directors declared a continuing dividend for 2015 of US $1.00 (NIS 3.855 according to the NIS-USD exchange rate as of March 21, 2016, as reported by the Bank of Israel) per share payable on April 14, 2016 to shareholders of record at the close of the NASDAQ Global Select Market on April 4, 2016, and in the aggregate amount of approximately US $7.3 million (approximately 28.1 million according to the NIS-USD exchange rate as of March 21, 2016, as reported by the Bank of Israel) for 2015. Taxes were withheld at source by the Company as required pursuant to Israeli law.
For more information on the taxation of dividends generally, and for our calculation of the tax withheld on the dividends paid as detailed above, see the section entitled “Taxation of Dividends” in Section 10.E “Taxation”.
Holders of our ordinary shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the receipt of any dividend distributions made to our shareholders, including, in particular, the effect of any foreign, state or local taxes, and of any taxes withheld at source by the Company.
B. Capitalization and indebtednessIndebtedness
Not ApplicableApplicable.
C. Reason for the offerOffer and useUse of proceedsProceeds
Not ApplicableApplicable.
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.
11An 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.
Risks Related to Our Business and Industry
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.
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.
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 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.
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.
Many of our employees in Israel are required to perform military reserve duty.
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.
Risks Relating to Our Business
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.
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.
Our short lead time of customer orders introduces uncertainty into our revenues and severely limits our ability to accurately forecast future sales.
The marketsfluctuations 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 products are characterized by rapidly changingexports.
Significant disruptions of our information technology systems or breaches of our data security could adversely affect our business.
Risks Related to Our Business and evolving industry standards. For example, the migrationIndustry
We may not be able to higher line rate Ethernet solutions, the adaptation of new bus interfaces and increased use of emerging technologies suchcapitalize, as Cloud, Virtualization and SDN, causeplanned, on our OEM customers to demand such new products and technologies. In the event that our OEM customers decide to begin using new technologies,Design Wins.
Once we secure a Design Win, we may not be able to develop products forproperly capitalize on such Design Win. For example, we may not receive revenues from a Design Win due to the new technologiescustomer deciding to hold back the introduction of its product or service, of which our Design Win product is a component, to the market. Additionally, the Design Win client may decide to abandon the use of our product or use an alternate source. For instance, a client may alter their operations processes, so that even after we have achieved a Design Win with that client, it will outsource certain parts of its purchasing decision-making to third-parties. Such changes in a timely manner. Our OEM customers may also select competing products despite our abilityoperations processes would require us to develop products incorporating new technologies. For Example,seek an additional Design Win with the shift towards running applicationsthird-party provider in addition to the Design Win we already achieved in the Cloudpast with that client, rather than continue selling the products per the initial Design Win, and if we anticipate thatare unsuccessful in achieving such additional Design Win, our sales would be negatively affected. Additionally, the demand will grow for add-on adapters and products which addressDesign Win client could shift its business focus away from the challenges presented by the Cloud, such as power, heat and space limitations in such environments which increase the need for essential building blocks in generic servers, which can be potentially served by our products. However there is no assurance that our OEM customers will buy such products from us orsolutions that we will continue to generate significant saleshad previously sold towards solutions in this area or other areas in which we do not operate. Consequently,Alternatively, we may sufferexperience delays in receiving revenues from reduced salesa Design Win due to circumstances unrelated to us, such OEMs and accumulate unusable inventory which can be used only with older technologies. We intenddelays may stem from delays in the deployment of the customer's product/service in the market. Delays may also lead to continue investing in product and technology development. Although we have recorded growing salesa request by the customer to change the specifications of our line of products (to which the majority of our revenues are attributable), there can beproduct due to changes in industry standards and/or market requirements. There is no assurance that we will continuebe able to be successfulsecure 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. The conflict in the marketingMiddle East, including the war between Israel and Hamas and potential conflict between Israel and Iran, and the wider consequences, such as extensive cancellation and disruption of flights to and from Israel, as well as other factors, such as any hostilities which could break out between China and Taiwan in the future, which may affect our current productssupply chain, such as new restrictions relating to the spread of pandemics, similar to Covid-19, in various geographies globally, the war in Ukraine and related business disruptions and sanctions, as well as U.S. restrictions on certain trade with China, may result in developing, manufacturing and marketing enhanced and new productsus experiencing extended delays in a timely manner.materialization of revenue from Design Wins, as mentioned above.
The market for cloud-basedCloud-based and cloud-focusedCloud-focused solutions is at a relatively early stage of development,rapidly developing, and if it develops in ways that are different from what we anticipate or expect, our business could be harmed.
The market for cloud-based solutions is at an early stage relative to physical appliances and on-premise networking solutions, and these types of deployments may not achieve or sustain high levels of demand and market acceptance, or may end up being implemented differently than current expectations in the market place.
In view of an anticipated increase inrecent 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 Array (or FPGA) products. We also expect the systems are expectedCloud-based data centers to be increasingly based on generic server platforms. These platforms will all needrequire offload capabilities in order to address the performance challenges realized due to the huge amountresulting 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 that consequently 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 add-on 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 add on adapters.our products or the failure of the market to adopt technologies which had previously been expected to be widely adopted by the market. While we have recently announced a 5-year plan under which we have, among other things, ceased certain non-core product lines, and are expanding into a more diversified scale of accounts, there is no guarantee that we have accurately predicted, or will continue to accurately predict, anticipated revenues which may be generated, our growth potential, our operations, including our inventory levels, and our financial results as a result of the factors mentioned above.
In addition, we believe that the market’s demand for our products and solutions in the Cloud demonstrates that the ongoing industry transition to the Cloud continues to represent a growth opportunity for us. Nonetheless, if significant organizations providing Cloud based solutions or other virtualized networks do not perceive the benefits of our cloud-focused andand/or virtualized network based solutions, or if our competitors or new market entrants are able to develop solutions for this sectormarket that do not require add on products such as ours, or offer features that are, or are perceived to be, more effective than ours,our solutions, this trendwould have a material adverse effect on our ability to achieve and/or consummate Design Wins, on our business, and on our results of moving towardsoperations and financial condition.
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.
With the cloud but without needingevolution 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. Additional factors may also include the 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 uselower 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. Additionally, we cannot provide any assurance that our 5-year plan will successfully address these, or other changes in the market.
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 growth opportunity for us. Nonetheless, if such virtualization environmentsTelcos 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 our products is highly competitive and some11
Rapid development of our competitorsbusiness 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 better positioned than we are.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.
The market for ourOur networking and data infrastructure solution products 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. For example,targeted by us mainly at customers in the network interface cards for which we have developed our Server Adapters, our main competitor is Intel, which may offer solutions competing with our developed products. In addition, Caswell, LannerOEM, Cloud, Telco, Mobile and Napatechrelated service providers’ markets, are the main competitors of some of our Smart Cards products. 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 and financial condition and the results of our operations. For more information regarding our competitors see "Item 4B. – Information on the Company – Business Overview – Competition"characterized by long sales cycles.
We may need to invest significantly in researchtarget 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 ofsell 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. The decision-making process has been further impacted by macro-economic factors such as high interest rates and the global economic slowdown, which have put pressure on companies seeking to make significant investments in infrastructure. 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. The technology industryAs 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. Furthermore, 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 and which may result in significant quarterly, or even annual, fluctuations in the sale rates of our products. These, together with the macro-economic factors described earlier, may have an adverse impact on our ability to accurately predict the ramp-up of sales of our products, which may have an adverse effect on our backlog estimates, actual sales and results of operations.
In addition, 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, is characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. While these changes couldunsuccessful efforts to secure or materialize Design Wins may lead to a reductionsubstantial increases in our expenditures, cause impairment of intangible assets and related write-offs, divert the demand forattention of our existing products, theysales force and management from other business opportunities, and 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 |
| · | Entering 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 couldultimately 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 potential 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 difficultylosses of Design Wins in developing new, commercially successful products at acceptable release times.
We conduct 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 responsesuch markets, for which we may not be able to rapidly changing customer preferences, technologies and industry standards. We cannot guarantee the continued success of our latest lines of products, which include Bypass Switches, Intelligent Bypass Switches, the SETAC product family, the CPE/Edge/Appliance Units and Low End Appliances, nor that they 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 releasedcompensate in a timely mannermanner. 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 respond effectivelymaintain 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 technological changesexplore 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.
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 have constituted 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 product announcements by others.customer relationships, 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 add-on products.
A significant portion of our products sold are add-on adapters that are added to existing servers in order to improve their functionality. If demand for improved functionality similar to the functionalitythat 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 sharemarket-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 assure youprovide 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.
Our OEM customers may replace the servers and appliances they currently use, withuse or sell servers and appliances that do not require our cards, and/or incorporate cards other than ours.
Many of the OEMsour 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 generations of appliances.generation. We cannot guarantee that our cards will be needed or selected for such new appliancesgeneration or compatible with them.it. A decision by a current OEM customer or customers 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.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 appliancesand 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 server-basedservers and appliances which use standard interfaces. Our potential customers may decide to use servers and appliances with such proprietary interfaces instead of the customary server-based appliancesstandard interfaces for which several manufacturers may provide add-on cards. There couldcan 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.
Our ability to accurately forecast future sales is severely limited due to the short lead time of customer orders.15
As a result of the short lead time for firm purchase orders, we are unable to accurately forecast future revenues from product sales. As a result, even dramatic fluctuation in revenue (whether increase or decrease) might not be detected until the very end of a financial quarter, which may not enable us to monitor costs in a timely manner to compensate for such fluctuation.
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 negatively on our finances.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 mustare usually required to place orders of certain components for our products betweenwithin sixteen andto twenty weeks prior to delivery.delivery, and more recently, in many cases, even earlier, where the global supply chains are affected by the external disruptions, such as the recent attacks by the Houthi militia on Red Sea shipping lanes, and this could be further exacerbated should hostilities break out in the future, between China and Taiwan. 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 fillfulfill such purchase orders which may lead to the loss of business from a customer.
The loss of a significant customer may have a material adverse effect on us.
We depend on a small amount of customers for our products. Our top three customers accounted for approximately 35% of our revenues in 2015 (out of which our top customer accounted for approximately 20% of our revenues in 2015). 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 margins, financial condition and business.
The loss or ineffectiveness of any of our original equipment manufacturer relationships or a reduction of purchase orders or sales efforts by such original equipment manufacturers may have a material adverse effect on our operations and financial results.
Our sales and marketing strategy is to develop and maintain strategic relationships with leading original equipment manufacturers ("OEMs") in the servers industry and server-based systems industry, which integrate our products into their systems. These OEMs 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 their sales efforts or discontinuance of sales of our products by our OEMs could lead to reduced sales and could materially adversely affect our operating results. Use of OEMs also entails the risk that they will build up inventories in anticipation of a growth in sales. If such growth does not occur as anticipated, such OEMs may substantially decrease the amount of products ordered in subsequent quarters or discontinue product orders. The termination or loss of either one of our key OEM relationships or several OEM relationships at approximately the same time, without being able to compensate this loss with sales to other OEM customers might have a material adverse effect on our operations and financial results.
We are dependent on key personnel.
Our success has been, and will 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.
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, 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.
On March 2, 2012 Internet Machines LLC, a Texas limited liability company filed a patent infringement lawsuit in the United States District Court for the Eastern District of Texas (the “Court”) against numerous defendants (including many switch manufacturers) with respect to certain patents for switches, and included our US subsidiary amongst the list of defendants named in such lawsuit. The lawsuit claims that the defendants have infringed certain patents purported to be owned by Internet Machines LLC and seeks unspecified compensation for damages as well as injunctive relief. The defendants filed answers and counterclaims to the complaint asserting that they do not infringe any claims of the asserted patents and the claims of the patents are invalid and/or unenforceable. On April 28, 2015, the lawsuit was dismissed with prejudice by the Court.
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, except for any such claims or legal proceedings that, if adversely determined, would not adversely affect the use or exploitation of such intellectual property right by the Company or by (i) any of our subsidiaries; (ii) our recently acquired assets from ADI Engineering, Inc.; or (iii) the creation, development, manufacturing, marketing, provision, distribution, licensing, or sale of any product or service created, developed, manufactured or otherwise provided by any of the Company, any or our subsidiaries or in relation to the assets recently acquired by us from ADI under the assets purchase agreement dated October 28, 2015, 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.
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 misappropriation of our technology or the independent development of similar technologies by others. The process of seeking patent protection may take a long time and be expensive. We cannot assure you that patents will be issued from pending or future applications 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 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 this technology 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.
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. For example, a key component in many of our cards is manufactured by Intel, one of our competitors. 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 of our products from our limited sources, or are able to purchase these key components only 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.
Inability to receive information from our key component manufacturers could affect our ability to develop new products required by our OEM customers and by the industry in which we operate.
Our products are based on networking controllers which are manufactured by eitherBroadcom, Cavium or Intel. In order to design our products, we need to receive information that enables us to design products with the use of such controllers. There can be no assurance that we will continue to receive all the information required for designing products with the use of new controllers continuously released by the above mentioned companies. Intel and Cavium are our competitors and Broadcom may also compete with our products. Such competition may also affect their decisions regarding the sharing of information with us. The inability to obtain such information may adversely affect our ability to develop new products required by our OEM customers and by the industry in which we operate.
Our networking and data infrastructure solution products which are sold by us mainly to OEMs, are characterized by long sales cycles.
We sell our networking and data infrastructure solution products mainly to original equipment manufacturers, or OEMs. The decision making process of our OEM customers includes several time consuming processes, resulting from the critical importance of our products in their systems. They need to define the required configuration of their server system/appliance, derive the need and type of adapters or other add-on products, evaluate our products, intensively test and qualify our products and then (or in parallel) negotiate the terms for a purchase. It may therefore take 12 months or more from the time we first contact a prospective customer before such customer implements our cards in its system 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 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 purchasing systems and appliances which include our products (and consequently facilitating sales of our products), companies spend a substantial amount of time performing internal reviews and obtaining capital expenditure approvals, consequently lengthening the period of time required for a Design Win to mature into consistent sales. These long sales 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. In addition, our allocation of significant resources to potential sales opportunities that do not materialize into sales could have a material adverse effect on our business, 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 impairment, 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 be certain 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.
We may be subject to risks associated with laws, regulations and customer initiatives relating to the environment, conflict minerals or other social responsibility issues, which may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.
The Dodd-Frank Wall Street Reform and Consumer Protection Act included 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 will require companies to diligence, disclose and report whether or not such “conflict” minerals originate from the DRC. The implementation of these requirements could adversely affect the sourcing, availability and pricing of minerals such as cassiterite, wolframite, coltan, and gold which are used in the manufacture of certain components used in 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. 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. In addition, we will 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. For additional information see "Item 4 Information on the Company – Business Overview."
Risks RelatingRelated to Operations in Israel and Internationally
The dollar cost of our operations in Israel may increase to the extent any 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 decreased steadily during 2023 and was 3% on an annualized basis. Any 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.
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"“Approved Enterprise” or "Benefited Enterprise"“Benefited Enterprise” or “Preferred Enterprise” status in past years and we currently holdreport as a "Preferred Enterprise" status and since“Preferred Technological Enterprise”, under the Encouragement of Capital Investments Law, 5719-1959 (the “Law”), and as such, we are entitled to certain tax benefits. ToIn 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 and we could be required to refund any tax benefits we might already have received.canceled. These tax benefits may not be continued in the future at their current levels, or at any level. In recent years, the Israeli government has reduced the benefits available and has indicated that it may further reduce or eliminate some of these benefits in the future. 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 each of our "Approved Enterprise" and "Benefited Enterprise" plans and under our "Preferred Enterprise"“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“regular” Israeli corporate tax rates. The standard corporate tax rate for Israeli companies in 2013 was 25.0%, was increased to 26.5% for 2014 and 2015 and reduced to 25% in 2016 and thereafter.of 23%. See Item“Item 10 "Additional– Additional Information – Taxation – Law for the Encouragement of Capital Investments 1959"Law, 1959” for more information about our "Benefited Enterprise"“Preferred Technological Enterprise” status.
The recent Amendment Number 7government 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 Israeli EncouragementGovernment of Industrial Research and Development Law, 1984 may cause ambiguity regarding its implementation and have an adverse effect onIsrael through programs with the Company
On July 29, 2015, the Israeli Parliament, the Knesset, enacted Amendment Number 7 to the Israeli Encouragement of Industrial Research and Development Law, 1984 (the "R&D Law" and the "R&D Amendment", respectively). The R&D Amendment, effective as of January 1, 2016 amends material provisions of the R&D Law, such as royalty rates, changes to royalty rates upon transfer of manufacturing rights abroad etc., leaves substantial discretion with a new authority which shall be established to replace the current Office of the Chief Scientist of the Israeli Ministry of Economy and Industry (known as the Israel Innovation Authority, or the “IIA”) under the Israeli Law for the Encouragement of Industrial Research, Development and Technological Innovation, 1984, and related regulations (the "OCS"“R&D Law”).
The R&D Law and includes only guidelinesthe IIA impose certain limitations with respect to sometransfer of the core issues of the R&A Law, thus currently causing much ambiguitymanufacturing rights and know-how, as well as to the implementationchange of the R&D Amendment and its effect oncontrol in companies which developed know-how using funds receivedreceive government funding from the OCS. In addition, it is still not clear ifIIA. Under the R&D Amendment will have a retroactive effect,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 terms of grants previously received from the OCS.Company.
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. In addition, internal
Also, Israel has been engaged, from time to time, in armed conflicts within neighboring counties such as Egyptwith terror groups Hamas and Syria also affect Israel, both directly and indirectly. A significant increase in violence began in September 2000 and has continued with varying levels of severity through 2013, such as Israel’s war with the Hezbollah, militant group in July and August of 2006. In December 2008 and January 2009 there was an escalation in violence among Israel, Hamas, the Palestinian Authority and other groups, as well as extensive hostilities along Israel’s borderIranian-backed militias in Syria and Yemen. These conflicts involve missile strikes against civilian targets in the southern and northern parts of Israel in particular and have also involved such missile strikes against central parts of Israel.
On 7 October 2023, Hamas terrorists infiltrated into Israel from Gaza and carried out a terrorist attack on Israeli communities leading to more than 1200 Israeli deaths. Israeli forces subsequently cleared Israel of Hamas forces and began a concerted counter-attack in Gaza, the stated aim of which was to destroy Hamas. The Israeli government has declared that Israel is at war. There have also been frequent missile attacks from Hezbollah in Lebanon towards the north of Israel with Israeli military responses, missile attacks towards the Gaza Strip, which resulted in missiles being firedsouth of Israel from the Gaza Strip into Southern Israel. Similar hostilities accompaniedHouthis in Yemen.
In April 2024, Iran launched a missile and drone attack on Israel, which was largely intercepted by missiles being fired from the Gaza Strip into SouthernIsraeli air defenses, and Israel as well at areas more centrally located near Tel Aviv and at areas surrounding Jerusalem, occurred during November 2012. During the summer of 2014, another escalation in violence among Israel, Hamas, the Palestinian Authority and other groups took place. This escalation became known as "Operation Protective Edge", which resulted in missiles being fired from the Gaza Strip into Southern and Central Israel, as well as civil insurrection of Palestinians in the West Bank. In October 2015, Israel encountered another escalation in violenceresponded with the Palestinian population, which resulted in clashesa limited strike on an Iranian military facility. While no additional direct military action between Israel and armed Palestinians onIran is anticipated over the border with Gaza, innear term, it is possible that hostilities will escalate into a war between the West Bank and in Israeli cities. Since February 2011, Egypt has experienced political turbulence and an increase in terrorist activity in the Sinai Peninsula, following the resignation of Hosni Mubarak as president. This included protests throughout Egypt, and the appointment of a military regime in his stead, followed by the elections to parliament which brought groups affiliated with the Muslim Brotherhood (which had been previously outlawed by Egypt), and the subsequent overthrow of this elected government by a military regime instead. Such political turbulence and violence may damage peaceful and diplomatic relationscountries.
The war between Israel and Egypt,Hamas, the potential for a further conflagration on Israel’s norther border with Hezbollah and couldwith Iran-backed Syrian militias, and with Iran itself, and the other factors mentioned above, raise a concern as to the stability in the region, which may affect the region as a whole. Similar civilpolitical and security situation in Israel and therefore could adversely affect our business, financial condition and results of operations.
Civil unrest and political turbulence hashave occurred in many other countries in the region, including Syriathose which sharesshare a common border with Israel, and is affecting the political stability of those countries. Since April 2011, internal conflict in Syria has escalated, and evidence indicates that chemical weapons have been used in the region. Intervention may be contemplated by outside parties in order to prevent further chemical weapon use. 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 believedand to have a strong influence among extremist groups in the region, such as Hamas in Gaza, Hezbollah in Lebanon.Lebanon, the Houthis in Yemen and various militias in Syria. Iran is known to support the government of Syria in its battles against various rebel militia groups in Syria. Furthermore, 2014 saw
Any further escalation of the rise of an Islamic fundamentalist group, known as ISIS. Following swift conquering operations, ISIS gained control of vast areasarmed conflict, especially with Hezbollah in the Middle East, including in Iraq and Syria, which contributed to the turmoil experienced in these areas. As a result, the United States armed forces have engaged in limited operations to eradicate ISIS and recently, Russia's armed forces have also engaged in limited operations to defeat ISIS and other rebel groups operating in Syria. These situations may potentially escalate in the future to more violent events which may affect Israel and us. Furthermore, several countries still restrict tradeIsrael’s north or 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. Any future armed conflict,Iran directly, 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 adverse effect on our business 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 escalation of the armed conflict or political instability in the region would likelycould 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.
In 2023, the current Israeli government pursued radical reform to Israel’s judicial system. In response to such developments, Israel saw mass civilian protests and individuals, organizations, and financial institutions, both within and outside of Israel, voiced concerns that the proposed changes may negatively impact the business environment in Israel. One such proposed change, the curtailment of the judiciary’s use of the 'reasonableness doctrine', was passed into law in July 2023, before being subsequently struck down by Israel’s Supreme Court. Since October 2023, the Israeli government has agreed not to pursue the proposed reforms while the current war in Gaza and unrest in the north of Israel continues. However, should the reforms be reinstated, civil unrest and mass protest may resume, and the prospect of a constitutional crisis in light of the Supreme Court ruling, may materialize. To the extent that the war in Gaza continues, the conflict in the north of Israel escalates, or any of these negative developments 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. In the first few weeks of the war with Hamas in October 2023, Israel called up approximately 360,000 military reservists, Israel’s largest call up of reservists in recent history. While many reservists have since been released, a significant number remain mobilized and more may be called up should hostilities escalate. While we have operated effectively despite these conditions in the past,to-date, we cannot assess what impact any deterioration of 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 97%95% of our international sales are denominated in U.S. dollarsDollars and may be subject to government controls and other risks, including, in some cases, export licenses, federal restrictions on export, currency fluctuations, armed conflict, 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 andand/or Denmark exceeds the devaluation of the NIS andand/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.
We are affected by worldwide downturns in industries based on technology.
The volatility in the securities markets discussed above and its effect on high-technology companies may have a ripple effect on our performance. In the downturn which the markets experienced beginning in 2001, technology companies dealing in communications and computers were severely affected and some were forced to cease operations. We felt the effects of this downturn in 2001 through 2003. We were also 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. We can give no assurance that our results will not be affected on a going forward basis by any economic downturns.
General economic conditions may adversely affect the Company’s results.
Uncertainty in global economic conditions, including any disruption in financial and credit markets, 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, suppliers and creditors. 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 have a material adverse effect on our financial condition and results of operations.
Risks Related to our Ordinary Shares
We are affected by volatility in the securities markets.
The securities markets in general have experienced volatility which has particularly affected the securities of many high-technology companies and particularly those in the fields of communications, software and internet, including companies that have a significant presence in Israel. This volatility has often been unrelated to the operating performance of these companies and may cause difficulties in raising additional financing required to effectively operate and develop their businesses. Such difficulties and the volatility of the securities markets in general may affect our financial condition and results.
We may experience a decline in our share price and there is no guarantee that our share price will rise at all.
Our share price fell during recent periods of uncertainty in global economic conditions and we expect it to continue to be affected by such uncertainty to the extent that it continues. We cannot assure you that our share price will stabilize, or not decline, in the coming fiscal year.
We may not be able to fulfill our dividend policy in the future.
We have announced a dividend policy for distributing up to 50% of our annual distributable profits as a dividend. Our Board of Directors declared a dividend for 2012 which was distributed in April 2013, for 2013 which was distributed in April 2014, for 2014 which was distributed in April 2015 and for 2015 which was distributed in April 2016. Our ability to distribute dividends in the future may be adversely affected by the risk factors described in this report. As part of the stated dividend policy the Company's 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. 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 Israeli 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 continue paying dividends or increase our payment of dividends in the future, nor is there any assurance that our Board of Directors will not change our dividend policy in the future. If we are unable to fulfill our stated dividend policy, or 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 “8A – Dividend Policy” for additional information regarding the payment of dividends.
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 $1.00 per share of our ordinary shares. If the closing bid price of our common stock were to fall below $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 we were to receive such a notification, we would be afforded a grace period of 180 calendar days to regain compliance with the minimum bid price requirement. In order to regain compliance, our ordinary shares would need to maintain a minimum closing bid price of at least $1.00 per share for a minimum of 10 consecutive trading days. 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 more than they paid for them.
Israeli courts might not enforce judgments rendered outside of Israel.
We are incorporated in Israel. All of our executive officers and all of our 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.
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, 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.
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 to be a PFIC if at least 50% of the value of our assets in a taxable year, quarterly averaged over the year and ordinarily determined either based on fair market value or adjusted bases 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, is attributable to assets that produce or 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"qualified electing fund,”fund", or QEF, or a “mark-to-market”"mark-to-market" election, “excess distributions”"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, gains recognized by the U.S. Holder on the sale of our shares would be allocated pro-rata over the U.S. Holder’s holding period for the shares. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or the highest rate in effect for corporations, as appropriate for that taxable year, and certain "interest" charges may apply. In addition, our dividends, to the extent that they constituted excess distributions,constitute "excess distributions", would be taxed atin the regular rates applicable to ordinary income,same manner as gain on the sale or other disposition of our shares, rather than the 15%20% maximum rate applicable to certain dividends received by an individual from a qualified"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.corporation". 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.
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.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 ElectionElecting Fund election. Accordingly, our shareholders are urged to consult their tax advisors regarding the application of PFIC rules.
General Risk Factors
We may be affected by global economic trends such as recession, rising inflation, rising interest rates, economic slowdown, etc.
Recent inflation, geopolitical issues, including hostilities which could break out between China and Taiwan in the future, the war in Gaza and threats from Hezbollah in Lebanon and the Houthis in Yemen, increases in energy costs, high 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.
Despite the recent steady decrease, inflation rates remain high relative to previous years in the markets in which we operate which 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, high interest rates, and any additional increases in interest rates, may lead our customers, to experience higher financing costs, which may, in turn, negatively impact on investment decisions relating to networking infrastructures, thereby adversely affecting 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.
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 continuing effects of the loosening of the supply chain (which has followed a long period of global component shortages, which resulted in customers building up significant inventories). The reversal of supply chain tightness, has resulted on occasion and may continue to result in customers drawing on their existing inventory stock and cancelling or postponing open purchase orders, which could negatively affect our revenues. In addition, the negative effects of such trends could be exacerbated, for example, if we are unable to sell parts of our inventory, 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.
26Customers 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.
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 and 5G , may 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, 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.
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 larger 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 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.
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 global pandemics, as detailed above, due to some of our employees being infected or quarantined along with any periodically imposed lockdowns and travel limitations or by a call-up of some of our employees to reservist military duty. 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 placed from time-to-time pursuant to Design Wins which create long-term pressures on us to prepare sufficient inventory to meet purchase orders for which our customers typically require a short lead time. The unpredictability of whether customers will place the expected volume of purchase orders, or whether they will defer previously made purchase orders, creates uncertainty. The tension between the long lead time required for us to prepare our inventory and production facilities and the short lead time typically required in 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 other events over which we have no control, such as any hostilities which could break out between China and Taiwan in the future, or the war in Gaza.
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.
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 2023 where we discontinued two non-core programs as part of our new 5-year strategic plan), 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 3 ultimate customers in 2023 accounted for approximately 38% of our revenues in 2023 (out of which our top ultimate customer accounted for approximately 22% of our revenues in 2023). 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 server 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 or shift their focus towards other product lines altogether. 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 draw down heavily on such built-up inventories, rather than continuing to purchase from us at previous rates, resulting in a substantial decrease in the number of products ordered in subsequent quarters or potentially the discontinuance of product orders altogether. 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.
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 four 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 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.
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.
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.
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 aton December 31, 20152023, as "held-to-maturity"."held-to-maturity." As of December 31, 2015,2023, we hold approximately US$ 32.924.6 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, if the event constitutes an impairment which is consideredevent. For that matter we are required to be other-than-temporary.use of forward-looking information to calculate credit loss estimates.
As of December 31, 2015,2023, we were not required to adjust the carrying value of our investment securities since there were no other-than-temporary impairments.
Thissecurities. If we do experience such a loss, wouldit 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.
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 long-term consequences of the war between Israel and Hamas are currently unknown but may also impact our supply chain and expenses due to, for example, the possibility of certain countries severing diplomatic relations or imposing trade boycotts on Israel. We may incur additional expenses, adverse effects on sales, or experience delays in our supply chain and operations, as a result.
The impact of the current war in Ukraine and sanctions on Russia and Belarus is that we have ceased to do business with such sanctioned countries.
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."
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 circumstances 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 any downturn to the global economy resulting from the current geopolitical volatility.
General economic conditions may adversely affect the Company's results.
Uncertainty in global economic conditions, including any disruption in financial and credit markets, 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.
Item 4.
INFORMATION ON THE 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”."SILC." Prior thereto our shares were listed on the NASDAQ Global Market (previously known as the NASDAQ National Market) under the ticker symbol “SILC”"SILC" (and previously “SILCF”"SILCF") from February 11, 2008. Prior thereto, our shares were listed on the NASDAQ Capital Mark.etMarket (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’sCompany'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"Item 9 – The Offer and Listing -– Markets and Share Price History”.History."
In March 2014, we filed a "shelf" registration statement with the Securities and Exchange Commission, or SEC. We may sell up to $80,000,000 of our ordinary shares in one or more offerings pursuant to this registration statement.
\In December 2014, we entered into apurchased all of the share purchase agreement withcapital of Fiberblaze A/S (now Silicom Denmark (Fiberblaze A/S)), a provider of high performancehigh-performance application acceleration solutions for the mobile, telecommunication, network monitoring, cyber security, financial and related industries Nikolaj Herman, Fiberblaze Holding APS, a Danish company, Hilmer APS, a Danish company, and Jakob Hilmer, for the purchase of the entire share capital of Fiberblaze and Fiberblaze US (the "Fiberblaze SPA"("Fiberblaze") in consideration for an amount of approximately $10 million, plus such additional amounts in the event Fiberblaze meets pre-determined criteria. For additional information regarding the Fiberblaze SPA, see "Item 10 – Additional Information – Material Contracts" and Note 3B to our financial statements included elsewhere in this annual report..
In September 2015, we, together with our wholly owned subsidiary, Silicom Connectivity Solutions, Inc., entered into an asset purchase agreement withpurchased the assets of ADI Engineering, Inc. ("ADI"ADI"), a US company which provides Intel-basedIntel®-based products targeted at SDN, NFV, IoT ("Internet('Internet of Things"Things'), Cloud computing and Virtualization, Steve YatesVirtualization.
On July 1st, 2022, Mr. Shaike Orbach, the Company's President and Patricia Yates (the "ADI APA")Chief Executive Officer for the purchasepast 21 years, became Executive Vice Chairman of ADI's assets in consideration for an amount equal to $10 million in cash at closing,the Board of Directors, and an additional consideration subject toLiron Eizenman, who served as the attainment of certain future performance milestones. For additional information regardingCompany's Chief Operating Officer, took over as the ADI APA, see "Item 10 – Additional Information – Material Contracts" And Note 3A to our financial statements included elsewhere in this annual report.
Company's new President and Chief Executive Officer.
Principal capital expenditures and divestitures
From January 1, 20152023, to December 31, 2015,2023, our capital expenditures totaled to approximately $20,771US$ 1,276 thousand (compared to $16,682US$ 2,120 thousand during 20142022 and $929US$ 2,475 thousand during 2013)2021), of which approximately $1,608US$ 1,162 thousand (compared to $1,179US$ 1,993 thousand during 20142022 and $788US$ 1,811 thousand during 2013)2021) can be attributed to machinery and equipment, and approximately $1,374US$ 114 thousand (compared to $659US$ 127 thousand during 20142022 and $141US$ 664 thousand during 2013)2021) can be attributed to office furniture and equipment and leasehold improvements, and approximately $17,802 thousand can be attributed to the ADI APA.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 2016.2024.
B. Business Overview
We are currently engaged in the design, manufacture, marketing and supportan industry-leading provider of high performancehigh-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 innovative solutions for high-density networking, high-speed fabric switching, offloading and acceleration, which utilize a broad range of servers, server based systemscutting-edge silicon technologies as well as FPGA-based solutions, are ideal for scaling-up and communications devices. scaling-out cloud infrastructures.
Our products are sold to OEM customers who offer networking appliances, serversused by major Cloud players, service providers, telcos and storage devices. AsOEMs as components of their infrastructure offerings including both add-on adapters in the market moves to utilize applications within virtualization based Cloud Data Centers, our products are now offered in this market as well.Center and stand-alone virtualized/universal CPE devices at the edge.
Products
Our products are comprised of:
| (i) | Server network interface cards with(Server Adapters) - These adapters are used mostly in networking appliances which are used both in the Cloud (including public cloud and without bypass (Server Adapters);On Premise cloud) and in the Edge. |
| (ii) | Smart Cards - Intelligent andand/or programmable cards, with features such as encryption, acceleration, data compression, redirection and switching, packet processing, time stamping, networkpacket capture solutions, FPGA based ultra-low latency solutions, and other offload features and/offloading features. These products are used mostly inside servers which are a part of Cloud, Telco and Enterprise Data centers or compute blades (Smart Cards);at the Edge. |
(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. |
| (iii) | Stand-alone Products (including Bypass Switches, Intelligent Bypass Switches, the patented SETAC (Server To Appliance Converter) product family and the CPE/Edge/Low End Appliance Units. |
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 speedhigh-speed potential of 1/10/25/40/100100/200/400 Gigabit Ethernet. The products have either one, two, four, six, or eight ports, which plug into the servers which need to have such capabilities.
Following demands from customers and potential customers, we also designed some Some of these sameproducts include bypass functionality which allows continuation of traffic even when the server adapter products with a bypass feature. Intended for mission-critical environments, Silicom’s Gigabit Ethernet Bypass Networking Cards feature innovative bypass circuitry to maintain continuity of network connectivity incarrying the event of an appliance failure. Upon the occurrence of an appliance failure, the card’s bypass mechanism automatically reroutes traffic to bypass faulty components, enabling customers to have reliable and always available network accessibility. As with all of Silicom’s Multiport Gigabit Ethernet Networking Cards, the Bypass Cards also improve server throughput and performance during normal operations by introducing more ports and better throughput while reducing network congestion, simplifying network management, and minimizing CPU utilization.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) time stampingFEC (Forward Error Correction) acceleration and fulloffloading cards, and (d) FPGA based network capture and mobile OSS distribution solutions, (d) Network processor acceleration cards, (e) VHIO – a product off-loading virtualization switching from the CPU, (f) FPGA based ultra-low latency solutions, and (g) compute blades which offer general compute capability in networking intensive environment.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, and (b)(c) load-balancing between external servers and/or CPUs and/or CPU cores increasing the efficiency of the server.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 internet security appliancesservers with respect to which the traffic into and other networking appliances.from them requires encryption or decryption. The products improve the performance of networking appliancessuch servers by independently executing encryption tasks, thereby accelerating the encryption process and freeing the CPUs of such appliancesservers for other activities. In 2013 we announced the launch of a new high-performance PCI Express Server encryption and compression card family based on the Intel® Communications Chipset 89xx series. During 2014 we achieved our first design win of our Coleto Creek encryption and compression card, from one of our existing customers, a market-leading provider of smart network solutions, who will use the Coleto Creek and Quad-Port 10G Networking cards in one of its next-generation network appliances, and during 2015 we achieved additional design wins for this solution. 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 appliances;applications; however, such compression off-load is now becoming more and moreincreasingly 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 1G/10G/40G/100G Nano-Second Time-Stamping/Full Capturing adapters,FEC cards offload the Forward Error Correction tasks that are based either on a combined Intel networking siliconsupposed 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 our proprietary time-stamping FPGA (field programmable gate array), or on a pure FPGA based solution, workingadditional calculations and processing that need to occur at wire speedthe edge, while at the same time more Radio Units are required to time-imprint packets at high resolutions and accuracy, process packet, load balance between packets and provide full capturing solutions in a variety of scenarios. Our PCI-E Network processor based Smart Cards are targeted for server acceleration by providing a packet processing platform which can be usedattached to off-load packet processing applicationseach DU. Therefore, it is essential to offload the FEC task from the main CPU onto a processor card, and consequently freeing CPU cycles for the main application and improving server performance.
In 2014 we launched a new Cloud Virtualization Off-Loading solution with open stack support – the SmartSilc VHIO 1.0, which is our first product utilizing a Virtualization Off-Load Engine. As a network processor blade incorporated within cloud compute nodes and network nodes, SmartSilc VHIO 1.0 offloads all network and storage I/O tasks from the Hypervisor, significantly reducing CPU utilization and consequently improving the performance of any compute node in which it is installed. In addition, its implementation of NAT, firewall and other tasks previously carried out in the network node frees the network node to become an additional compute node.
Our FPGA based ultra-low latency solutions are used for the programming process needed to achieve line-speed data processing with ultra-low latency. These features are required in Network Monitoring/Capture/Analysis solutions for telecommunications, Lawful Interception, data centers and the Algorithmic HFT (High Frequency Trading) niche of the financial service market, as well as the emerging mobile OSS/BSS markets.card.
Our compute blades offer general compute capabilityFPGA based cards are divided between two families of cards, based on the world’s largest providers of such FPGA components: AMD and Intel. Our AMD based cards are sold mostly in networking intensive environment. These compute blades could be integratedthe 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 an appliance, micro server, CPE equipment and alike. In addition, we use our low end compute blades for IoT. The growing IoT market requires compute nodes for an unlimited number of applications. Such compute nodes are requiredorder to be low-cost, and we are addressing such need by basing our compute blades mostly on using Intel’s low-end compute silicon and optimizing it for high performance atadd their own code to the low-cost.
Stand-alone Products
Our Stand-alone Products include (i) Bypass Switches and Intelligent Bypass Switches which allow the usecards. For some of our solutions even whereAMD based cards, we provide a framework which we call Packet Mover. Such framework allows the networking componentcustomer to add to the FPGA its own application, while the various interfaces are already a part of the solution is already present, (ii) the patented SETAC product family,framework, providing optimized solutions for low latency, throughput and speed. Our Intel based FPGA cards are a unique solution that enables standard servers to be configured as network appliances with high-density front networking ports and easy port modularity, including Switched SETAC which adds the functionalityresult of a switch toclose 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 solution, (iii) CPE/Edge/Low End Appliance Units, which integrate our compute blades and enable us to offer a stand-alone solution with general compute capability in networking intensive environment tovariety of Intel based FPGA Smart Cards addressing mostly the customer.
We developed stand-alone bypass solutions which allow the use of our solutions even where the networking component of the solution is already present. We market stand-alone bypass units for: (a) entry level bypass switch 1/10Gbps, directed at power failure bypass; and (b) high end 1G/10G/40G/100Gbps Intelligent Bypass Solution which includes switch with self-generating heartbeat and versatile monitoring and control options.
Our SETAC products convert standard servers to network appliances. The SETAC product line includes SETAC converters (comprised of PCI-Express G2 and G3 adapters, cables and Silicom’s backplane), which interface with Silicom’s front loading I/O Express Modules adapters. SETAC products are installed by a simple process of placing Silicom’s I/O Express Modules adapters into a server’s hard drive slots. This combination enables standard servers to be configured as network appliances with server-grade reliability, front-end access, field replaceable architecture and a stable technology environment, thus creating a complete network appliance platform solution that provides us with a competitive edge. To the best of our knowledge we are currently the only company offering such a unique solution in the hardware networking appliance industry.
In December 2014, we announced the achievement of our first design win of our Switched SETAC solution, a new cloud platform designated to save space, energy and costs in cloud and data center services by integrating x86 standard motherboards, switching capability utilizing commercial off-the-shelf switching silicon, our Redirector features and potential support for SDN/NFV protocols from a provider of cloud based cyber security and application delivery solutions. Pursuant to this announcement, we announced in December 2014 the achievement of another design win of our Switched SETAC (the accelerated version), from a European provider of PDI solutions. This unique product adds Network Processor acceleration to the many additional features and benefitsinfrastructure market. Such cards include Standard NIC on top of the Switched SETAC,FPGA making them especially suitable for these markets.
Smart Platforms
Our Smart Platform products are used at the Edge as CPEs (including also uCPEs and vCPEs) which are used by allowing applicationsTelcos, Cloud Players, service providers and Application vendors (OEMs) to be offloaded from the main CPUprovide a variety of services to the Network Processor modules, thus resulting in high performance while maintaining all Switched SETAC capabilities. During 2015 we announced an additional design win achievement of our Switched SETAC solution.
In addition, wetheir customers. These are now offering to the market full computing platforms in a networking intensive environment. Suchenvironment and many of the technologies incorporated into these platforms are based on compute blades, integrating such bladessimilar to those incorporated into a fullour 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/Appliance Units. Such units offer a stand-alone solution with general compute capability in networking intensive environment. These unitsEdge devices are used is SD-WAN, for which most of our systems have been deployed. The devices are also offeredfrequently 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 CPE or edge equipmentwell as customized designs, to help the customer achieve its required as a partchallenging 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 Cloud solution and alsocombination of all product families in a single product. An example of such integration is our IBS (Intelligent Bypass Switches), which combine functionalities as low-end branch office appliances carrying mostly networking applications.
We cannot assure that anywell as design elements from each of our Server Adapters, our Smart Cards and our Smart Platforms.
On February 1, 2024, we issued a press release on form 6-K announcing our 2023 results and that the Board had approved a strategic 5-year plan.
On August 16, 2023, we issued a press release on form 6-K announcing that we launched a new line of advanced high-end Edge platforms together with a major design win and initial US$ 3.5 million order.
On July 6, 2023, we issued a press release on form 6-K announcing that we launched a new product line of Edge AI products in partnership with Hailo, a leading artificial intelligence chipmaker.
On May 15, 2023, we issued a press release on form 6-K announcing that we were selected to develop an innovative Edge Networking product by a leading US-based provider of enterprise telecommunications services and that the customer has already placed initial orders totaling approximately US$ 5 million.
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 commercially successful, that our development effortsramping up during the second half of 2023, and mass deployment will resultbegin in commercially successful products, that such products will be released in a timely manner or that we will be able to respond effectively to technological changes or new product announcements by our competitors.2024.
We cannot assure you that revenue generated from our current suite of products and solutions will reach or exceed historical levels in any future period. A decrease in the price of, or demand for, any of these products or solutions, or a significant increase in our costs of manufacturing could have a material adverse effect on our business, results of operations and financial condition.
Principal Markets
The principal markets in which we compete are set forth more particularly in, and are incorporated by reference to Note 12A13A to the consolidated financial statements set forth in Item 18 of this annual report. In 2013, 20142021, 2022 and 20152023 approximately, 76%70%, 71%72% and 66%85% of our sales, respectively, were in North America, 13%23%, 15%23% and 20% respectively,13% of our sales, respectively, were in Europe, and 11%7%, 14%5% and 14%2% 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, and (iii) turnkey manufacturers.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.
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-28001:2022", "ISO 9001:2008"2015", "ISO 27001:2013", and "ISO 14001:2004"2015", which are the quality control standardstandards 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. Components currently available from one source include proprietary Gigabit Ethernet chipsetssources, on which we are dependent. For example, some key components in many of our products are manufactured by Intel® and other components, including other semiconductor devices and transformers, as well as plastic and metal product housings.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 includedincludes disclosure requirements regarding the use of "conflict" minerals mined from the Democratic Republic of Congo and adjoining countries (“DRC”)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”"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), wolframite, coltan, gold and 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.
In June 2014 and May 2015, we issued our Specialized Disclosure Report for the years ended December 31, 2013 and December 31, 2014, respectively, in compliance with Rule 13p-1 under the Exchange Act, according to which, some conflict minerals (gold, tantalum, tin, and tungsten) are necessary to the functionality or production of certain of our products. Conflict minerals are obtained, via our direct suppliers, from sources worldwide, and our desire is not to eliminate those originating in the DRC and adjourning countries but rather to obtain conflict minerals from sources that do not directly or indirectly finance or benefit armed groups in the DRC and adjourning countries.
We have also adopted a policy with respect to the sourcing of conflict minerals, according to which as part of our commitment to corporate responsibility and respecting human rights in our own operations and in our global supply chain, it is our goal to seek to use tantalum, tin, tungsten and gold in our products that are "DRC conflict free", while continuing to support responsible in-region mineral sourcing from the DRC and adjoining countries.
Furthermore, since the origin of conflict minerals cannot be determined with any certainty once the ores are smelted, refined and converted to ingots, bullion or other conflict minerals containing derivatives, we rely on our direct suppliers to assist with our reasonable country of origin inquiry and due diligence efforts, including the identification of smelters and refiners, for the conflict minerals contained in the materials which they supply to us.
Based on our reasonable country of origin inquiry and due diligence process, we concluded that during 2013 and 2014 (i) we manufactured and contracted to manufacture products as to which conflict minerals are necessary to the functionality or production of our products and (ii) as a result of the reasonable country of origin inquiry and due diligence measures, we determined that our products to which conflict minerals are necessary to the functionality or production of our products are “DRC Conflict Undeterminable” (as defined in Rule 13p-1 under the Exchange Act). We made this determination due to insufficient information provided by some of its active suppliers and manufacturers who supplied it with some of the necessary conflict minerals, which originated in the DRC and adjoining countries, but who were unable to indicate whether such necessary conflict minerals were from recycle or scrap sources, were DRC conflict free or were not found to be DRC conflict free.
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.
Marketing Channels
The principal market sectors for our products are:
| (i) | Providers of applications on Network appliances, including WAN Optimization, Internet Security,mostly SD-WAN, Cyber Security and Application Delivery Traffic Management, Network Monitoring and Analytics, High Frequency Trading (HFT) for the financial service market and other mission-critical sectors;applications; |
| (ii) | Servers;Telcos / Carriers / service providers deploying CPEs/Edge for SD-WAN, SASE and NFV; |
| (iii) | Data storage including Big Data;Mobile Operators/Telcos/Carriers deploying Telco routers and 4G/5G infrastructure; |
| (iv) | The “Cloud” (virtualized data centers with and without SDN); and"Cloud". |
| (v) | Network CPE/EDGE/Low End appliances; and |
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 customer shows interest in the products and we believe that achievement of a business relationship with the customer is possible, we ship products for such customer’sIf 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 customer receivesDuring 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 specific 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, the evaluation and qualification process may take 12 months or more. |
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 server based systems, and thenthereafter sell or deploy such systems with our cards embedded in them.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 cardsproducts for as long as it (i) continues to sell or deploy its server based system.system in which our products are incorporated, or (ii) continues to deploy our Smart Platform as part of its network.
Over the last few years,For all of our Server Adapters and for some of our Smart Cards and Smart Platforms, our sales and marketing hashave been mostly carried out through a network of strategic relationships with leading original equipment manufacturers whichOEMs that sell our products, generally as a part of their systems and sometimes under their own private labels. Our current original equipment manufacturerOEM customers are mostly active in the InternetSD-WAN market, Cyber Security market, Data Storage market, Application Delivery market, Traffic managementManagement market, Network Monitoring market, data storage market, general servers market, WAN optimizationOptimization market and other server based applications.server-based applications markets. Our OEM customers sell their products to theTelcos, Governments, EnterpriseEnterprises (headquarter and branch) and to Data Centers (regular and virtualized, including to the Cloud). They are referred to in this report as OEMs, or OEM customers. Our strategy of carrying out strategic relationships with OEM customers continues to be the strategy under which we operate.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 furtherance of this strategy, during the last few years we entered into strategic arrangements with OEMs and continued securing successful Design Wins with OEMs who purchase our products. Revenues from sales of our products to OEM customers in 2015 constituted substantially all of our revenues. We expect the percentage of our revenues that is derived from sales to OEM customers to continue at similar percentage levels, though we believe that within our group of OEM customers we will gradually increase the proportion of our sales to Cloud/Virtualized data Center/SDN customers. This isaddition, due to the fact that: (a)trends that we see in our industry, including primarily the marketshift 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, Cloud players, and service providers. In some cases, such sales involve a relationship with an independent software vendor, which is moving towards running applicationsthe case in most of our SD-WAN Edge Platforms 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 Cloud;sales process, mostly with Smart Cards and (b) Cloud and web 2.0 companies are typically either using standard servers or design their own “white boxes” into both of which we offer our solutions. While there are no assurances that such solutions will be accepted by such Cloud and Web 2.0 players, we believe that this trend represents significant potential for us.Smart Platforms.
The loss of some of our OEM customers, or any single key OEM 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 OEMsany such customer in the future. Normal paymentPayment terms of our OEM customers are, up toon average, approximately 90 days net. Approximately 95% of our international sales are denominated in U.S. dollarsDollars 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 OEM 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.
Our OEM customers, distributors and resellers are not withinunder 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 OEM customers could lead to reduced sales and could materially adversely affect our operating results, as we experienced during the second quarter of 2015, during which we updatedresults. In addition, our revenue projections for such quarter due to a softening of demand from some of our customers, due to longer-than-expected decision making processes together with the slower market deployment of our high-potential design wins and our new solutions for upcoming industry trends. Use of OEMsbusiness model also entails the risk that OEMsour customers will build up inventories, either in anticipation of a growth in sales.deployments or sales, or as a result of a tighter global supply chain incentivizing customers to build up significant inventories. If such growth does not occur as anticipated, or if customers have built up significant inventories, these OEMscustomers may substantially decrease the amountnumber of products ordered from us in subsequent quarters, as they draw down on accrued inventories, discontinue product orders, or even attempt to return unused or unsold products. The loss of a major or key customer or group of customers, a loss or ineffectiveness of severalsome of our OEM relationships at approximately the same time, or a customer’s shift of its business focus away from the loss of any key OEM customer, mightsolutions that we had previously sold towards solutions in areas in which we do not operate, may 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 patent.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 in the United States inwith the United States Patents and Trademarks Office, or the USPTO, for the "Server-Based‘Server-Based Network Appliance", to protect our proprietary intellectual property with respect to SETAC products.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, with respectwhich relates to our SETAC product. The patent will expire in October, 2030. The patent covers 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. Communication adapter cards are mounted in the case so that the ports of these cards are accessible at the front panel. Bus extension circuitry inside the case connects the bus slots on the motherboard with the communication adapter cards, as though the cards were plugged into the motherboard. This configuration, which is used in the our SETAC product, gives the convenience of connecting and replacing modules via the front panel while using standard motherboards, which are not normally designed for front-panel access.
During 2012-2013, we developed a Nano-Second Time-Stamping NIC. The NIC combines Intel’s networking silicon and the Company’s time-stamping FPGA (field programmable gate array), working at wire speed to time-imprint packets.
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. The Virtualization Off-Load Engine is able to off-load CPU tasks onto a separate intelligent add-on card, thereby freeing up server cycles and improving the server’s Networking and Storage I/O. Through the acquisition, we secured exclusive access to this important technology, which we anticipate will provide us with a significant competitive advantage. We intend to continue developing, improving and utilizing this technology, as we did through the SmartSilc VHIO 1.0. Despite perceived exclusive access to this product, and our best efforts during the acquisition process to secure the same, internal or external parties may attempt to copy, disclose, obtain or use our products, services or technology without our authorization, or may assert a claim of infringement regarding the product.such intellectual property. We do not consider this intellectual property to be material for our operations.
On February 8, 2015, we filed a patent application (14/616,718) 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“We may not be able to protect our intellectual proprietary rights”rights” under Item 3.D - “Risk Factors3.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 givesgive us a competitive edge.
With respect to Server Adapters, our main competitor is Intel. In the Server Adaptercompetitors 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 line, our competition is not as significant. To the best of our knowledge, our only significant competitors in this industry are Interface Masters, Portwell, Caswell, Lanneroffering with various interfaces and Adlink. In addition, there may be other localform factors while providing very fast and efficient path to customized solutions which might also compete with our products.required by customers. Although the situation may change in the future, we believe that our competition in areas which are not being pursued by the bypass card marketlarge companies, is less significant than our competition in the non-bypass card market.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, Cavium, Tilera (now a part of Mellanox),Marvel, Nvidia, Netronome, Napatech, Solarflare Myricom (a subsidiary of CSP),Molex, Lanner and Caswell compete with certain of our Smart Cards. With respect to the encryption productsIn some cases of FPGA based cards, Intel and AMD also compete with our Smart Cards, sector, our main competitor is Cavium. With respect tohowever, as with the compressionServer Adapters space, they target mostly the biggest accounts and only with mainstream products of ourwhile for other accounts they cooperate with us.
In the Smart CardsPlatforms products sector, our main competitors are CaviumCaswell, Lanner, Advantech and Exar. In addition, Lanner, PortwellNexcom. We believe that we provide a fast and Nexcom competeefficient path to customized Smart Platforms frequently required by customers, which coupled with our compute bladeswell established technical and network processor based cards.
Inbusiness relationships with Intel (the major supplier of the Stand-alone Products sector, our competition is fragmented, and differsmain building block of these Smart Platforms’ X86-based CPUs), provides us with respect to the specific solution being offered by us. With respect to the Bypass Switches and Intelligent Bypass Switches solutions (in which solutions are offered in the form of an external box instead of an embedded card), to the best of our knowledgeadvantage over our main competitors are Net Optics (subsidiary of IXIA), Gigamon, and Interface Masters. With respect to our unique SETAC solution, to the best of our knowledge, there is no direct competition to our products. As network appliances may be built based on either standard servers or special hardware appliances, our SETAC products are designed to improve and enhance the competitive positioning of standard servers in the network appliance industry compared to the special hardware appliances alternative. We believe that the products offered by suppliers of special hardware appliances such as Portwell, Caswell, Nexcom, Lanner and Advantech do not provide similar solutions as the SETAC solution and therefore constitute only non-direct competition. With respect to our CPE/Edge/Low End Appliance products, to the best of our knowledge our main competitors are Portwell, Caswell, Lanner and Nexcom.this area.
Governmental Regulation Affecting the Company
We are affected by the terms of research and development grants we have received from the OCS. IIA.
Under the termsR&D Law, research and development programs approved by the Research Committee of Israeli Government participation,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 or provision of related services, in accordance with the published Track guidelines and subject to other restrictions. Once a royaltyproject is approved, the IIA awards grants generally of 3% or up to 5%50% of the net salesproject’s expenditures in return for royalties, usually at the rate of products developed from a project funded by the OCS must be paid under the terms of the pre-R&D Amendment regime, beginning with the commencement3% of sales of products developed with grant funds and ending whensuch 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 is repaid. or other applicable interest rate, such as the 12 month Secured Overnight Financing Rate (SOFR) rates, as published on the first trading day of the year by the CME Group (or any other institution authorized by the Federal Reserve).
The terms of Israeli Government participation also impose significant restrictions on manufacturingthese grants prohibit the manufacture outside of Israel of productsthe product developed with government grants, in accordance with the terms and conditionsprogram without the prior consent of the pre-R&D Amendment regime. In addition, accordingResearch Committee. Such approval is generally subject to an increase in royalty rates, as well as in the total amount to be repaid to the pre-RIIA to between 120% and 150% of the amount granted, depending on the extent of the manufacturing that is conducted outside of Israel.
The R&D Amendment regimeLaw, 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 R&D 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 R&D 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 of technologies developed through such projects is subject towithout the approval of the OCS. FollowingResearch Committee, whose approval is generally contingent on payment of a significant penalty of up to six times the R&D Amendment there is currently much ambiguity regarding its implementationdollar-linked grant amount plus LIBOR or other applicable interest rate (such as the SOFR) and its effect onminus any royalties paid, subject to depreciation in accordance with the published rules. 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 grants received prior thereto. For additional information see “Item 10. Additional Information – Taxation”.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 (such as the SOFR) and minus any royalties paid, subject to depreciation.
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 10.10.E. – Additional Information – Taxation”.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, 2023, 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 R&D 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. |
Fiberblaze A/S – a private company incorporated in Denmark. On December 10, 2014, we entered into the Fiberblaze SPA for the purchase of the entire holdings in Fiberblaze, pursuant to which we became its sole shareholder. As part of the Fiberblaze SPA, we have also purchased Fiberblaze US LLC, a private company incorporated in the United States, beingStates; and
Silicom Denmark (Fiberblaze A/S) – a 100% owned subsidiary of Fiberblaze. See "Item 10. Additional Information – C. Material Contracts" for additional information on the Fiberblaze SPA.private company incorporated in Denmark.
In addition, two of our founders, Messrs. Yehuda and Zohar Zisapel, are also founders of, and in certain instances still directors and/or material shareholders of some of the corporations within the “Rad Group”. See Item 7. “Major Shareholders and Related Party Transactions" for additional information on our relationships with members of this group of companies.
D. Property, Plant and Equipment
We do not own any real property, but we lease property at fivesix locations. Our manufacturing plant and additional storage space are located in two locations in Yokne’am, Israel, , our executive offices are located in Kfar Sava, Israel, our marketing and sales offices are located in our Kfar Sava, Israel, 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.
In November 2007, we renewed the term of the lease for our Kfar Sava offices until December 31, 2008, and have been extending such lease each year. During 2013 we extended the lease further until April, 2015, when the lease terminated in accordance with its terms. This facility was approximately 1,050 square meters in size, and we paid a monthly rent of approximately $16,000. In April 2015, following the termination of our lease due to our election not to renew it, we moved to our newOur executive offices in Kfar Sava which we lease for a period of five years, ending in February 28, 2020, with an option to renew the term for an additional five years period. This facility isare approximately 1,5002,000 square meters in size and thesize. The remaining lease period is approximately one year, ending February 28, 2025. Our monthly rental payments for this office space (which include various managementmaintenance services) are equal to approximately $32,000.US$ 51,100.
We have conducted our manufacturing in Yokneam,Yokne’am, Israel since 2000.
In January 2014, followingMarch 2020, we entered into a lease agreement for the termination our lease (which wasof an approximately 4,000 square meter manufacturing facility, as well as an approximately 360 square meters of storage space, in effect since January 2009) due to our election not to exercise our option to renew it, we moved to a new facility in Yokneam, which we lease pursuant to a sub-leaseYokne’am, Israel, for a period of three years, ending in December 31, 2016, with an optionup to renew the term for an additional period of three years. This facility is approximately 2,400 square meters in size plus additional warehouse areas of approximately 250 meters in size and the120 months. The monthly rental payments (which include rentalvarious payments including maintenance services) will vary during the remaining lease period from between approximately US$ 71,300 to approximately US$ 79,400
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. This agreement was terminated effective as well as fees for various management and upkeep services) are approximately $45,000.of February 29, 2024.
WeIn October 2019, we entered into a commercial lease agreement to lease office space in Charlottesville, Virginia, in the United States.States for a 37-month period commencing on December 1, 2019. The lease isagreement 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 2624 months, ending in December 31, 2017. Thiscommencing on January 1, 2023. The facility is approximately 929606 square meters in size and the monthly payments are approximately $11,000.US$ 8,900 per month in the first 12 months and approximately US$ 9,100 per month in the following 12 months.
As of February 2004,Since April 2017, we sub-leasehave leased office space of approximately 2,500 square feet in Paramus, New Jersey, from our affiliate, Radcom Equipment, Inc.Jersey. Our current sub-lease extendslease is until December 31, 2016.June 2027. Currently, the monthly rentrental payments (including utilities) for this space are approximately $2,000. See “Item 7 – Major Shareholders and Related Party Transactions.”US$ 4,820.
WeIn addition, we lease office space of approximately 1,800 square meters in Søborg, DenmarkDenmark. The term of approximately 472 square meters, until September 2016. If we will choose notthe lease agreement expires on November 1, 2025. The lease can be terminated by a six-month advanced notice to extend our current lease pass such date, we will seek to lease a new facility for its office space.the landlord. The monthly rent paymentsrental payment (including maintenance services) for this space areis approximately $8,000.US$ 20,000.
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. UNRESOLVEDUNRESOLVED STAFF COMMENTS
There are no unresolved staff comments.
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
Silicom was incorporated in Israel and commenced operations in 1987. We have traditionally been engaged in the design, manufacture, marketing and support of connectivity solutions for computers. We are currently engaged in the design, manufacture, marketing and support of high performancehigh-performance networking and data infrastructure solutions. Designed primarily to improve performance and efficiency in Cloud and Data Center environments, our solutions for a broad rangeincrease throughput, decrease latency and boost the performance of servers server based systems and communications devices.networking appliances, the infrastructure backbone that enables advanced Cloud architectures and leading technologies like NFV, SD-WAN and Cyber Security. Our products are sold to OEM customers who offer networking appliances, serversused by major Cloud players, service providers, telcos and storage devices. AsOEMs as components of their infrastructure offerings, including both add-on adapters in the market moves to utilize applications within virtualization based Cloud Data Centers, our products are now offered in this market sector as well.Center and stand-alone virtualized/universal CPE devices at the edge. In 2013, 20142021,2022 and 20152023 we recorded sales from all of our networking and data infrastructure solutions of approximately, $73.3US$ 128.5 million, $75.6US$ 150.6 million and $82.7US$ 124.1 million respectively. We primarily sell our products through original equipment manufacturersto major Cloud players, service providers, telcos and OEMs and, to a lesser extent, through independent distributors (on a non-exclusive basis).
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
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.
| · | 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.
Goodwill is reviewed for impairment at least annually in accordance with ASU 2011-08, Testing Goodwill for Impairment. ASU 2011-08 provides an entity the option to perform a qualitative assessment to determine whether it is more likely than-not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step goodwill impairment test. If this is the case, the two-step goodwill impairment test is required. If it is more likely than-not that the fair value of a reporting is greater than its carrying amount, the two-step goodwill impairment test is not required.
If the two-step goodwill impairment test is required, first, the fair value of the reporting unit is compared with its carrying amount (including goodwill). If the fair value of the reporting unit is less than its carrying amount, an indication of goodwill impairment exists for the reporting unit and the entity must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. If the fair value of the reporting unit exceeds its carrying amount, step two does not need to be performed. During the year ended December 31, 2015, no impairments were found and therefore no impairment losses were recorded.
Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives of up to 3 years. The acquired customer relationships, current technology, intellectual property and backlog 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.
Recent Accounting Pronouncements
| · | Inventories – Inventories are stated at the lower of cost or market. Cost is determined using the "weighted average-cost" method. We write down obsolete or slow moving inventory to its market value. |
Not applicable.
A. | · | Marketable securities – We account for investments which we intend and are able to hold to maturity, that are classified as held-to-maturity investments as defined in ASC 320-10, “Accounting for Certain Investments in Debt and Equity Securities”.Operating Results |
Whenother-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether we intend to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If we intend to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is recognized in earnings equal to the entire difference between the amortized cost basis of the investment and its fair value at the balance sheet date. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings.
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| Income Taxes – We account for income taxes under ASC 740-10, "Accounting for Income taxes". Under ASC 740-10, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are 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 income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred taxes assets to the amount expected to be realized. Valuation allowances in respect of deferred taxes were recorded in respect of the following matter: |
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| Deferred tax assets that, as we believe, are more likely than not to be realized. In assessing the potential of realization of deferred tax assets, we consider projected future taxable income and tax planning strategies. |
Deferred tax assets and liabilities are classified as current or non-current items in accordance with the nature of the assets or liabilities to which they relate. When there are no underlying assets or liabilities the deferred tax assets and liabilities are classified in accordance with the period of expected reversal. Income tax expenses represent the tax payable for the period and the changes during the period in deferred tax assets and liabilities. In 2012, Silicom Connectivity Solutions, Inc. utilized all of its loss carry-forward (in 2011, all of the valuation allowance referred to loss carry-forward related to Silicom Connectivity Solutions, Inc.) and therefore all related deferred tax assets and valuation allowance were derecognized. As of December 31, 2015, the deferred tax assets were $1,545 thousand and the deferred tax liabilities were $268 thousand, whereas in 2014, the deferred tax assets were to $913 thousand and the deferred tax liabilities were $543 thousand.
We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
ASC 740, "Accounting for Uncertainty in Income Taxes" clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This interpretation prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. ASC 740 also provides guidance on de-recognition of tax positions, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. ASC 740 requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position.
As of January 1, 2015 and for the twelve months ended December 31, 2015, we did not have any significant unrecognized tax benefits. In addition, we do not expect that the amount of unrecognized tax benefits will change significantly within the next 12 months.
| · | Accounting for Stock-Based Compensation – The Company recognizes compensation expense in accordance with ASC topic 718, "Compensation – stock compensation" based on estimated grant date fair value using an option-pricing model. Some of our share-based awards granted after January 1, 2008 include features that are not supported by the Black and Scholes valuation model, such as an expiration date to occur if the closing price of the Shares falls below 50% of the grant date share price. Therefore for such share-based awards granted after January 1, 2008, the Company recognizes compensation expense based on estimated grant date fair value using the Monte Carlo option-pricing model or the Binomial option-pricing model, while for the remaining share-based awards granted after January 1, 2008 the Company recognizes compensation expense based on estimated grant date fair value using the Black and Scholes model. |
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, | 2021 | 2022 | 2023 |
Sales | 100% | 100% | 100% |
Cost of sales | 65.4 | 65.5 | 76.9 |
Gross profit | 34.6 | 34.5 | 23.1 |
Research and development expenses | 15.6 | 13.7 | 16.6 |
Sales and marketing expenses | 5.1 | 4.6 | 5.6 |
General and administrative expenses | 3.6 | 3.0 | 3.4 |
Impairment of goodwill | - | - | 20.6 |
Operating Income | 10.2 | 13.2 | (23.1) |
Financial income, net | (0.1) | 1.6 | 1.1 |
Income (loss) before income taxes | 10.0 | 14.9 | (22.0) |
Income tax expenses (benefit) | 1.8 | 2.8 | (0.7) |
Net Income (loss) | 8.2 | 12.2 | (21.3) |
Year Ended December 31,
| | 2013 | | | 2014 | | | 2015 | |
Sales | | | 100 | % | | | 100 | % | | | 100 | % |
Cost of sales | | | 59.8 | | | | 59.3 | | | | 58.8 | |
Gross profit | | | 40.2 | | | | 40.7 | | | | 41.2 | |
Research and development costs | | | 7.5 | | | | 8.6 | | | | 11.7 | |
Sales and marketing expenses | | | 5.2 | | | | 5.8 | | | | 6.8 | |
General and administrative expenses | | | 3.5 | | | | 3.7 | | | | 4.4 | |
Contingent consideration expense (benefit) | | | 0.0 | | | | 0.1 | | | | (3.7 | ) |
Operating Income | | | 24.0 | | | | 22.5 | | | | 22.0 | |
Financial income, net | | | 0.5 | | | | 0.4 | | | | 0.3 | |
Income before income taxes | | | 24.5 | | | | 22.9 | | | | 22.3 | |
Income tax expenses | | | 1.2 | | | | 3.6 | | | | 2.3 | |
Net Income | | | 23.3 | | | | 19.3 | | | | 20.0 | |
Sales in 2015 increased2023 decreased by 9.4%17.6% to 82,738US$ 124,131 thousand compared to $75,622US$ 150,582 thousand in 2014.2022, reflecting mainly two major headwinds that impacted our business during the second half of the year. The first one is a result of customers’ excess inventories built up during a period of supply chain uncertainty that started with Covid and continued with a long period of electronic component shortages. The second one is the global economic slowdown and high interest rates leading to longer decision-making processes on new projects and slower investment and implementation of existing infrastructure projects.
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 continued success in our target markets including those driven by trends like Cyber security, Cloud Computing, SDN, NFV, Virtualization and other trends, and to our continued success inSmart Edge products, expanding our product offering and customer base.total addressable market for these products beyond SD-WAN to markets such as SASE, Dedicated Internet, as well as other markets.
Sales in 2014 increased moderately by 3.2% to $75,622 thousand compared to $73,298 thousand in 2013. Our modest growth in 2014 was mainly attributed to the following overlapping factors - continued increase of ongoing orders from existing customers, continued integration of our products into some of our larger customers' product lines and the continued expansion of our customer base, offset by a lower demand for our products from our largest customer (who is not a competitor of the Company) in the total amount of approximately $6.4 million during 2014, representing approximately 8.5% of our sales in 2014. Such lower demand was attributed to the customer's typical refresh and upgrade cycle, which occurs every few years and during which our sales to customers undergoing such cycle may either decline, increase or remain steady. During 2014, the customer replaced one of its appliances which embedded Silicom cards with cards of another company. All of the above, coupled with a sharp growth of 50.4% in 2013 which created high comparable sales number for 2014, lead to our modest growth in 2014.
Gross profit in 20152023 was $34,079US$ 28,689 thousand compared to $30,787US$ 51,956 thousand in 2014.2022. Gross profit as a percentage of sales in 20152023 was 41.2%23.1%, compared to 40.7%34.5% in 2014. Our2022. The lower gross profit percentage in 2023 compared to 2022 was mainly attributed to: (i) a US$ 5.3 million impairment of intangible assets, (ii) changes in the mix of products that we sold in 2023, on which our gross profit is largely dependent on the mix of products we sell during a specific year. The higher gross profit percentage in 2015 compared to 2014 was primarily a result of changes to the mix of products we sold in 2015.dependent. Gross profit iswas also affected by, among other factors, by amortization of acquired intangible assets in the amount of $655 thousand, compared with $40 thousand in 2014 as well as by write-downs of inventory made with respect to any obsolete or slow moving or obsolete inventory that we can no longer use. Theuse; the inventory write-downs as a percentage of sales in 2015 decreased2023 increased to 0.3%5.2% (of which 3.5% (US$ 4.3 million) is attributed to a one-time write-down of inventory related to an impairment of intangible assets), compared to 1.4%2.0% in 2014.2022.
Gross profit in 20142022 was $30,787US$ 51,956 thousand compared to $29,433US$ 44,388 thousand in 2013.2021. Gross profit as a percentage of sales in 20142022 was 40.7%34.5%, compared to 40.2%34.6% in 2013. Our gross profit is largely dependent on2021. The change in the mix of products we sell during a specific year. The higher gross profit percentage in 20142022 compared to 20132021 was primarily a result of changesmainly attributed to the mix of products that we sold in 2014.2022, on which our gross profit is largely dependent. Gross profit iswas also affected by, among other factors, by write-downs of inventory made with respect to any obsoleteslow moving or slow movingobsolete inventory we can no longer use. Theuse; the inventory write-downs as a percentage of sales in 20142022 decreased to 1.4%2.0%, compared to 2.6%4.1% in 2013.
Research and development costsexpenses in 20152023 increased by 49.7%0.4% to $9,702US$ 20,638 thousand compared to $6,480US$ 20,563 thousand in 2014.2022. This increase was mainly attributed to the increasea decrease in the numbercapitalization of our research andinternal software development employees 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 $2,999 thousand to such increase and to an increase in amortization of acquired intangible assetscosts which amounted to approximately $693thousandUS$ 1,092 thousand in 2015,2023, compared to $95US$ 2,547 thousand in 2014,2022, as offset by a relative 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) ofShekels and Danish Krone), which amounted to approximately $470US$ 1,118 thousand.
Research and development costsexpenses in 20142022 increased by 18.6%2.3% to $6,480US$ 20,563 thousand compared to $5,465US$ 20,091 thousand in 2013.2021. This increase was mainly attributed to our continued investmenta decrease in new productcapitalization of internal software development enhancementscosts in the amount of US$ 2,547 thousand in 2022, compared to existing products and the development of new networking and connectivity technologies which contributed approximately $876US$ 3,562 thousand to such increase, toin 2021, as well as an increase in amortization of acquired intangible assetsthe share-based compensation which amounted to approximately $95US$ 1,454 thousand in 2014,2022, compared to $20US$ 1,011 thousand in 2013, and to2021, as offset by a relative weakeningstrengthening 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)Shekels and Danish Krone), which contributedamounted to approximately $44 thousand to such increase.US$ 1,018 thousand.
Sales and marketing expenses in 2015 increased2023 decreased by 27.9%0.8% to $5,651US$ 6,935 thousand compared to $4,418US$ 6,990 thousand in 2014.2022. This increasedecrease was mainly attributed to our continued investment in the promotion of our server networking products to our target markets including those driven by trends like Cyber security, Cloud Computing, SDN, NFV, Virtualization and other trends, by, among others, our continued effort to expand exposure of our product offering and expanding our customer base , which contributed approximately $1,176 thousand to such increase and to an increase in amortization of acquired intangible assets which amounted to approximately $262 thousand in 2015, compared to $10 thousand in 2014, offset by a relative strengthening of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our sales and marketing expenses are incurred in New Israeli Shekels)Shekels and Danish Krone) which amounted to approximately US$ 329 thousand, as offset by our continued investment in the promotion of our networking and data infrastructure solutions, expanding our customer base and product offering, which contributed approximately $205US$ 301 thousand.
Sales and marketing expenses in 20142022 increased by 15.7%5.9% to $4,418US$ 6,990 thousand compared to $3,818US$ 6,599 thousand in 2013.2021. This increase was mainly attributed to our continued investment in the promotion of our server networking products,and data infrastructure solutions, expanding our customer base and product offering, which contributed approximately $581US$ 484 thousand, as well as to suchan increase andin the share-based compensation which amounted to approximately US$ 774 thousand in 2022, compared to US$ 697 thousand in 2021, as offset by a relative weakeningstrengthening of the US Dollar against the New Israeli Shekel (since part of our selling and marketing expenses are incurred in New Israeli Shekels), which contributed approximately $ 19 thousand to such increase.
General and administrative expenses in 2015 increased by 29.1% to $3,611 thousand compared to $2,798 thousand in 2014. This increase was mainly attributed to the growth in our activity, which contributed approximately $685 thousand to such increase, and to acquisition related expenses, which contributed approximately $299 thousand to such increase, offset by a relative strengthening of the US Dollar against the New Israeli ShekelDanish Krone (since a significant portion of our sales and marketing expenses are incurred in New Israeli Shekels) ofShekels and Danish Krone), which amounted to approximately $171US$ 170 thousand.
In 2015 we had a contingent consideration benefit in the amount of $3,090 thousand compared to an expense of $45 thousand in 2014. For additional information see Note 3B to our financial statements included elsewhere in this annual report.
General and administrative expenses in 2014 increased2023 decreased by 10.5%5.5% to $2,843US$ 4,229 thousand (out of which $45 thousand expenses were related to contingent consideration), compared to $2,572US$ 4,477 thousand in 2013.2022. This increasedecrease was mainly attributed to the growth in our activity, which contributed approximately $250 thousand to such increase, and to a relative weakeningstrengthening 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),Shekels and Danish Krone) which contributedamounted to approximately $21US$ 652 thousand, as offset by an increase in payroll related expenses attributed to such increase.general and administrative activity, which amounted to approximately US$ 359 thousand.
Financial income, netGeneral and administrative expenses in 20152022 decreased by 16.3%3.5% to $220US$ 4,477 thousand compared to $263US$ 4,641 thousand in 2014. The2021. This decrease was primarilymainly attributed to increase in expenses attributed to the relativea 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, as 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.
Impairment of goodwill - as of the end of 2023 we deemed our entire goodwill in the amount of US$ 25,561 thousand impaired, and recorded an impairment charge of US$ 25,561 thousand, compared to no impairment of goodwill in 2022.
Financial income, net in 2023 amounted to US$ 1,372 thousand compared to financial income, net of US$ 2,464 thousand in 2022. 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 significant portion of our balance sheet assets and obligations are denominated in New Israeli Shekels), andShekels as well as Danish Krone) of US$ 163 thousand in 2023 compared to financial income of US$ 2,308 thousand in 2022, as offset by an increase in income from investment in marketable securities and bank fees.deposits, which was attributed to an increase in funds available for investment, and which amounted to US$ 1,254 thousand in 2023 compared to US$ 230 thousand in 2022.
Financial income, net in 2014 decreased by 34.9%2022 amounted to $263US$ 2,464 thousand compared to $404financial expenses, net of US$ 152 thousand in 2013.2021. The decrease was primarily caused by the relative weakeningchange is mainly attributed to a strengthening of the US dollarDollar against the New Israeli Shekel and the Danish Krone, which created net financial income in US Dollars from exchange rate differences (a significant portion of our balance sheet assets and obligations are denominated in New Israeli Shekels), which createdShekels as well as Danish Krone) of US$ 2,308 thousand in 2022 compared to financial expenses of US$ 1,031 thousand in 2021, as offset by a net financial expense in US dollars from exchange rate differences, and the decrease in yieldsincome from investmentsinvestment in marketable securities.securities and bank deposits, which was attributed to a decrease in funds available for investment, and which amounted to US$ 230 thousand in 2022 compared to US$ 927 thousand in 2021.
In 20152023 we recorded current income tax expenses of $2,848US$ 1,122 thousand and deferred income tax benefit of $907US$ 1,885 thousand compared to similar current income tax expenses of $2,903US$ 2,963 thousand and deferred income tax benefitexpenses of $219US$ 1,178 thousand in 2014.2022. The increasedecrease in our current income tax expenses was mainly attributed to a decrease in our income and the resulting taxable income. The change in the deferred income taxes was mainly attributed to the following factors: (i) deferred income tax benefit was mainly attributedrelated to acquired goodwill, which amounted to US$ 382 thousand in 2023 compared to deferred income tax expenses in the amount of US$ 1,511 thousand in 2022, (ii) deferred income tax benefit relating to intangible assets, which amounted to US$ 150 thousand in 2023 compared to deferred income tax expenses in the amount of US$ 253 thousand in 2022, (iii) an increase in income tax benefit relating to tax benefitsloss carryforwards, which amounted to US$ 306 thousand in 2023 compared to 0 thousand in 2022, (iv) deferred income tax expenses relating to share basedresearch and development costs, which amounted to US$ 315 thousand in 2023 compared to deferred income tax expenses in the amount of US$ 620 thousand in 2022, offset by (v) deferred income tax expenses relating to share-based compensation provided by us to our employees and directors, which amounted to $242 thousand compared to $0US$ 53 thousand in 2014,2023 compared to an increase in deferred income tax benefitexpenses in relation to amortizationthe amount of acquired intangible assets, which amounted to $280US$ 36 thousand in 2015 compared to $19 thousand in 2014, and to tax loss carryforwards, which amounted to $179 thousand in 2015 compared to $0 thousand in 2014.2022. In addition, in 20152023 we recorded an income tax benefitsbenefit relating to prior years in the amount of $36US$ 126 thousand, and in 2014 we recordedcompared to an income tax expensesbenefit relating to prior years in the amount of $20 thousand.US$ 57 thousand in 2022.
In 20142022 we recorded current income tax expenses of $2,903US$ 2,963 thousand and deferred income tax benefitexpenses of $219US$ 1,178 thousand compared to current income tax expenses of $1,428US$ 2,473 thousand and deferred income tax benefitexpenses of $552US$ 48 thousand in 2013. In addition,2021. The increase in 2014 we recordedour 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 prior yearsresearch and development costs, which amounted to US$ 620 thousand in 2022 compared to deferred income tax benefit in the amount of $20US$ 141 thousand and in 2013 we recorded2021, (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 $29 thousand.US$ 57 thousand, compared to an income tax benefit relating to prior years In the amount of US$ 157 thousand in 2021.
In 20152023 we recorded net incomeloss of $16,520US$ 26,413 thousand compared to net income of $14,605US$ 18,306 thousand in 2014,2022. The loss was mainly attributed to: (i) US$ 25.6 million impairment of goodwill, (ii) US$ 5.3 million impairment of intangible assets, (iii) a 13.1% increase. Thisone-time US$ 4.3 million inventory write-off related to impairment of intangible assets, and (iv) a decrease in our activity and sales.
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 dueattributed to the increase in our activity and sales.
In 2014 we recorded net income of $14,605 thousand compared to net income of $17,077 thousand in 2013, a 14.5% decrease. This decrease was mainly due to higher operating expenses which we incurred during 2014 and to a higher corporate income tax rate effective as of 2014, whereas our sales remained similar to previous years.
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,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,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 Resources50
B. | Liquidity and Capital Resources |
As of December 31, 2015,2023, we had working capital of $59,419US$ 122,251 thousand and our current ratio (current assets to current liabilities) was 4.00.10.49. Cash and cash equivalents as of December 31, 20152023 increased by $288US$ 16,238 thousand to $18,178US$ 46,972 thousand, compared to $17,890US$ 30,734 thousand as of December 31, 2014.
We did not have any short-term bank deposits in 2015, compared to $4,000 thousand short-term bank deposits as of December 31, 2014.
2022. Short-term marketable securities decreasedincreased by $6,531US$ 3,937 thousand to $8,636US$ 7,957 thousand, compared to $15,167US$ 4,020 thousand as of December 31, 2014,2022, and long-term marketable securities increased by $3,888US$ 1,456 thousand to $24,246US$ 16,619 thousand, compared to $20,358US$ 15,163 thousand as of December 31, 2014.2022. The net decreaseincrease of $6,355US$ 21,631 thousand in these fourthree balance sheet items in 20152023 was mainly dueattributed to acquisitions which contributed an expenditure of approximately $10,000 thousand to such changes, to payment of dividend which contributed approximately $7,300 thousand to such changes and to property, plant and equipment expenditures which contributed approximately $3,000 thousand to such changes, offset bythe following: positive net cash provided by operating activities in the amount of $13,000US$ 31,924 thousand, and to consideration received in connection with exerciseas offset by (i) purchase of options to purchase our ordinarytreasury shares in the amount of approximately $943 thousands.
US$ 9,320 thousand, (ii) payments in relation to purchase of property, plant and equipment which amounted to US$ 1,122 thousand, and (iii) investment in intangible assets which amounted to US$ 1,092 thousand.
Trade receivables (including trade receivable from related parties; For additional information regarding trade receivables from related parties see "Item 7B. – Major Shareholders and Related Party Transactions – Related Party Transactions.") increaseddecreased to $23,768US$ 25,004 thousand as of December 31, 2015,2023, compared to $18,831US$ 27,258 thousand as of December 31, 2014. 2022. This increasedecrease was mainly attributed to the increase ofdecrease in our activity.
sales. Other receivables decreasedincreased to $1,380US$ 3,688 thousand as of December 31, 2015,2023, compared to $1,632US$ 3,620 thousand as of December 31, 2014.2022.
Trade payables increaseddecreased to $8,556US$ 4,139 thousand as of December 31, 2015,2023, compared to $8,236US$ 15,922 thousand as of December 31, 2014.2022. This decrease was mainly attributed to the decrease in our purchasing of inventory. Other payables and accrued liabilities increaseddecreased to $11,147US$ 6,668 thousand as of December 31, 2015,2023, compared to $5,783US$ 9,641 thousand as of December 31, 2014.2022. This increasedecrease was mainly attributed to a decrease in our employee-related payable benefits.
Inventories decreased to US$ 51,507 thousand as of December 31, 2023, compared to US$ 87,985 thousand as of December 31, 2022. This decrease was primarily the paymentresult of contingent consideration which the Company is obligateda decrease in our inventory purchasing, and a decrease in our inventory level needed to pay under the Fiberblaze SPA to the Fiberblaze sellers in the amount of $1,498 thousand pursuant to achievement of certain pre-determined milestones and to the payment of the first contingent consideration which the Company is obligated to pay under the ADI APA to the ADI sellers in the amount of $3,000 thousand pursuant to the achievement of certain pre-determined first milestone.support our customers' orders.
Cash provided by operating activities in 20152023 amounted to $13,287US$ 31,924 thousand compared to $20,684cash used in operating activities in the amount of US$ 4,090 thousand in 2014.2022. The cash provided by operating activities in 20152023 was the result ofmainly attributed to a decrease in our positive operating income.inventory.
Inventories increased to $26,321 thousand as of December 31, 2015, compared to $25,449 thousand as of December 31, 2014.
Capital expenditures on property and equipment for the year ended at December 31, 20152023 were $2,969US$ 1,275 thousand, compared to $1,838US$ 2,121 thousand as of December 31, 2014. This increase was mainly attributed to investment in our leased property designated to better accommodate our needs.2022.
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 employee’' severance benefits amounted to approximately US$ 2,672 thousand as of December 31, 2023.
The liability for employee’' 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 employee’' manager’' 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, such liability will be removed, either by termination of employment or retirement.
C. Research and development, patents and licenses, etc.
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'Server-Based Network Appliance’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 respectthe bus slots of the motherboard adjacent to our SETAC product.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 Fiberblaze,Silicom Denmark (Fiberblaze A/S), including Fiberblaze'sSilicom Denmark (Fiberblaze A/S’'s high performance OEM hardware platform for Ethernet and network interface product family, registered names and domain name.
As of SeptemberOctober 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 IntelIntel® 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.
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. The Virtualization Off-Load Engine is able to off-load CPU tasks onto a separate intelligent add-on card, thereby freeing up server cycles and improving the server’s Networking and Storage I/O. Through the acquisition, we secured exclusive access to this important technology, and we intend to continue developing and improving upon this technology. Despite perceived exclusive access to this product, and our best efforts during the acquisition process to secure same, internal or external parties may attempt to copy, disclose, obtain or use our products, services or technology without our authorization, or assert a claim of infringement regarding the product.
On February 8, 2015 we filed a patent application (14/616,718) in the USPTO with respect to 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“We may not be able to protect our intellectual proprietary rights”right” under Item 3.D - “Risk3.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 OCSOffice of the Chief Scientist, replaced by the IIA, for the development of systems and products. We have received from the OCSIIA up to 30% of certain research and development expenditures for particular projects. Under the terms of Israeli Government participation, as in effect prior to the R&D Amendment, a royalty usually at the rate of 2% or up to 5%3% of the net sales of products developed from a project funded by the OCSIIA 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 as in effect prior to the R&D Amendment, 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 R&D Amendment amended the core terms of the Israeli Government participation and placed substantial discretionIIA has previously provided funding in a new authority establishedrelation to replace the OCS and provided only guidelines regarding material terms such as royalty rates and transfer of know-how developed with government grants. See “Item 10. Additional Information - Taxation”. We received approximately 20% of certainour research and development expenditures for a particular projectefforts. As of the date hereof, we have received funding from the IIA in 2003the aggregate amount of approximately US$ 4,388,000 and have paid the IIA an aggregate amount of approximately 30% of such expenditures for a particular projectUS$ 1,428,000 in 2004. We did not have any new grant programs withroyalties in relation thereto. See “Item 4.B. – Information on the OCS from 2005 to 2015. Company – Business Overview – Governmental Regulation Affecting the Company”
In August 2005, we received approval for a $54 thousand dollarUS$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. The annual paymentWe received approximately 20%-30% of certain research and development expenditures for every year following the first sale of the product will not exceed certain percentages of the amounts received from Koril-RDF.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 OCSIIA or Koril-RDF. As of December 31, 2015, weWe have closed all of our OCSIIA funded programs, and do not anticipate having any sales of products funded by OCSIIA grants or be required to pay any royalties to the OCSIIA with respect thereto.
We expect that we will continue to commit resources to research and development in the future. As of March 31, 2016,2024, we had 83120 employees engaged primarily in research and development and design activities of which 4971 employees were based in Israel, 2027 in Denmark and 1422 in the U.S.A.U.S. In 2013, 20142021, 2022 and 2015,2023 our research and development expenses were $5,465, $6,480US$ 20,091 thousand, US$ 20,563 thousand and $9,702US$ 20,638 thousand respectively, constituting approximately 7.5%15.64%, 8.6%13.66% and 11.7%16.63% respectively, of our sales.
The increase in our research and development expenses in 20152023 compared to 20142022 was mainly attributed to a decrease in capitalization of internal software development costs, and amounted to US$ 1,092 thousand in 2023, compared to US$ 2,547 thousand in 2022, offset by a strengthening of the increase inUS Dollar against the numberNew Israeli Shekel and the Danish Krone (since a significant portion of our research and development employees required for our continued investmentexpenses are incurred in new product development, enhancementsNew Israeli Shekels and Danish Krone), which amounted to existing products and the development of new networking and connectivity technologies expanding our product offering to our target markets, as well as to the increase in amortization of acquired intangible assets. For additional information concerning commitments to pay royalties on sales of products developed from projects funded by the OCS, see “Item 10. Additional Information - Taxation.”approximately US$ 1,118 thousand.
D. Trend Information
In today’stoday's network-based environment, the rate at which traffic is generated is continuously growing and as such there is a growingcontinuous demand for server-based systems. We believescalability 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 marketsshift 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 service provider and Telco worlds, where service providers and Telcos have moved towards buying Hardware platforms separately from the Software running on such systemsHardware 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.
These trends are continuously growing. Exploding data and internet traffic increase thehaving 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 appliance vendors which have less need for connectivityour products. Such vendors are now forced to sell to the Cloud players, rather than to their traditional end customers, and bandwidth, which results insuch Cloud players are now buying from them Software only, rather than a full system comprised of Hardware and Software. Even when the increased need of networking throughput, connectivity, compute powerCloud is a private or On Premise, it is based on standard components with decreasing demand for specialized and storage. Such growing demand was the basis for the emerging technologies of virtualization, cloud and SDN, all of which are targeting the implementation of a more effective model for all the above mentioned tasks.customized Server Adapters.
In view ofOn the other hand, having such an anticipated increase in Cloud-based data centers utilizing virtualizationstandardization increases the demand for our Smart Cards as the standard servers, which constitute the Cloud, need acceleration and SDN, the systems are expected to be increasingly based on generic server platforms. These platforms will all need offload capabilitiesoffloading in order to addressincrease their performance.
Furthermore, the performance challenges realizedDisaggregation and Decoupling trends have created significant demand by 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 the huge amount 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 that consequently 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.trend.
We address the above needs with a comprehensive suite of cards that integrate encryption and compression functionality, with the Virtualization Off-Load Engine which is able to off-load these CPU tasks onto a separate intelligent add-on card thereby freeing up server cycles and improving the server’s Networking and Storage I/O, with our generic off-loading platforms based on network processors and with our redirector cards which deal with load balancing between servers/CPUs/CPU cores and perform traffic filtering to increase the efficiency of the server. We believe that our Server network interface cards (with and without bypass), Intelligent and programmable cards, and Stand-alone products will all continue to be key driver of our growth in the coming years. A distinct advantage of these products is that the demand in the server based industry has been continuously growing, especially as our products are suited to the growth in Big Data and the Cloud (including SDN).54
The sales cycles in the markets for our products are long, and continuing to achievelong. 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 dowill continue to achieve, may represent an opportunity for sustained long-term revenues once we establish a relationship with a customer.
AlthoughWhile we expect our business and products to further develop in the coming years in light of these trends, we are also experiencing other trends which are creating significant headwinds for our business: After several years of supply chain tightness, where demand for our products increased as customers built up inventories, the current loosening of the supply chain has resulted in customers drawing down on accumulated inventory thereby decreasing the level of their purchases from previous years. This inventory depletion process by many of our customers started in 2023 and there is no assurance that weas to how long it will continue to generate significantimpact our revenues. Additionally, high global interest rates have disincentivized customers and potential customers from investing in new infrastructure solutions, and as a result, we experience longer than usual sales incycles and slower crystallization of existing Design Wins into hard orders and sales.
As part of our efforts to address these challenges and to take advantage of the areascloud, disaggregation and decoupling trends, we have recently announced a 5-year plan in which we operate.
E. Off-Balance Sheet Arrangements
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 Agreement provides that the directors and officers will be exempt from liability in certain circumstances. The 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,have, among other things, ceased certain non-core product lines and are now focusing on our Server Adapter and Edge solution portfolios, along with expanding our sales efforts into a breachmore diversified scale of accounts.
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 officer’s dutyamount that reflects the consideration we expect to receive in exchange for those products. Transfer of loyalty, a willful breach of an officer’s duty of care, or a reckless disregard forcontrol occurs once the circumstances or consequences of a breach of duty of care. Thecustomer has the contractual right to indemnification alsouse 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 cover acts that are taken intentionallycreate an asset with an alternative use to unlawfully realize personal gain. The maximum amount of our liability under these Indemnification Agreementsus and we have an enforceable right to payment for any monetary obligation imposed on an officer or a director in favor of another personperformance completed to date if the customer were to terminate the contract. Revenue recognized over time is measured by a judgment is currently $3,000,000 for each instance of a covered scenario. In addition we would be liablethe costs incurred 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 2011date relative to the Israeli Securities Law,estimated total direct costs to fulfill each contract. Incurred costs represent work performed, which corresponds with, and a corresponding amendmentthereby best depicts, the transfer of control to the Companies Law, authorized the Israeli Securities Authority to impose administrative sanctions against Israeli public companiescustomer. Contract costs include labor, materials 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 to 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 Articles of Association and a revised form of Indemnification Agreement for directors serving in such capacity from time to time.overhead.
As per Amendment 20Capitalization 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 Companies Law, it was decidedproduct. 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 July 31, 2013, at the Extraordinary General Meetingpattern 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 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 of Association, be presented at a General Meeting of the shareholders. As set forthproducts. Other costs incurred in the Companies Law, an Executive Compensation Policy for a period exceeding three years has to be re-approved once every three years. Accordingly, we intend to bring our amended Executive Compensation Policy for shareholders approval on the next annual general meetingresearch and development of our shareholders. products are expensed as incurred.
We are not a party to any other material off-balance sheet arrangements or contingent obligations.
F. Tabular disclosure of contractual obligations
The following table shows our outstanding contractual obligations by category and by payments due as of December 31, 2015:
| | Payments due by period |
Contractual Obligations | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | More than 5 years |
Operating Leases | | $ | 2,877 | | | $ | 1,434 | | | $ | 1,010 | | | $ | 433 | | |
Purchase Obligations | | $ | 12,714 | | | $ | 12,714 | | | | | | | | | | |
Total | | $ | 15,591 | | | $ | 14,148 | | | $ | 1,010 | | | $ | 433 | | |
Our total outstanding contingencies in respect of OCS royalty-bearing participations received or accrued, net of royalties paid or accrued before interest, amounted to approximately $2,960 thousand as of December 31, 2015 which are attributable to sales of certain discontinued products. As of the date of this annual report, all of our OCS programs have been closed per our request, we are not anticipating any sales of our products developed with OCS funding and accordingly don't expect to be required to pay any royalties to the OCS. In the unlikely event we do sell products developed using OCS funding, we will be required to pay royalties to the OCS as set forth in the R&D Law.
Other Long-Term Liabilities Reflected on the Company's Balance Sheet:
The liability for employees’ severance benefits amounted to approximately $2,251 thousand as of December 31, 2015.
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. Such liability will be removed, either by termination of employment or retirement. 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.
Item 6. DIRECTORS, SENIOR MANAGEMENT ANDAND 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, 2016.2024:
Name | Age | Position with Company |
| | |
Avi Eizenman(1) | 5866 | Active Chairman of the Board |
Shaike Orbach(1)(2) | 6472 | Executive Vice Chairman of the Board |
Ayelet Aya Hayak(3) | 54 | Director |
Ilan Erez(3) | 56 | Director |
Eli Doron(4) | 71 | Director |
Liron Eizenman(5) | 38 | President, Chief Executive Officer Director |
Zohar Zisapel(2)
| 67 | Former Director |
Ayelet Aya Hayak | 46 | External Director |
Ilan Erez | 48 | External Director |
Eli Doron(3)
| 63 | Director |
Eran Gilad | 4856 | Chief Financial Officer and Company Secretary |
(1) | Was re-elected forServing an additional one-yeartwo-year term, commencing as of July 28, 2015.June 7, 2022. |
(2) | ServedServing an additional three-year term, commencing as a Director until his cessation of service on July 28, 2015.June 14, 2023. |
(3) | Was elected for a one-yearServing 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 28, 2015.1, 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’sCompany'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. Mr. Eizenman served as headBefore the incorporation of the ASIC department at Scitex Ltd. in 1986. From 1979 until 1985,Silicom, Mr. Eizenman held various engineering and management positions including project manager, ASIC specialistat Scitex Ltd. and engineer, withat 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 Orbachhas been was our President and Chief Executive Officer from April 2001 until June 30, 2022 and has been a director on our Board since AprilDecember 2001. In December 2001,On July 1, 2022, Mr. Orbach was named a Director, replacing Zohar Zisapel, who resigned fromappointed Executive Vice Chairman of the Board of Directors.Board. Prior to that, for a period of four and a half years,joining our Company, Mr. Orbach was President and CEO of Opgal Ltd., a high-tech subsidiary of Israel’sIsrael's Rafael and El-Op corporations.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.
Zohar Zisapel is a co-founder of the Company. HeAyelet Aya Hayak has served as a Director from the Company's inception and until 2001. In September 2010, he was elected again as Director in the Company and served as Director until July 2015. Mr. Zisapel is also a founder and a director of RAD Data Communications Ltd., of which he served as CEO from January 1982 until January 1998 and has served as chairman from 1998 until 2013. Mr. Zisapel serves as chairman of two other public companies – Ceragon Networks Ltd. (Ticker Symbol CRNT) and RADCOM Ltd. (Ticker Symbol RDCM) – and as chairman or director of several private companies. The Company has certain dealings with members of the Rad Group (see “Item 7. Major Shareholders and Related Party Transactions” below). Since July 2008, Mr. Zisapel has been a director of Amdocs Limited (Ticker Symbol DOX). Mr. Zisapel received a B.Sc. and a M.Sc. in electrical engineering from the Technion, Israel Institute of Technology, and an M.B.A. from Tel Aviv University.
Ayelet Aya Hayak was elected by the shareholders as an external director for an initial three-year term commencingsince July 1, 20132013. Ms. Hayak provides financial consulting services to corporations. Hayak Ayelet was the CEO of an Automation company, and is expected to be recommended for a second three-year term in the next annual general meeting of our shareholders. Ms. Hayakalso serves as a director in several public companies, among which are New Horizon Group Ltd., One Software Technologies (O.S.T.) Ltd., MYDAS Fund Investments Ltd., Danel (Adir Yehushua) Ltd., B.S.R. Projects Ltd., Financitech Ltd., and M.I. Holdings Ltd. Additionally, Ms. Hayak also serves as the chairman of the board of directors of S.D.S (Star Defense Systems) Ltd. Between 2009 and 2011 Ms. Hayak served as the CEO of Paula Ltd.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 co-Managedserved 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 of 3D Systems Corporation (NYSE: DDD) sincefrom September 2016 to March 2019 and co-managed that business unit from May 2015.2015 to September 2016. 3D Systems provides comprehensive 3D products and services, including 3D printers, print materials, on-demand partsmanufacturing services and digital design and manufacturing tools. From 2005 to 2015, Mr. Erez served as Chief Financial Officer of Cimatron Ltd. (Ticker Symbol(NASDAQ: CIMT) engaged in the design and sale of CAD/CAM software for the tool-making and discrete manufacturing industries, since July 2005.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 assistantAssistant to the Chief Executive Officer atof Bio-Dar Ltd. From 1994 to 1996 Mr. Erez served as an auditor at Kesselman & Kesselman, a PWC member of Price Waterhouse Coopers.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. Mr. Ilan Erez has served as
Eli Doron is the Co-founder and CTO of Carteav, that develops and manufactures an external director of the Company since 2010, was re-elected by the shareholders as an external director for a second three-year term commencing July 1, 2013 andautonomous low speed vehicle. Eli Doron is expected to be recommended for an third three year term in the next annual general meeting of our shareholders.
Eran Gilad was our Chief Financial Officer since May 2005 and the Secretary of the Company since 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.
Eli Doron isalso 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: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 19981988 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.
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 executive officersoffice holders during the year ended December 31, 2015.2023. All amounts are in USD.USD, based on the following components:
Name and Position | | Salary and Benefits(1) | | | Cash Bonus(2) | | | Equity-based Compensation(3) | | | Total | |
Avi Eizenman – Active Chairman | | | 467,024 | | | | 162,300 | | | | 538,768 | | | | 1,168,092 | |
Yeshayahu ("Shaike") Orbach – CEO and President | | | 318,310 | | | | 162,300 | | | | 538,768 | | | | 1,019,378 | |
David Castiel – VP Engineering | | | 190,099 | | | | 16,723 | | | | 91,586 | | | | 298,407 | |
David Hendel – VP Research and Development | | | 188,175 | | | | 16,723 | | | | 91,586 | | | | 296,482 | |
Elad Blatt – VP Business Development and Sales North America | | | 179,938 | | | | 21,867 | | | | 91,586 | | | | 293,391 | |
“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. | (1) | "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, 2023. | (2) | "Cash Bonus" includes bonus payments as recorded in our financial statements for the year ended December 31, 2015. |
“Equity-based Compensation” includes the expense recorded in our financial statements for the year ended December 31, 2023, with respect to equity-based compensation granted to the executive officers detailed above. | (3) | "Equity-based Compensation" includes the expense recorded in our financial statements for the year ended December 31, 2015 with respect to equity-based compensation granted to the executive offices detailed above. |
Liron Eizenman – President and CEO. Salary and Benefits $312,308; Equity-based Compensation $764,912.
Avi Eizenman – Active Chairman. Salary and Benefits $579,534; Equity-based Compensation $484,062.
Yotam Levy – Vice President, Sales & Business Development North America. Salary and Benefits $147,892; Cash Bonus $162,914; Equity-based Compensation $22,826.
Eran Gilad – CFO and Company Secretary. Salary and Benefits $235,605; Equity-based Compensation $97,591.
David Castiel – VP Engineering. Salary and Benefits $234,897; Equity-based Compensation $97,591.
The aggregate direct remuneration paid to all persons as a group who served in the capacity of director or executive officeroffice holder during the year ended December 31, 20152023, was $2,535US$ 2,871 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, 20152023, was $921US$ 1,040 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, which was approved by the shareholders, may entitle them, in certain circumstances, to additional payments. We have not paid any compensation to Zohar Zisapel for serving on our board of directors until his cessation of service on July 2015. We do pay cash compensation to Avi Eizenman who is an active Chairman of the Board, and to Shaike Orbach, who is the President and Chief Executive Officer.
AviMr. Liron Eizenman and Shaike OrbachMr. Avi Eizenman may also be entitled to cash bonuses by meeting some pre-determined thresholds, and as calculated based on a pre-determined formulasformula set by our boardBoard of directors,Directors, as approved by the annual general meeting of our shareholders for the years 2013 and 2014-2016commencing in 2017 on April 30, 2014.June 8, 2016. Mr. Liron Eizenman, and Mr. Orbach's 2014-2016Avi Eizenman annual cash bonuses may not exceed the value of 18 oftimes their monthly salaries, respectively,respectively. Mr. Liron Eizenman's and their cash bonus formulas are taking into consideration the erosion rate from the 2013Mr. Avi Eizenman's annual bonus formulas, according to which their cash bonus formulas were based on achieving one or more of the following thresholds: (i) the Company'sCompany’s actual annual revenue for 2013 was 80% or more of the pre-determined budget target; and (ii) the Company's actual operating profit for 2013 was 65% or more of the pre-determined budget target, and are based on achieving one or more of the following thresholds: (i) the Company's actual revenue for any of the years 2014-2016each applicable year is 80% or more of the pre-determined budget target for the relevant year; and (ii) the Company'sCompany’s actual annual operating profit for any of the years 2014-2016each applicable year is 65% or more of the pre-determined budget target for the relevant year. The Compensation CommitteeBoard of Directors may, in its sole discretion, raise or lower such annual cash bonuses by up to 20%.or not pay them in their entirety, if it determines that such a decision is in the best interests of the Company. Furthermore, in accordance with the Company'sCompany’s recoupment policy, Mr. Liron Eizenman, Mr. Avi Eizenman and Mr. Orbach (in relation to compensation received for his service as the CEO of the company) 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'sCompany’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 officersoffice holders other than the externalMr. Eli Doron and our independent directors work full time forare employed by us. We do not currently grant any variable bonus or equity basedequity-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 under the Silicom Directors Share Incentive Option Plan (1994) (under which there are presently no options outstanding) and certain of such compensation is 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 willwere and may be granted under the Silicom Ltd -Ltd. – Global Share Incentive Plan (2013), as described below.
On December 30, 2004, our shareholders adopted our Share Option Plan (2004). Under, which expired at the original termsend of the Share Option Plan (2004) up to a maximum2014. As of 282,750 of our ordinary shares are reserved for issuance, subject to certain adjustments, upon the exercise ofMarch 31, 2019, there were no outstanding options granted to employees, directors, officers, consultants and service providers. In December 2007, the Board of Directors increased the number of our ordinary shares available for issuance under the Share Option Plan (2004) by 300,000. In August 2012, the Board of Directors increased the number of our ordinary shares available for issuance under the Share Option Plan (2004) by an additional 500,000. The Share Option Plan (2004) is administered by the board of directors, which designates the optionees, dates of grant, vesting periods and the exercise price of options. The options are non-assignable except by the laws of descent. Certain tax advantages apply to certain of our directors, officers and employees with respect to options granted to them under the Share Option Plan (2004). As of March 31, 2016, we have granted a total of 1,036,000 options under the Share Option Plan (2004), of which (i) 200,000 options were granted to Mr. Avi Eizenman, such that: (a) 30,000 were exercised at an exercise price of $2.53 (which would have otherwise terminated on December 30, 2014); (b) 40,000 expired in July 2008, (c) 40,000 were exercised at an exercise price of $3.82 (which would have otherwise terminated on the earlier of October 15, 2016 or the closing price of our shares falling below $1.91), (d) 50,000 were exercised at an exercise price of $18.82 (which would have otherwise terminated on the earlier December 21, 2018 or the closing price of our shares falling below $9.41),directors and (d) 40,000 were granted with an exercise price of $15.28 and a termination date of the earlier of September 13, 2020 or the closing price of our shares falling below $7.64, of which 20,000 were exercised at an exercise price of $15.28; (ii) 30,000 options were granted to Mr. Yehuda Zisapel (who was formerly a Director of the Company) and exercised at an exercise price of $2.53 (which would have terminated on December 30, 2014); (iii) 200,000 options were granted to Mr. Shaike Orbach, of which (a) 30,000 were exercised at an exercise price of $2.53 (which would have otherwise terminated on December 30, 2014), (b) 40,000 expired in July 2008, (c) 40,000 were exercised at an exercise price of $3.82 (which would have otherwise terminated on the earlier of October 15, 2016 or the closing price of our shares falling below $1.91), (d) 50,000 were exercised at an exercise price of $18.82 (which would have otherwise terminated on the earlier of December 21, 2018 or the closing price of our shares falling below $9.41) and (e) 40,000 were exercised at an exercise price of $15.28 (which would have otherwise terminated on the earlier of September 13, 2020 or the closing price of our shares falling below $7.64); (iv) 30,000 options were granted to Ms. Einat Domb-Har (who was a former external director of the Company) and exercised at an exercise price of $2.53 (which would have terminated on December 30, 2014) ; and (v) 30,000 options were granted to Mr. Ilan Kalmanovich (who was a former external director of the Company) and exercised at an exercise price of $2.53 (which would have terminated on December 30, 2014). 36,625 of the options granted under the Share Option Plan (2004) were returned to the company due to certain employees who left their positions not exercising their options and 200,000 of the options granted under the Share Option Plan (2004) expired without exercise due to the expiration of their term. The Share Option Plan (2004) expired at the end of 2014, upon which expiration any unallocated shares under this plan have been returned to the general pool of registered but unissued share capital of the Company.office holders.
On October 21, 2013, our board of directors adopted our Global Share Incentive Plan (2013) (the “Plan”). 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 (“RSU’s”RSUs”) or other equity basedequity-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 basedequity-based awards granted to employees, directors, officers,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 Plan 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. In October 2023, our board of directors approved the extension of our Plan by a further ten years, and increased the number of our ordinary shares available for issuance by additional 375,000 ordinary shares. The awards are non-assignable except by the laws of descent. Certain tax advantages apply to certain of our directors, officersoffice holders and employees with respect to equity basedequity-based awards granted to them under Global Share Incentive Plan (2013).
As of MarchDecember 31, 2016, we have granted a total of 82,000 RSUs under the Global Share Incentive Plan (2013), of which a total of (i) 25,000 RSUs were granted to Mr. Avi Eizenman, and (ii) 25,000 RSUs were granted to Mr. Shaike Orbach, pursuant to the approval of our compensation committee, board of directors and annual general meeting of our shareholders, which gave effect to such grants in its meeting on April 30, 2014.
In addition, in March 2015, our compensation committee and board of directors, respectively, have approved the grant of a total of 92,59182,000 RSUs and 209,963 options under the Plan, 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 (and accordingly all of the unexercised options granted, have expired), (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 Plan of a total of (a) 119,925 options and (b) 78,000 RSUs, of which a total of 29,999 options and 54,000 RSUs, were granted to directors and office holders. The options were granted 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. Accordingly all of the unexercised options granted, have expired). annual general meeting of our shareholders approved such grants of options and of RSUs granted to directors in their meeting on June 5, 2017.
In April, 2018, our compensation committee and board of directors, respectively, approved the grant under the Plan of a total of 137,010 options under the Global Share Incentive Plan (2013), of which a total of (i) 13,33329,999 options were granted to Mr. Avi Eizenman,directors and (ii) 13,333office holders, with an exercise price of US$ 36.11. Such options were to 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. Accordingly all of the unexercised options granted, have expired.
In January 2019, our compensation committee and board of directors, respectively, approved the grant under the Plan of a total of 141,928 options under the Plan, of which 29,999 options were granted to Mr. Shaike Orbach,directors and office holders with an exercise price of US$ 33.83. Such options were to 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. Accordingly all of the unexercised options granted, have expired.
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 Plan, of which pursuant29,999 options and 54,000 RSUs were granted to directors and office holders. The exercise price for the options (per ordinary share) was US$ 32.54. Such options were to 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. Accordingly all of the unexercised options granted, have expired. 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 Plan, of which 29,999 options were granted to directors and office holders. The exercise price for the options (per ordinary share) was US$ 41.84. Such options were to 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. Accordingly, all of the unexercised options granted, have expired.
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 Plan, of which 3,333 options were granted to an office holder. The exercise price for the options (per ordinary share) was US$ 47.98. Such options were to 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. Accordingly all of the unexercised options granted, have expired.
In March 2022, our compensation committee and board of directors, respectively, approved the grant of a total of 26,666 options under the Plan, of which 26,666 options were granted to directors and office holders. The exercise price for the options (per ordinary share) was US$ 35.69. Such options were to 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. Accordingly all of the unexercised options granted, have expired).
In April 2022, our compensation committee and board of directors, respectively, approved the grant of a total of 50,000 options under the Plan, of which 50,000 options were granted to an office holder. The exercise price for the options (per ordinary share) was US$ 34.90. Such options were to 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. Accordingly all of the unexercised options granted, have expired).
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 Plan, of which 29,999 options and 54,000 RSUs were granted to directors and office holders. The exercise price for the options was US$ 35.12. Such options were to expire, by their terms, on the earlier to occur of: (a) June 14, 2031, and (b) the closing price of the shares falling below US$ 17.56 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. Accordingly, all of the unexercised options granted, have expired. The Annual General Meeting of our shareholders approved such grant of options in their meeting on June 14, 2023.
In March 2024, our compensation committee and board of directors, respectively, approved the grant of a total of 410,714 options and 2,969 RSUs under the Plan as extended, of which 170,000 options and 2,969 RSUs were granted to directors and office holders, and of which 160,000 options and 2,969 RSUs grants to directors and office holders are subject to the approval of our Annual General Meeting, became effective on July 28, 2015.
C. Board Practices
Each of Avi Eizenman and Shaike Orbach was re-elected, and Eli Doron was elected, to the board of directors most recently on July 28, 2015 to serve until the next2024 Annual General Meeting, which is currently scheduledexpected to convene in June 2016,2024.
As of March 31, 2024, a total of 157,706 of the options granted under the Plan were returned to the company after not being exercised, and 10,000 of the RSUs granted under the Plan were returned to the company after not being vested following the cessation of employment of certain employees, as set forth in the terms of grant of such options or RSUs.
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 Amended and Restated Articles of Association.Articles. Avi Eizenman is a founder of the Company and has served as a Directordirector since our inception in 1987. Shaike Orbach was re-elected to hold office as a director most recently on June 14, 2023, to serve until the Annual General Meeting which will take place in 2026. 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 directorExternal Director for an initial term of three years in accordance with Section 245(a) of the Israeli Companies Law, with such termsterm 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 directorExternal Director for an additionala second three-year term, and elected Ms. Ayelet Aya Hayak as an external directorExternal 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 are expected to be brought for re-electionwere re-elected as External Directors for a fourth three-year term and third three-year term, and second three-year term, respectively, onat the next Annual General Meeting of our shareholders, scheduledwhich took place on June 5, 2019. Mr. Ilan Erez and Ms. Ayelet Aya Hayak were elected as directors to convenethe board of directors on June 7, 2022, to serve until the Annual General Meeting to be held in June, 2016.2025.
None of the members of the boardBoard of directorsDirectors is entitled to receive any severance or similar benefits upon termination of his or her service with the boardBoard of directors,Directors, except for Avi Eizenman, who also functionsserves as the active Chairman of the Board, and Shaike Orbach, who also functionsuntil the 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 Committeeaudit committee and Board of Directors approved severance arrangements for each of Mr. Avi Eizenman and Mr. 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 2008,2008. 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, and Mr. Shaike Orbach)Liron Eizenman):
The termination of the executive’s employment of Mr. Avi Eizenman 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 inof 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 inof 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 executive’s employment of Mr. Avi Eizenman, 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 inof control, he shall be entitled to receive one and half times the Severance Law Amount. If the executive’shis 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.
As per Amendment 20 to the Companies Law, it was decided at theThe Extraordinary General Meeting of the Shareholders on July 31, 2013, to adoptapproved the adoption of 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.Liron Eizenman. The Amended Executive Compensation Policy is expected to be brought for shareholders re-approval atwas approved by our next Annual General Meeting scheduled to conveneconvened in June 2016.2019. 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 of Association provide for a boardBoard of directorsDirectors 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 director (except external directors)group is electedbrought 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 next annual general meeting of shareholdersAnnual General Meeting in three years’ time and until his or her successortheir 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 been elected.expired, and so on ad infinitum, so that each year, the term in office of one group of directors shall expire. Other officersoffice holders serve at the discretion of the boardBoard of directors.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 a substitute directoran 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 a substitute director.an Alternate Director. Additionally, the Companies Law prohibits a person from serving as a substitute directoran Alternate Director for more than one director.Director. Appointment of a substitute directoran Alternate Director for a member of a board committee is only permitted if the substitutealternate is a member of the boardBoard of directorsDirectors and does not already serve as a member of such committee. If the committee member being substituted is an external director,External Director, the substitutealternate may only be another external directorExternal Director who possesses the same expertise as the external directorExternal Director being substituted. The term of appointment of a substitute directoran Alternate Director may be for one meeting of the boardBoard of directorsDirectors or for a specified period or until notice is given of the cancellation of the appointment. To our knowledge, no directorDirector currently intends to appoint any other person as a substitute director,an Alternate Director, except if the directorDirector is unable to attend a meeting of the boardBoard of directors.Directors.
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“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,External Director, any affiliation with any of either the company, any entity or person controlling, controlled by or under common control with the company,company” or relatives of such person. The term “affiliation” includes:
| · | anAn employment relationship; |
| · | a business or professional relationship maintained on a regular basis; |
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”.qualifications.” At least one external director must possess expertise“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.
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“expertise in finance and accounting"accounting” or being "professionally qualified"“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“Amendment to the Affiliation Regulations"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.
External directors are to be elected for a term of three years by a majority vote at a shareholders’ meeting, provided that either: