UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
☐REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
Or
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
Or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report.………………
For the transition period from to
Commission File number: 000-23288
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 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, 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 | ||
Title of each class | None Name of each exchange on which registered | |
Ordinary Shares, NIS 0.01 nominal value per share | NASDAQ GLOBAL SELECT MARKET |
Trading Symbol(s) |
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 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:
6,899,515
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐ No ☒
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
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 filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ | Accelerated filer ☒ | Non-accelerated filer ☐ | Emerging growth company ☐ | |||
2
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Yes ☒ No ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this fling:
U.S. GAAP ☒ International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ Other ☐
If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ☐ No ☐
This annual report on Form 20-F includes certain “forward-looking”"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 any 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.
3
Table of Contents
7 | |
7 | |
7 | |
7 | |
A. Selected Financial Data | 7 |
B. Capitalization and | 10 |
C. Reason for the offer and use of proceeds | 10 |
D. Risk Factors | 10 |
32 | |
A. History and Development of the Company | 32 |
B. Business Overview | 34 |
Principal Markets | 37 |
Manufacturing and Suppliers | 37 |
Marketing Channels | 39 |
Patents and Licenses | 41 |
Competition | 41 |
Governmental Regulation Affecting the Company | 42 |
C. Organizational Structure | 43 |
45 | |
45 | |
A. Operating Results | 47 |
B. Liquidity and Capital Resources | 51 |
C. Research and development, patents and licenses, etc. | 52 |
D. Trend Information | 54 |
E. Off-Balance Sheet Arrangements | 55 |
F. Tabular disclosure of contractual obligations | 57 |
58 | |
A. Directors and Senior Management | 58 |
B. Compensation | 60 |
Board of Directors | 64 |
External Directors | 65 |
Audit Committee | 69 |
Compensation Committee | 70 |
D. Employees | 75 |
E. Share Ownership | 77 |
4
78 | |
A. Major Shareholders | 78 |
B. Related Party Transactions | 79 |
81 | |
A. Consolidated Statements and Other Financial Information | 81 |
B. Significant Changes | 81 |
81 | |
A. Offer and | 81 |
Markets and Share Price History | 81 |
83 | |
A. Share Capital | 83 |
B. Memorandum and Articles of Association | 83 |
C. Material Contracts | 92 |
D. Exchange Controls | 93 |
E. Taxation | 93 |
F. Dividends and Paying Agents | 102 |
G. Statement by | 102 |
H. Documents on Display | 102 |
I. Subsidiary Information |
103 | |
103 | |
Interest Rate Risk | 103 |
Foreign Currency Exchange Risk | 104 |
105 | |
106 | |
106 | |
106 | |
106 | |
Disclosure Controls and Procedures | 106 |
Management's Annual Report on Internal Control over Financial Reporting | 106 |
Inherent Limitations on Effectiveness of Controls | 106 |
Changes in Internal Control over Financial Reporting | 107 |
107 | |
107 | |
107 |
107 | |
107 | |
108 |
5
108 | |
109 | |
110 | |
110 | |
112 | |
112 | |
112 | |
112 | |
113 |
6
Not Applicable.
Not Applicable.
A.Selected Financial Data
The selected data presented below under the captions "Consolidated"Consolidated Statements of Operations Data"Data" and "Consolidated"Consolidated Balance Sheets Data"Data" for and as of the end of each of the years in the five-year period ended December 31, 2017,2020, are derived from our audited consolidated financial statements. The consolidated financial statements as of December 31, 2017,2020, and for each of the years in the three-year period ended December 31, 2017,2020, 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.
7
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
2016 | 2017 | 2018 | 2019 | 2020 | ||||||||||||||||
(in thousands of U.S. dollars, except share and per share data) | ||||||||||||||||||||
Sales | 100,347 | 125,690 | 133,753 | 105,240 | 107,398 | |||||||||||||||
Cost of sales | 61,796 | 79,762 | 91,697 | 69,146 | 73,632 | |||||||||||||||
Gross profit | 38,551 | 45,928 | 42,056 | 36,094 | 33,766 | |||||||||||||||
Research and development expenses | 12,663 | 13,915 | 14,820 | 15,075 | 17,244 | |||||||||||||||
Sales and marketing expenses | 6,423 | 6,722 | 6,642 | 6,647 | 6,209 | |||||||||||||||
General and administrative expenses | 3,969 | 4,507 | 3,943 | 4,159 | 4,065 | |||||||||||||||
Contingent consideration expense (benefit) | (334 | ) | (4,642 | ) | - | - | - | |||||||||||||
Total operating expenses | 22,721 | 20,502 | 25,405 | 25,881 | 27,518 | |||||||||||||||
Operating income | 15,830 | 25,426 | 16,651 | 10,213 | 6,248 | |||||||||||||||
Financial income, net | 35 | 156 | 923 | 1,646 | 1,034 | |||||||||||||||
Income before income taxes | 15,865 | 25,582 | 17,574 | 11,859 | 7,282 | |||||||||||||||
Income tax expenses | 2,728 | 3,868 | 2,937 | 1,623 | 1,557 | |||||||||||||||
Net income(1) | 13,137 | 21,714 | 14,637 | 10,236 | 5,725 | |||||||||||||||
Net income per share | ||||||||||||||||||||
Basic income per ordinary share | $ | 1.789 | $ | 2.912 | $ | 1.938 | $ | 1.361 | $ | 0.804 | ||||||||||
Diluted income per ordinary share | $ | 1.767 | $ | 2.856 | $ | 1.912 | $ | 1.352 | $ | 0.800 | ||||||||||
Weighted average number of ordinary shares used to compute basic income per share (in thousands) | 7,344 | 7,456 | 7,552 | 7,520 | 7,118 | |||||||||||||||
Weighted average number of ordinary shares used to compute diluted income per share (in thousands) | 7,435 | 7,602 | 7,657 | 7,573 | 7,157 | |||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | ||||||||||||||||
| Sales | $ | 73,298 | $ | 75,622 | $ | 82,738 | $ | 100,347 | 125,690 | |||||||||||
| Cost of sales | 43,865 | 44,835 | 48,659 | 61,796 | 79,762 | |||||||||||||||
| Gross profit | 29,433 | 30,787 | 34,079 | 38,551 | 45,928 | |||||||||||||||
| Research and development expenses | 5,465 | 6,480 | 9,702 | 12,663 | 13,915 | |||||||||||||||
| Sales and marketing expenses | 3,818 | 4,418 | 5,651 | 6,423 | 6,722 | |||||||||||||||
| General and administrative expenses | 2,572 | 2,798 | 3,611 | 3,969 | 4,507 | |||||||||||||||
| Contingent consideration expense (benefit) | 0 | 45 | (3,090 | ) | (334 | ) | (4,642 | ) | ||||||||||||
| Total operating expenses | 11,855 | 13,741 | 15,874 | 22,721 | 20,502 | |||||||||||||||
| Operating income | 17,578 | 17,046 | 18,205 | 15,830 | 25,426 | |||||||||||||||
| Financial income, net | 404 | 263 | 220 | 35 | 156 | |||||||||||||||
| Income before income taxes | 17,982 | 17,309 | 18,425 | 15,865 | 25,582 | |||||||||||||||
| Income tax expenses | 905 | 2,704 | 1,905 | 2,728 | 3,868 | |||||||||||||||
Net income(1) | 17,077 | 14,605 | 16,520 | 13,137 | 21,714 | |||||||||||||||
| Net income per share | ||||||||||||||||||||
| Basic income per ordinary share | $ | 2.404 | $ | 2.033 | $ | 2.273 | $ | 1.789 | $ | 2.912 | ||||||||||
| Diluted income per ordinary share | $ | 2.357 | $ | 1.996 | $ | 2.242 | $ | 1.767 | $ | 2.856 | ||||||||||
| Weighted average number of ordinary shares used to compute basic income per share (in thousands) | 7,103 | 7,184 | 7,269 | 7,344 | 7,456 | |||||||||||||||
| Weighted average number of ordinary shares used to compute diluted income per share (in thousands) | 7,246 | 7,319 | 7,368 | 7,435 | 7,602 | |||||||||||||||
(1) NetThe net income is presented 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", under the Investment Law following its election to be taxed in its capacity as such commencing 2014, and as applicable with respect to each of the years indicated above under Israeli law
8
CONSOLIDATED BALANCE SHEET DATA
(in thousands of US dollars)
2016 | 2017 | 2018 | 2019 | 2020 | ||||||||||||||||
Total assets | $ | 146,437 | $ | 162,614 | $ | 182,301 | $ | 195,063 | $ | 195,887 | ||||||||||
Total current liabilities | $ | 17,964 | $ | 19,049 | $ | 21,540 | $ | 26,332 | $ | 29,376 | ||||||||||
Long-term liability | $ | 7,081 | $ | 2,765 | $ | 2,612 | $ | 5,808 | $ | 11,674 | ||||||||||
Shareholders' equity | $ | 121,392 | $ | 140,800 | $ | 158,149 | $ | 162,923 | $ | 154,837 | ||||||||||
Capital stock | $ | 22 | $ | 22 | $ | 22 | $ | 22 | $ | 22 | ||||||||||
Number of ordinary shares issued(1) | 7,396,584 | 7,564,502 | 7,574,176 | 7,618,676 | 7,670,033 | |||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | ||||||||||||||||
| Total assets | $ | 105,257 | $ | 122,436 | $ | 139,998 | $ | 146,437 | $ | 162,614 | ||||||||||
| Total current liabilities | $ | 11,948 | $ | 19,006 | $ | 19,814 | $ | 17,964 | $ | 19,049 | ||||||||||
| Long-term liability | $ | 2,618 | $ | 2,698 | $ | 7,350 | $ | 7,081 | $ | 2,765 | ||||||||||
| Shareholders' equity | $ | 90,691 | $ | 100,732 | $ | 112,834 | $ | 121,392 | $ | 140,800 | ||||||||||
| Capital stock | $ | 21 | $ | 21 | $ | 21 | $ | 22 | $ | 22 | ||||||||||
Number of ordinary shares issued(1) | 7,154,984 | 7,233,604 | 7,299,315 | 7,396,584 | 7,564,502 | |||||||||||||||
(1) Including 14,971 held by one of our subsidiaries -
Silicom Connectivity Solutions,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 | ||||||||||||
2020 | 3.862 | 3.210 | 3.442 | 3.215 | ||||||||||||
2019 | 3.746 | 3.455 | 3.565 | 3.456 | ||||||||||||
2018 | 3.781 | 3.388 | 3.597 | 3.748 | ||||||||||||
2017 | 3.860 | 3.467 | 3.600 | 3.467 | ||||||||||||
2016 | 3.983 | 3.746 | 3.841 | 3.845 | ||||||||||||
| NIS per U.S. $ | ||||||||||||||||
| Year Ended December 31, | High | Low | Average | Period End | ||||||||||||
| 2017 | 3.860 | 3.467 | 3.600 | 3.467 | ||||||||||||
| 2016 | 3.983 | 3.746 | 3.841 | 3.845 | ||||||||||||
| 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 | ||||||||||||
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 2021 | 3.342 | 3.287 | 3.311 | 3.334 | ||||||||||||
February 2021 | 3.300 | 3.237 | 3.270 | 3.280 | ||||||||||||
January 2021 | 3.294 | 3.116 | 3.222 | 3.291 | ||||||||||||
December 2020 | 3.304 | 3.210 | 3.248 | 3.215 | ||||||||||||
November 2020 | 3.416 | 3.308 | 3.359 | 3.308 | ||||||||||||
October 2020 | 3.431 | 3.378 | 3.395 | 3.422 | ||||||||||||
| NIS per U.S. $ | ||||||||||||||||
| Month | High | Low | Average | Period End | ||||||||||||
| March 2018 | 3.514 | 3.431 | 3.469 | 3.514 | ||||||||||||
| February 2018 | 3.535 | 3.427 | 3.494 | 3.485 | ||||||||||||
| January 2018 | 3.460 | 3.388 | 3.423 | 3.405 | ||||||||||||
| December 2017 | 3.550 | 3.467 | 3.504 | 3.467 | ||||||||||||
| November 2017 | 3.544 | 3.499 | 3.517 | 3.499 | ||||||||||||
| October 2017 | 3.542 | 3.491 | 3.512 | 3.521 | ||||||||||||
The NIS to U.S. Dollar exchange rate on March 31, 2018,2021, as published by the Bank of Israel, was NIS 3.514.
9
Dividends
On January 14, 2013, we announced that our Board of Directors has adopted a policy for distributing dividends, subject to, among other things, all applicable laws. Accordinglaws, according to this policy, each yearwhich we willmay 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. According to the policy, the actual distribution of a dividend will be subject to meeting the conditions required by applicable law, including the distribution tests set forth"distributable profits" (as such term is defined in Section 302 of the Companies Law, andLaw) to the specific decision of the Company's Board of Directors for each distribution.our shareholders. On March 15, 2018, our Board of Directors adopted a resolution to suspend until further notice the said dividend policy in order to increase our available funds in support of our long-term growth. 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.
For more information onregarding our dividend policy and the taxation of dividends generally, see "Item 8A – Financial Information – Dividend Policy" and for our calculation"Item 10.E. – Taxation – Taxation 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 indebtedness
Not Applicable
C.Reason for the offerOffer and useUse of proceeds
Not Applicable
D.Risk Factors
This annual report and statements that we may make from time to time may contain forward-looking information. There can be no assurance that actual results will not differ materially from our expectations, statements or projections. Factors that could cause actual results to differ from our expectations, statements or projections include the risks and uncertainties relating to our business described below.
Risks Relating to Our Business
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, such as the COVID-19 pandemic, which may impact our business.
The significant outbreak of a contagious disease, Covid-19, which was declared a pandemic by the World Health Organization in March 2020, has resulted in a widespread health crisis that has adversely affected the economies and financial markets of many countries, resulting in a global economic downturn. As a response to the spread of Covid-19 many countries, including Israel, USA and Denmark where most of our workforce is located, have been taking measures designated to limit the continued spread of Covid-19, including the closure of workplaces, restricting travel, prohibiting assembling, closing international borders and quarantining populated areas. Additionally, the Israeli Government has announced a mandatory 10-day quarantine period for any individual who is not fully vaccinated, who may have come in contract with a carrier of Covid-19, and any person who is not fully vaccinated and who has returned from travel abroad to certain countries which have been designated as ‘red’ countries due to high levels of Covid-19 cases. Many Governments around the globe introduced temporary emergency regulations requiring all residents to remain in their homes along with limitations on which business are allowed to remain open and the number of workers allowed at each site – these emergency regulations are still current, at various levels, in many countries, including Israel.
10
While Israel began vaccinating its population in December 2020, it is still unclear to what extent the vaccines will be able to stop the spread of the pandemic, especially because it is still unknown whether the vaccine is effective in neutralizing all variants of the virus and also since the vaccine is still unavailable to children under 16. Furthermore, the pace of vaccination around the world is not consistent and delays in one country could affect the speed at which the pandemic and its effects will be brought under control.
While the full impact of the Covid-19 pandemic is still unknown at this time, we are closely monitoring the developments and continually assessing the potential impact on our business. Our business may be adversely affected by the Covid-19 pandemic due to the following risks, any of which may lead to an adverse effect on our financial performance, revenue, financial position and results:
•
As any number of the members of our workforce, including key employees, may be infected and/or subject to quarantine periods and may be unable to perform their duties and our offices and factories may be forced to operate with a reduced workforce and/or be forced to close under the temporary emergency regulations. This may lead to ineffective control over our business and a lower work efficiency, productivity, manufacturing and financial performance;
•
A reduced workforce, lack of international travel, and no face to face meetings may adversely affect our operations, including our R&D efforts, marketing and sales activities, the materialization of existing Design Wins, and the achievement of new Design Wins;
•
We rely on third-party suppliers and manufacturers for many of our products. This pandemic has resulted in the extended shutdown of certain businesses globally, which may in turn result in disruptions or delays to our supply chain. These may include disruptions from the temporary closure of third-party supplier and manufacturer facilities, interruptions in product supply or restrictions on the export or shipment of our products. Any disruption of our suppliers and their contract manufacturers will likely impact our sales and operating results and Design Win related activities;
•
Due to the impact of Covid-19 on flights and airlines, which reduced air transportation dramatically, we may be significantly limited, or it may be impossible, for us to ship our products to our customers and/or receive components and other bill of material parts from our suppliers;
11
•
We may experience difficulties in collecting amounts due from customers, including major customers, due to a downturn in their financial condition;
•
Due to the pandemic, from time to time significant numbers of our employees are required to work from their homes and remotely access our IT networks. Such remote working mode creates the risk of attacking the end-point user stations, connection channels and gateways. These potential breaches of our security measures may harm our business;
•
In the past, following periods of market volatility, shareholders have often instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and attention of management from our business, even if we are successful.
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, due to the spread of Covid-19, 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.
We may not be able to capitalize, as planned, on our Design Wins.
Once we secure a Design Win, we may not be able to properly capitalize on such Design Win. For example, we may not receive revenues from a Design Win due to the customer deciding to hold the introduction of its product or service, of which our Design Win product is a component, to the market. Alternatively, we may experience delays in receiving revenues from a Design Win due to circumstances unrelated to us, such delays may stem from delays in the deployment of the customer's product/service in the market. Delays may also lead to a request by the customer to change the specifications of our product due to changes in industry standards and/or market requirements. There is no assurance that we will be able to secure a Design Win for the product with the new specifications. A customer may also experience a lower demand than forecasted by the customer at the time of securing the Design Win for its product/service, which will accordingly affect its demand for our Design Win product. Additionally, the Design Win client may decide to abandon the use of our product and use an alternate source. Due to the spread of Covid-19 we may experience extended delays in materialization of revenue from Design Wins, as mentioned above.
12
The markets for our products change rapidly and demand for new products is difficult to predict.
The markets for our products are characterized by rapidly changing technology and evolving industry standards. For example, the migration to higher line rate Ethernet solutions, the adaptation of new bus interfaces and increased use of emerging technologies such as Cloud, Virtualization, NFV, SD-WAN, 5G and SDN,O-RAN, cause some of our customers to demand such new products and technologies. In the event that such customers decide to begin using new technologies, we may not be able to develop products for the new technologies in a timely manner. Such customers may also select competing products despite our ability to develop products incorporating new technologies. For example, with the shift towards running applications in the Cloud we anticipate that the demand will grow for add-on adapters and products which address the challenges presented by the Cloud, such as a switch in every server, hardware acceleration, power, heat and space limitations in such environments, which increase the need for essential building blocks in generic servers, which can potentially be served by our products. Another example is related to the NFV, SD-WAN, O-RAN and SD-WAN5G market sectors, in which our virtualized CPE ('vCPE')CPE/EDGE (as defined below), as well as our networking, offloading and CPEacceleration related FPGA solutions may have significant demand. However,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 CPE productssolutions from us or that we will be able to generate significant sales in these areas or otherin the long run. If we do not generate significant sales in these areas in which we operate.
The market for Cloud-based and Cloud-focused solutions is rapidly developing, and if it develops in ways that are different from what we anticipate or expect, our business could be harmed.
In recent years, the Cloud-based market has rapidly developed, and the demand for Cloud-based data centers utilizing virtualization and SDN has increased. We expect that this increase in demand will lead to increased demand for our CPE/EDGE products as well as for our networking, offloading and acceleration related Field Programmable Gate Arrays, or FPGAs. We also expect the Cloud-based data centers to be increasingly based on generic server platforms. These platforms will 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.
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While we believe that we address the above needs with a comprehensive suite of products, and while during 2017, we experienced significant growth in the value of Cloud related orders we received for our 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. These factors may also affect our ability to accurately predict the anticipated revenues which may be generated under any such Design Win, our growth potential in the Cloud, our operations, including our inventory levels, and our financial results.
In addition, we believe that market’smarket's demand for our products and solutions in the Cloud demonstrates that the ongoing industry transition to the Cloud continues to represent a fast growing opportunity for us. Nonetheless, if significant organizations providing Cloud based solutions or other virtualized networks do not perceive the benefits of our cloud-focused and/or virtualized network based solutions, or if our competitors or new market entrants are able to develop solutions for this market that do not require add on products such as ours, or offer features that are, or are perceived to be, more effective than our solutions, this would have a material adverse effect on our ability to achieve and/or consummate Design Wins, on our business, and on our results of operations and financial condition.
The market for Edge Networking Devices to Telcos and service providers for NFV and/or SD-WAN deployments is rapidly developing, and if it develops in ways that are different from what we anticipate or expect, our business could be harmed.
Recently, with the evolution of the NFV and SD-WAN, most Telcos and Telco-related service providers arehave begun seeking for solutions which utilize virtual CPEs and/or universal CPEs ('uCPE') for the deployment of SD-WAN or other applications within an NFV architecture. We believe that our uCPE and vCPECPE products address the requirements of such Telcos and service providers' needs and requirements, and since 2018 we have been engaged insecured several bids and RFPs during 2017, some of which we hope would turn into awards and/or deliveries during 2018.
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 lack ofrelatively limited experience in transacting with such Telcos and service providers, our competition with competitors which may offerthe possible offering of a wider selection of products by some of our competitors, or the possible offering by our competitors of products which include a wider, better suited or more advanced features than the ones included in our products, development of technologies of LTE and WiFi with which our current products may not be compatible, and the price expectations of such Telcos and service providers which may require us to offer our products for lower our prices which may leadin order to better position ourselves in the market, or remain competitive, thus leading to lower gross profit, andwhich in turn may have an adverse effect on our financial results.
We believe that market’sthe market's demand for our products and solutions in the NFV and SD-WAN era demonstrate that the TelcosTelcos' and service providersproviders' related industry is transitioning into uCPEs and vCPEsCPEs which represent a fast growing opportunity for us. Nonetheless, if such Telcos and service providers do not perceive the benefits of our Edge Networking vCPEs/uCPEs,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, than us,
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The rapidmarket for Infrastructure Deployment of 4G/5G Distributed Units and UPF acceleration with the Telcos and Mobile operators is rapidly developing, and if it develops in ways that are different from what we anticipate or expect, our business could be harmed.
Recently, with the evolution of O-RAN, most Telcos have begun seeking solutions that are compliant with the Disaggregation and Decoupling trends, especially in the Distributed Units market and with respect to UPF acceleration, where, in both cases, solutions are required which are stand alone and not a part of a comprehensive solution.
While we believe that we address the above needs with a comprehensive suite of products, many factors may affect the market acceptance of such solutions and our ability to secure Design Wins and/or awards in this market. Some of these factors include our limited experience in transacting with such mobile operators, the possible offering of a wider selection of products by some of our competitors, or the possible offering by our competitors of products which include wider, better suited or more advanced features than those included in our products, development of technologies with which our current products may not be compatible, and the price expectations of such Telcos and Mobile operators which may require us to offer our products at lower prices in order to better position ourselves in the market, or remain competitive, thus leading to lower gross profit, which in turn may have an adverse effect on our financial results.
We believe that the market's demand for our products and solutions in the infrastructure deployment for 4G/5G Distributed Units and UPF acceleration demonstrates a transition by the Telcos and related industry into O-RAN, which represents a fast-growing opportunity for us. Nonetheless, if such Telcos do not perceive the benefits of our offering to the market, or if our competitors or new market entrants are able to develop solutions for this market that are better suited to the market demand, offer their solutions at lower prices, or offer features that are, or are perceived to be, more effective than ours, this would have a material adverse effect on our business, including the results of operations and our financial condition.
Rapid development of our business in the Cloud-based, Telco and Telco-relatedservice 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 Telco-relatedservice providers' markets, which we anticipate would constitute our mainconsider major sources of growth engines in the future, may require us to offer longer payment terms to our targeted Cloud-relatedcustomers in the Cloud, Telco and Telco-related customersservice providers markets as customary in these markets, and in order to establish and maintain relationships with such targeted customers and strengthen our competitive position in such markets. In addition, we may be required by such customers to hold higher inventory levels by such customers in order to meet such customers'their expectations of anfor on-demand delivery,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 significantly in order to support our activities in these markets as mentioned above. There is no assurance that we will be able to reach such additional working capital levels, which may impair our business and growth strategy, and/or have an adverse effect on our financial results.markets.
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Our networking and data infrastructure solution products which are targeted by us mainly to OEMs,customers in the OEM, Cloud, Telco, Mobile and Telco customers,related service providers' markets, are characterized by long sales cycles
We target and sell our networking and data infrastructure solution products to customers mainly toin the original equipment manufacturersmanufacturing ("OEMs"OEMs"), Cloud, Telco, Mobile and Telco customers. Therelated 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 their systems. Theyour customers' systems or networks. Our customers usually need to define the required configuration of their server system/system, appliance deriveor network, define the needneeded solution and the type of adapters or other add-on products that will address their need, evaluate our products, intensively test and qualify our products for their use and then (or in parallel) negotiate the terms for a purchase. ItThis process is lengthy and may therefore take 12result in investing twelve months or more from the time we first contact a prospective customer before such customer implements our cardsproducts in its system, appliance or network, constituting what is known as a Design Win. Additionally, once a Design Win for one of our products is secured, our sales of these products typically involve significant capital investment decisions by the customer or its prospective end customers, as well as a significant amount of time to educate such end customers as to the benefits of systems and appliances that include our products. As a result, before initiating the deployment of our products within their infrastructure, and before purchasing systems and appliances, which include our products (and consequently facilitating sales of our products), companies spendour potential customers usually invest a substantial amount of time performing internal reviews and obtaining capital expenditure approvals, consequentlythereby lengthening the period of time required for a Design Win to mature into consistent sales. These long salessale 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 allocationThese long sale cycles may be especially exacerbated due to the spread 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.
Furthermore, we are required to allocate significant resources in order to compete for the achievement of Design Wins. Since there is no guarantee that we will be successful in achieving such Design Wins or that secured Design Wins will materialize into consistent sales in the competitive and rapidly evolving market in which we operate, unsuccessful efforts to secure or materialize Design Wins may lead to substantial increases in our expenditures, divert the attention of our sales force and management from other business opportunities, and could ultimately have a material adverse effect on our business, results of operations and financial condition.
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The loss of Design Wins from customers in the Cloud, Telco, Mobile and Telco customersrelated service providers' markets may result in significant quarterly and even annual fluctuations in our revenues.
The Cloud, Telco, Mobile and Telco-relatedrelated service providers' markets would constitute our main growth engines in the future.major sources of growth. We further anticipate that Design Wins secured from Cloud and Telco customers in these markets would be significantly larger in size thenthan our Design Wins from our OEMother customers. In light of the risk factors related to our operations in the Cloud-basedCloud, Telco, Mobile and Telco-relatedrelated service providers' markets as detailed elsewhere in this Annual Report, we may experience losses of Design Wins in such markets, for which we may not be able to compensate in a timely manner. The losses of such Design Wins may result in significant quarterly or even annual fluctuations in our revenues and results of operations.
Rapid development of our business in the Cloud-basedCloud, Telco, Mobile and Telco-relatedrelated 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-basedCloud, Telco, Mobile and Telco-relatedrelated service providers' markets, and our increasing operations and efforts in these markets, require us to adopt a lower gross margin strategy relativelyrelative to our gross margins in past years in order to take advantage of increased revenue potential and opportunities in these markets. While in the past we were able to increase our profitability while operating under such lower gross margins, there can be no assurance that we will be able to maintain or increase our profitability and/or earnings per share in the future and we may not be successful in maintaining or increasing our profitability and/or earnings per share while operating under such lower gross margins in the future.
The lossrapid development of the Cloud, Telco, Mobile and related service providers' markets may lead certain of our largest evercustomers to explore various technologies at different points in time during their development process, which are not necessarily compatible with our solutions, or for which our solutions are not designed, for their own internal reasons, even after we secured Design Win which we announced in 2017 may lead to excess inventory levels, may lead to significant write-offs, may cause legal disputes, may significantly increase our operational efforts related toWins with such losscustomers, and may divert the management’s attention,ultimately decide to pursue different solutions than ours, which will be harmful formay impact our businessability 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 announcedsecure 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 largest-ever Design Win with a giant top-tier Cloud player. For additional information regardingsolutions were selected, for reasons which are not related to us and which are not under our announcements relatingcontrol. If such players decide to said Design Winpursue other paths than the ones for which we published in 2017, see "Item 4.B. – Business Overview."
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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 their ownother 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 fulfilmentfulfillment 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, one ofa customer will place orders for our customers places ordersproducts under several Design Win
The market for our products is highly competitive and some of our competitors may be better positioned than we are.
The market for our products is highly competitive. We face competition from numerous companies, some of whichwhom are more established, benefit from greater market recognition and have greater financial, production and marketing resources than we do. For example,
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 (now a part of Marvel), Mellanox, Netronome, Napatech, are the main competitorsMyricom (a subsidiary of someCSP), Bittware and Nallatech (both now a part of Molex), Lanner and Caswell compete with certain of our Smart Cards. In some cases of FPGA based cards, Intel and Xilinx (recently acquired by AMD) also compete with our Smart Cards, products. however, similarly to the Server Adapters space, they target mostly the biggest accounts and only with mainstream products, while for other accounts they cooperate with us.
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In the Smart Platforms products sector, our competition is fragmented, and differs with respect to the specific solution offered by us. With respect to our uCPE products, to our knowledge our main competitors are Caswell, Lanner, Advantech and Nexcom.
With respect to the Integrated Distributed Units ("DU"s), there is significant competition for the platform of a DU only (by all server manufacturers) and competition for the Smart Cards which go inside (as mentioned above).
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
We may not be successful in achieving and consummating Design Wins for our products for the Cloud, Telco, Mobile and Telco related products,the service providers markets, which we anticipate would constitute oura main growth engines in the future.
Our ability to achieve Design Wins for our products for the Cloud, Telco, Mobile and Telco related products,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 not underout of our control. These factors include the highly competitive nature of the markets in which we operate, including the Cloud, Telco, Mobile and Telcoservice providers' markets, the long sale cycles of our products to our OEMs, Cloud, Telco and TelcoMobile customers, as well as other factors detailed in this Item 3.D. In addition, the loss, ineffectiveness or inability to maintain our customer relationships or our inability to develop new customer relationships, especially due to limitations on travel and meetings and the general disruption of our business due to Covid-19, as detailed above, may have an adverse effect on our ability to achieve, secure or consummate Design Wins for our Cloud, Telco, Mobile and Telcoservice providers' related products.
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 change,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:
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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;
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Diversion of management's attention from our core business; and
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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.
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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 the enhancement of existing products generally in response to rapidly changing customer preferences, technologies, and industry standards. We cannot guarantee the continued success of our products, norefforts, or that theyour 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.
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-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 customers may replace the servers and appliances they currently use, use or sell servers and appliances that do not require our cards, and/or incorporate cards other than ours.
Many of our
customers that use and/or sell servers and appliances which include our cards do so for a few years, and then consider migration to a newer generation. We cannot guarantee that our cards will be needed or selected for such new generation or compatible with it. A decision by a current customer to select a new server and/or appliance without including our cards in such new server and/or appliance may have a significant adverse effect on our results of20
We may experience difficulty in developing solutions for servers and appliances with proprietary interfaces, which may be used by some of our potential customers.
The market for networking and data infrastructure includes servers and appliances that make use of proprietary interfaces. These servers and appliances are offered to our potential customers in addition to the customary servers and appliances which use standard interfaces. Our potential customers may decide to use servers and appliances with such proprietary interfaces instead of the customary standard interfaces for which several manufacturers may provide add-on cards. There 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 short lead time of customer orders introduces uncertainty into our revenues and severely limits our ability to accurately forecast future sales.
Our sales are made on the basis of purchase orders, which may be placed pursuant to Design Wins, rather than long-term purchase commitments. In addition, our customers may defer purchase orders. The short lead time for firm purchase orders introduceintroduces uncertainty into our revenue and production forecasts and business planning, and leadleads 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 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.
While we are generally required to fill orders for our products within one or two weeks following the receipt of a firm purchase order, we are usually required to place orders of certain components for our products within sixteen to twenty weeks prior to delivery, and in some cases on even earlier dates prior to delivery. 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 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 effects of Covid-19.
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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 2020 where we aborted some efforts which did not match our focus strategy), or due to our being unsuccessful in the market, or to other related triggers. Such cancellations may result in a significant one-time adverse effect on our results of operation.
The loss of a significant customer may have a material adverse effect on us.
We depend on a small amountnumber of customers for our products. Our top four3 customers in 20172020 accounted for approximately 48%36% of our revenues in 20172020 (out of which our top customer accounted for approximately 21%13% of our revenues in 2017)2020). 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 and 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.
Our sales and marketing strategy includes development and maintenance of strategic relationships with leading OEMs in the servers industry and server-based systems industry, as well as with leading
Cloud, Telco andWe 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.
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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 which 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, 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 assets acquired from ADI Engineering, Inc. in 2015 under the ADI APA, as defined below; 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 of our subsidiaries or in relation to the assets acquired by us from ADI under the ADI APA, 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.
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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 you that patents will be issued from 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 this technologyit 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
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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,impairing, of the relevant assets. In addition, our operation of any acquired or merged businesses, technologies, or assets could involve numerous risks, including:
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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;
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Diversion of management's attention from our core business;
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Substantial expenditures, which could divert funds from other corporate uses;
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Entering markets in which we have little or no experience; and
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Loss of key employees of the acquired operations.
We cannot be certainassure 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 and customer initiatives, relatingincluding such that relate to the environment, conflict minerals, privacy or other social responsibility 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.
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.
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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 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, columbite-tantalite (coltan), and gold or their derivatives, which are limited to tantalum, tin and tungsten, 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, becauseBecause 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".
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.
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 the spread of Covid-19, when our employees are required to work from home and remotely access our IT networks.
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Risks Relating to Operations in Israel and Internationally
The tax benefits available to us under Israeli law require us to meet several conditions and may be terminated or reduced in the future, which would increase our taxes.
Our production facilities have been granted "Approved Enterprise" or "Benefited Enterprise" status in past years and currently hold a "Preferred Enterprise" status under the Encouragement of Capital Investments Law, and since and as such, we are entitled to certain tax benefits. In order to be eligible for these tax benefits, we must meet certain conditions. If we fail to meet these conditions in the future, the tax benefits could be reduced or canceled. These tax benefits may not be continued in the future at their current levels, or at any level. The termination or reduction of these benefits may increase our income tax expense in the future. To the best of our knowledge, to date we have met the conditions for benefits under each of our "Approved Enterprise" and "Benefited Enterprise" plans and under our "Preferred Enterprise" status in all material respects. There can be no assurance, however, that we will continue to meet such conditions in the future. If these tax benefits are reduced, cancelled, or discontinued, our Israeli taxable income would be subject to "regular" Israeli corporate tax rate. The regular corporate tax rate for Israeli companies in 2013 was 25%, 26.5% in 2014 and 2015 and 25% in 2016. In December 2016, the regular tax rate in Israel was reduced to 24% in 2017 and to 23% as from 2018 and thereafter. See "Item 10 –Additional– Additional Information – Taxation – the Encouragement of Capital Investments Law, 1959" for more information about our "Benefited"Preferred Enterprise" status.
The government programs and benefits, which we previously received, require us to meet several conditions in order to transfer intellectual property developed using government funding abroad, or in order to consulateconsummate a change inof control.
We received grants from the Government of Israel through programs with the Office of the Chief Scientist of the Israeli Ministry of Economy and Industry (now known as the Israel Innovation Authority, or OCS,the "IIA"), as it was known prior to Amendment No. 7 (the "R"R&D Amendment"Amendment") to the Israeli Law for the Encouragement of Industrial Research, Development and Development,Technological Innovation, 1984, and related regulations (the "R"R&D Law"), now known as the Israel Innovation Authority (the "IIA"Law").
On July 29, 2015, the Israeli Parliament, the Knesset, enacted the R&D Amendment, which, effective as of January 1, 2016, amends material provisions of the R&D Law, including royalty rates, changes to royalty rates upon transfer of manufacturing rights abroad, etc., and leaves substantial discretion with the newly established IIA, and, until recently, included only guidelines to some of the core issues ofIIA.
In addition, the R&D Law thus causing much ambiguity as toand the implementation of the R&D Amendment and its effect on companies which developed know-how using funds received from the OCS.
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 conflicts within neighboring counties such as Egypt 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 border with the Gaza Strip, which resulted in missiles being fired from the Gaza Strip into Southern Israel. Similar hostilities accompanied by missiles being fired from the Gaza Strip into Southern 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 violence with the Palestinian population, which resulted in clashes between Israel and armed Palestinians on the border with Gaza, in 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 relations between Israel and Egypt, and could affect the region as a whole. Similar civil
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Civil unrest and political turbulence has 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 believed to have a strong influence among extremist groups in the region, such as Hamas in Gaza, and Hezbollah in Lebanon. Iran is known to support the government of Syria in its battles against various rebel militia groups in Syria. Furthermore, 2014 saw the rise of an Islamic fundamentalist group, known as ISIS. Following swift conquering operations, ISIS gained control of vast areas 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, following which Russia's armed forces have also engaged in limited operations to defeat ISIS and other rebel groups operating in Syria. 2017 saw several defeats by ISIS, and the establishment of Hezbollah and other Shiite groups 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 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.
Any future armed conflict, political instability, continued violence in the region or restrictions could have a material adverse effect on our business, operating results and financial condition. While such hostilities did not in the past have a material adverse impact on our business, we cannot guarantee that hostilities will not be renewed and have such an effect in the future. The political and security situation in Israel may result in parties with whom we have contracts claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions.
Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could adversely affect our operations and could make it more difficult for us to raise capital or obtain components used in our products. Since many of our facilities are located in Israel, we could experience serious disruptions if acts associated with this conflict result in any serious damage to our facilities. Any insurance coverage we may have may not adequately compensate us for losses that may occur and any losses or damages incurred by us could have a material adverse effect on our business. Any future armed conflict or political instability in the region 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.
Many of our employees in Israel are required to perform military reserve duty.
All non-exempt male adult citizens and permanent residents of Israel under the age of 40, or older for reserves officers or citizens with certain occupations, as well as certain female adult citizens and permanent residents of Israel, are obligated to perform military reserve duty and may be called to active duty under emergency circumstances. In recent years, there have been significant call-ups of military reservists, and it is possible that there will be additional call-ups in the future. While we have operated effectively despite these conditions in the past, we cannot assess what impact these conditions may have in the future, particularly if emergency circumstances arise. Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees or a significant number of our other employees due to military service. Any disruption in our operations would harm our business.
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Exchange rate fluctuations and international risks could increase the cost of our operations.
Approximately 95%97% of our international sales are denominated in U.S. Dollars and may be subject to government controls and other risks, including, in some cases, export licenses, federal restrictions on export, currency fluctuations, political instability, trade restrictions, and changes in tariffs and freight rates. Our U.S. dollar costs in Israel and Denmark will increase further to the extent that inflation in Israel andand/or Denmark exceeds the devaluation of the NIS andand/or Danish Krone ("DKK"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 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 computersFor example, we 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. WeThere can givebe 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’sCompany's results.
Uncertainty in global economic conditions, including any disruption in financial and credit markets, such as the current disruption to the global economy relating to the spread of Covid-19, pose a risk to the overall economy that could impact demand for our and our customers’customers' products, as well as our ability to manage commercial relationships with our customers suppliers and creditors.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.
Israeli courts might not enforce judgments rendered outside of Israel.
We are incorporated in Israel. All of our executive officers and directors are non-residents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult to enforce a judgment obtained in the United States against us or any such persons. It may also be difficult to enforce civil liabilities under U.S. federal securities laws in original actions instituted in Israel. However, subject to certain time limitations, Israeli courts may enforce U.S. final executory judgments for liquidated amounts in civil matters obtained after due trial before a court of competent jurisdiction (according to the rules of private international law currently prevailing in Israel) which enforces similar Israeli judgments, provided that the requisite procedural and legal requirements are adhered to.
If a foreign judgment is enforced by an Israeli court, it generally will be payable in NIS, which can then be converted into foreign currency at the rate of exchange of such foreign currency on the date of payment. Pending collection, the amount of the judgment of an Israeli court stated in NIS (without any linkage to a foreign currency) ordinarily will be linked to the Israeli consumer price index plus interest at the annual statutory rate prevailing at such time. Judgment creditors bear the risk of unfavorable exchange rates.
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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 rise at all.
In the past, our share price has fallendeclined, including during periods of uncertainty in global economic conditions, and we expect it tomay be affected by, such uncertainty againamong others, downturn in economic conditions, including the current downturn to the extent that it resumes.global economy relating to the spread of Covid-19, as detailed above. We cannot assure you that our share price will stabilize,remain stable or not decline in the coming fiscal year.
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. 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, for 2015 which was distributed in April 2016 and for 2016 which was distributed in April 2017. 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 in order to increase our available funds in support of our long-term growth.
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 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 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’shareholders' investment may be reduced. See "Item 8.A
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 $1.00US$ 1.00 per share of our ordinary shares. If the closing bid price of our common stock were to fall below $1.00US$ 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’sNASDAQ'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, Thethe 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.
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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 moreprices equal to or higher than the price for which they paid for them.
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 our assets in a taxable year, averaged over the year and ordinarily determined based on fair market value and including our pro-rata share of the assets of any company in which we are considered to own, directly or indirectly, 25% or more of the shares by value, are held for the production of, or produce, passive income. If we were to be a PFIC, and a U.S. Holder does not make an election to treat us as a "qualified electing fund,"fund", or QEF, or a "mark-to-market" election, "excess distributions" to a U.S. Holder, and any gain recognized by a U.S. Holder on a disposition or our ordinary shares, would be taxed in an unfavorable way. Among other consequences, our dividends, to the extent that they constituted excess distributions,constitute "excess distributions", would be taxed at the regular rates applicable to ordinary income, rather than the 20% maximum rate applicable to certain dividends received by an individual from a qualified"qualified foreign corporation,corporation", and certain "interest" charges may apply. In addition, gains on the sale of our shares would be treated in the same way as excess distributions. The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of future income and assets, which are relevant to the determination of PFIC status. In addition, under the applicable statutory and regulatory provisions, it is unclear whether we would be permitted to use a gross loss from sales (sales less cost of goods sold) to offset our passive income in the calculation of gross income. 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.
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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 at December 31, 20172020 as "held-to-maturity"."held-to-maturity." As of December 31, 2017,2020, we hold approximately US$ 13.750.4 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 considered to be other-than-temporary. As of December 31, 2017,2020, we were not required to adjust the carrying value of our investment securities since there were no other-than-temporary impairments.
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" (and previously "SILCF") from February 11, 2008. Prior thereto, our shares were listed on the NASDAQ Capital Market (previously known as the NASDAQ Small-Cap). On December 20, 2005, we obtained the approval of the Tel Aviv Stock Exchange, or TASE, for the listing of our shares on TASE. Trading of our shares on TASE commenced on December 27, 2005. On October 26, 2015, our Board of Directors resolved to act to delist the Company’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 Offer and Listing – Markets and Share Price History".
In March 2014, we filed a "shelf" registration statement with the Securities and Exchange Commission (the "SEC""SEC") effective until April 4, 2017, under which we were authorized to sell up to $80,000,000US$ 80,000,000 of our ordinary shares in one or more offerings. On April 3, 2017, we filed a replacement "shelf" registration statement with the SEC (the "April"April 2017 Shelf Registration Statement"Statement"), designated to replace our March 2014 "shelf" registration statement, which was declared effective on June 1,2, 2017, under which we have not offered any securities for sale to date. Under the April 2017 Shelf Registration Statement, we maywere authorized to sell up to $80,000,000US$ 80,000,000 of our ordinary shares in one or more offerings once it is declared effective by the SEC. We may offer securities under theofferings. The April 2017 Shelf Registration Statement untilexpired on May 31, 2020.
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In December 2014, we entered into a share purchase agreement with Fiberblaze A/S (now Silicom Denmark (Fiberblaze A/S)), a provider of high performance application acceleration solutions for the mobile, telecommunication, network monitoring, cyber security, financial and related industries ("Fiberblaze"Fiberblaze"), Nikolaj Herman, Fiberblaze Holding APS ("Fiberblaze Holding"Holding"), a Danish company, Hilmer APS, a Danish company ("Hilmer"Hilmer"), and Jakob Hilmer, for the purchase of the entire share capital of Fiberblaze and Fiberblaze US (the "Fiberblaze SPA""Fiberblaze SPA") in consideration for an amount of approximately $10US$ 10 million, plus such additional amounts as earn out payments in the event Fiberblaze meets pre-determined criteria during the Evaluation Period (as such term is defined in the Fiberblaze SPA). In 2016 we paid an earn out payment in the amount of US$ 1,463 thousand, of which 90% was paid in cash and 10% in options to purchase ordinary shares of the Company. For additional information regarding the Fiberblaze SPA, see "Item 10 – Additional Information – Material Contracts", "Item 19 – Exhibits – Exhibit 4.7.4.10. – Fiberblaze SPA" 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 with ADI Engineering, Inc. ("ADI"ADI"), a US company which provides Intel®-based products targeted at SDN, NFV, IoT ('Internet of Things'), Cloud computing and Virtualization, Steve Yates and Patricia Yates (the "ADI APA""ADI APA") for the purchase of ADI's assets in consideration for an amount equal to $10US$ 10 million in cash at closing, and an additional consideration subject to the attainment of certain future performance milestones applicable to the years 2015-2017 (the "Excess Consideration""Excess Consideration"). In 2016 we paid an Excess Consideration in the amount of US$ 3,000 thousand for the attainment of the 2015 performance milestone detailed in the ADI APA. In 2017 and 2018 weWe did not pay any additional Excess Consideration since the respective performance milestones for each of 2016 and 2017, respectively, were not attained. For additional information regarding the ADI APA, see "Item 10 – Additional Information – Material Contracts", "Item 19 – Exhibits – Exhibit 4.8.4.11. – ADI APA" and Note 3A to our financial statements included elsewhere in this annual report.
Principal capital expenditures and divestitures
From January 1, 20172020, to December 31, 2017,2020, our capital expenditures totaled to approximately $2,118US$ 2,543 thousand (compared to $1,705US$ 1,635 thousand during 20162019 and $20,771US$ 1,740 thousand during 2015)2018), of which approximately $2,006US$ 2,092 thousand (compared to $1,589US$ 1,234 thousand during 20162019 and $1,608US$ 1,590 thousand during 2015)2018) can be attributed to machinery and equipment, and approximately $112US$ 451 thousand (compared to $116US$ 401 thousand during 20162019 and $1,374US$ 150 thousand during 2015)2018) can be attributed to office furniture and equipment and leasehold improvements. We have financed our capital expenditures from our available internal resources, and expect to continue to finance our capital expenditures in a similar manner in 2018.2021.
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B.Business Overview
We are an industry-leading provider of high-performance networking and data infrastructure solutions. Designed primarily to improve performance and efficiency in Telco and Mobile Deployments Infrastructure, Cloud and Data Center environments, our solutions increase throughput, decrease latency and boost the performance of serverscompute and networking appliances,nodes within the network, including the Edge (Distributed Units) and core network (Central Unit) within the mobile infrastructure as well as 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 range of cutting-edge silicon technologies as well as FPGA-based solutions, are ideal for scaling-up and scaling-out mobile and cloud infrastructures.
Our products are used bytarget major Telcos and Mobile operators, Telcos and Mobile Equipment vendors, Cloud players, Networking appliances vendors, service providers telcos and OEMs as components of their infrastructure offerings, including both add-on adapters in the Data Center and stand-alone virtualized/universal CPE devices at the edge.
Products
Our products are comprised of:
(i)
Server network interface cards (Server Adapters) - These adapters are used mostly in networking appliances which are used both in the Cloud (including public cloud and On Premise cloud) and in the Edge.
(ii)
Smart Cards - Intelligent and/or programmable cards, with features such as encryption, Time Synchronization, acceleration, data compression, redirection and switching, packet processing, time stamping, packet capture solutions, ultra-low latency solutions, and other offloading features. These products are used mostly inside servers which are a part of Cloud and Enterprise Data centers or inside Distributed Units and Central Units which are a part of mobile infrastructures.
(iii)
Smart Platforms - Customer-Premises Equipment, including virtualized Customer-Premises Equipment (vCPE) and universal Customer-Premises Equipment (uCPE) (together, "CPE"), Edge devices for SD-WAN and NFV deployments and Distributed Units (which may or may not include some of the above-mentioned Smart Cards) for the 5G mobile infrastructure market.
Server Adapters
We have developed a line of products for the server networking industry, which facilitates interaction between servers and switches, allowing them to communicate with each other through a larger number of ports and with higher performance than their original manufacturer designed capabilities. Our designs have resulted in powerful products that allow server-based systems to fully exploit the high speed potential of 1/10/25/40/100 Gigabit Ethernet. The products have either one, two, four, six, or eight ports, which plug into the servers which need to have such capabilities.
Smart Cards
Our Smart Card products include smart server adapters such as: (a) redirector and switching cards, (b) encryption and data compression hardware acceleration cards, (c) FEC (Forward Error Correction) acceleration and offloading cards, (d) Time Synchronization cards, and (e) FPGA based packet processing cards, and (d) compute blades which offer general compute capability in networking intensive environment.
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Our redirector and switching card cards improve performance by: (a) enabling switching fabric on a network interface card ("NIC"NIC") while (in some cases) providing separate data path and management path for the switching fabric and sometimes eliminating the need for a Top Of Rack switch within the Cloud, (b) enabling traffic filtering in order to reduce the amount of traffic received by the server, limiting it to only essential traffic for the server CPU, and consequently improving server performance, (c) load-balancing between external servers and/or CPUs and/or CPU cores increasing the efficiency of the server, and (d) offloading some of the CPU tasks to the switch on the NIC.
Our product line of high-performance encryption cards is designed to improve the throughput of servers with respect to which the traffic into whichand from them requires encryption or decryption. The products improve the performance of such servers by independently executing encryption tasks, thereby accelerating the encryption process and freeing the CPUs of such servers for other activities. This product line can off-load not only encryption functionality, but compression functionality as well. The market need for compression off-load was previously limited to some content delivery and WAN optimization networking applications; however, such compression off-load is now becoming 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/25G/40G/100GFEC card is the result of our cooperation with Intel. Intel used its intellectual property, or IP, for FEC within an eASIC process resulting in a fast time to market for ASIC, for which we built the first card. The purpose of the card is to offload some of those tasks that are supposed to be carried out by the CPU of the Distributed Unit within 4G/5G mobile deployments, in order to allow for better performance. Such performance is more necessary in the 5G space, due to the higher bandwidth, and additional calculations and processing that need to occur at the edge, while at the same time more Radio Units are required to be attached to each DU. Therefore, it is essential to offload the FEC task from the main CPU onto a card. We believe that our FEC acceleration card provides such offload for the best performance to price ratio.
Our Time Synchronization card provides a solution for the 4G/5G deployment time synchronization requirements. In 4G, when the quantity of edge compute units was relatively small and most of the computation was done in the core or back haul, the solution for time synchronization was based on external switching units which included the time synchronization mechanisms. Such solutions were very expensive. In 5G, where both the quantity of Distributed Units is increasing and the requirements for time synchronization are becoming more complex, there is a need for a different solution and our solution incorporates the full features required for time synchronization on a card which is also a NIC. The card integrates NIC technologies with time synchronization technologies, while the software handling the entire process is ported to run on the host DU processor and as such we believe, provides the best performance to price ratio. We have built a number of variants of our Time Synchronization cards, which address various numbers of ports (up to 12) as well as various speeds.
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Our FPGA (field programmable gate array) based packet processing cards are divided between two families of cards, based either on the world’s largest providers of such FPGA components: Xilinx (recently acquired by AMD) and Intel (which acquired Altera a combined standard Intel® networking siliconfew years ago). Our Xilinx based cards are sold mostly in the Packet Capturing market and an FPGA,towards the High Frequency Trading market, or on a pure FPGA based solution, working at wire speed to achieve a variety of functionalities. Our products include three levels of solutions: The first level include minimal solution related IP, whereHFT market. For the Packet Capture market, we provide our customers with "Naked" FPGAsell cards which they can use to program ininclude our IP for Packet Capturing. For the HFT market we sell mostly “naked” cards which do not include any way they want. In these cards,software code other than the hardware we only provide FPGA and softwarecode which areis required by our customers in order to test and verifyadd their own code to the cards. For some of our Xilinx based cards, functionality. In the second level we provide a framework for a Smart Card.which we call Packet Mover. Such a framework allows the customer to add to the FPGA its own application, while the various interfaces are already a part of the framework, providing optimized solutions for low latency, throughput and speed. InOur Intel based FPGA cards are a result of a close relationship with Intel over the third level we provide solutions implemented in the FPGA. Such solutions are related to Packet Capturing, HFT, encryption/decryption, Deep Packet Inspection (DPI) and other Cloud and NFV related applications. The implementation of these solutions by the customers is proposed both in an "as is" model and as a sample codepast 2 years, during which the customer can then use as the basis to what it wants to do.
On November 1, 2017, we issued a Press Release on Form 6-K announcing announced that one of our existing customers, a world-leading Cyber Security player, has selected our encryption solution, and plans to deploy it in a number of its new platforms.
On March 21, 2017,26, 2019, we issued a Press Release on Form 6-K announcing the achievement of our largest-ever Design Win granted to us bythat a Cloud player for a highly customized version of our 100-Gigabit high bandwidth switch fabric on a NICleading cloud solution.
On October 13, 2020, we issued a Press Release on Form 6-K announcing that a Tier-1 Mobile Operator has selected our 4G/5G Next Generation Integrated Distribution Unit (DU) for which it had orderedField Trials. Such DU included our product. In communicatingSmart Cards.
On January 11, 2021, we issued a Press Release on Form 6-K announcing that a Top-5 Global Telco has selected our Accelerator Cards for its decision, the customer indicated that the cancellation of such Design Win was unrelated to our product, development or support, which was flawless, and that rather, its decision to abort the configuration was based on modification to its technical and business strategy.
Smart Platforms
Our main Stand-Alone product line includesSmart Platform products are divided between a family of CPE (Customer Premise Equipment), vCPECPEs (including also uCPEs and vCPEs) which are used by Telcos, Cloud Players, service providers and Application vendors (OEMs) to provide a variety of services to their customers, and a family of Distributed Units and other compute nodes which are used by Telcos and Mobile operators for their 4G/5G deployments at the Edge or Edge Networking Devices products. These productswithin their mini Clouds. Both families are full computing platforms in a networking intensive environment mostly existingand many of the technologies incorporated into both families are the same, which facilitates the use of almost identical solutions in the Cloud edge, and offered by both Cloud Vendors, Telco’s and application vendors. Such platforms are based on compute blades, integrating such blades into a full CPE/EDGE/Appliance Units. families.
Our products in thisthe "CPE" family includesinclude 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 the CPE devices are used is SD-WAN, for which most of our systems have been deployed. The devices are also frequently used by NFV which uses SD-WAN as its leading application running on the device and may be used for additional applications also running on the device. Our capabilities within the CPE world include modular approach and secured management features, as well as customized designs, to help the customer achieve its required challenging performance, data volume and infrastructure-scale-up goals. Our CPE products offer reliability and robust performance, addressing challenges of SD-WAN and NFV integration and deployment.
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Our 4G/5G related Smart Platforms are typically based on high end units originally developed as CPEs. Incorporating the advantages of the CPEs on the one hand and integrating our Smart Cards into the device – a must have feature set within the mobile infrastructure Distributed Units – on the other hand provides us with a significant advantage when proposing such devices, which include time synchronization and FEC accelerator (or an FPGA accelerator) as a Distributed Unit for 4G/5G deployment.
We also sell Smart Platforms which consist of a combination of all product families in a single product. An example of such integration is our IBS (Intelligent Bypass Switches), which combine functionalities as well as design elements from each of our Server Adapters, our Smart Cards and our Smart Platforms.
On November 20, 2017,April 29, 2019, we issued a Press Release on Form 6-K announcing that we have been selected by a Tier-1 Service provider to deliver Edge devices for one of its services.
On January 9, 2020, we issued a Press Release on Form 6-K announcing that one of the U.S.'s largest healthcare chains has selected our latest generation CPEs as a high-performance platform for its new organization-wide SD-WAN-based network.
On April 8, 2020, we issued a Press Release on Form 6-K announcing that a leading provider of Cloud-based networking solutionsmajor systems integrator has selected our vCPE edge devices as its hardware platform10G, 40G and 100G Intelligent Bypass Units for a customized Cloud-based SD-WAN networking solution.
On October 5, 2020, we issued a Press Release on Form 6-K announcing that we achieved three new Telco uCPE wins related to SD-WAN.
On October 13 2020, we issued a Press Release on Form 6-K announcing that a Tier-1 Mobile Operator selected our Bypass Switches4G/5G Next Generation Integrated Distributed Unit (DU) (incorporating our FEC and Intelligent Bypass Switches which allow the use of our solutions even where the networking component of the solution is already present.
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 2015, 20162018, 2019 and 20172020 approximately 66%80%, 65%73% and 80%61% of our sales, respectively, were in North America, 20%16%, 24%20% and 16%33% of our sales, respectively, were in Europe, and 14%4%, 11%7% and 4%6% 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 from (i) components purchased from third parties, and (ii) sub-assemblies manufactured by sub-contractors. In addition, we perform testing and quality assurance procedures with respect to the components and sub-assemblies which are incorporated into our final products and to the final products themselves. In addition,Furthermore, we use turnkey manufacturers to manufacture some of our products.
We seek to monitor quality with respect to each stage of the production process including, but not limited to, the selection of component suppliers, warehouse procedures and final testing, packaging and shipping. We have been certified as complying with "ISO-28001:2007", "ISO 9001:2015", and "ISO 14001:2015", which are the quality control standard used in our industry. We believe that our quality assurance procedures have been instrumental in achieving a high degree of reliability for our products. We intend to continue to maintain and improve the efficiency of such procedures.
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Although we generally use standard parts and components for our products, certain key components used in our products are currently available from only one source, and others are available from a limited number of sources, on which we are dependent. For example, asome key componentcomponents in many of our products isare manufactured by Intel®.Intel® and Broadcom. We believe that during regular supply periods we maintain a sufficient inventory of these components to protect against delays in deliveries. For additional information see the risk factor entitled "Loss of our sources for certain key components could harm our operations" under Item 3.D – "Risk Factors".
Firm purchase orders for our products generally include an agreed supply date for the supply of our products. In addition, we may agree to fill orders for our products within short periods of time after receipt of a firm purchase order based on the immediate availability of our products and/or components in our inventory. Consequently, we need to maintain inventory at levels that are in accordance with our forecasts and those of our customers. There can be no assurance that such forecasts will indeed materialize into firm purchase orders and consequently we cannot guarantee that the full volume of such inventory will be delivered against firm purchase orders and not remain unused.
The Dodd-Frank Wall Street Reform and Consumer Protection Act includedincludes disclosure requirements regarding the use of "conflict" minerals mined from the DRC and procedures regarding a manufacturer's efforts to prevent the sourcing of such "conflict" minerals. These requirements will require companies to undertake due diligence, disclose and report on whether or not such "conflict" minerals originate from the DRC. This implementation of these requirements could adversely affect the sourcing, availability and pricing of minerals such as cassiterite, wolframite, columbite-tantalite (coltan), gold and/or their derivatives (tantalum, tin, and tungsten) which are used in the manufacture of certain components used in our products, as well as affect the companies we use to manufacture components of our products. As a result, this could limit the pool of suppliers who can provide us DRC "conflict free" components and parts, and we may not be able to obtain DRC "conflict free" products or supplies in sufficient quantities for our operations. In circumstances where conflict minerals in our products are found to be sourced from the DRC, we may take actions to change materials or designs to reduce the possibility that our purchase of conflict minerals may fund armed groups in the region. These actions could add engineering and other costs to the manufacture of our products, and we may not be able to obtain "conflict free" products or supplies in sufficient quantities for our operations. In addition, we incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products, as further elaborated below. Also, because our supply chain is complex, we may face reputational challenges with our customers, shareholders and other stakeholders if we are unable to sufficiently verify the origins for the minerals used in our products. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free. There can be no assurance that we will not experience delays in the supply of critical components in the future or that we will have a sufficient inventory of critical components at such time to produce products at full capacity. If we do experience such delays and there is an insufficient inventory of critical components at that time, our operations and financial results would be adversely affected.
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Marketing Channels
The principal market sectors for our products are:
(i)
Providers of applications on Network appliances, including mostly SD-WAN, Cyber Security and Application Delivery applications;
(ii)
Telcos / Carriers / service providers deploying CPEs for SD-WAN and NFV;
(iii)
Mobile Operators/Telcos/Carriers deploying 4G/5G infrastructure DUs and CUs;
(iv)
The "Cloud".
Our main business model for our line of products is called the Design Win Model. The following are the main aspects of this model:
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We approach a potential customer or are approached by such customer.
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If the potential customer shows interest in the products and we believe that achievement of a business relationship with the potential customer is possible, we ship products for such potential customer's evaluation.
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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.
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During the qualification process the potential customer usually purchases a larger amount of our products for more specific testing, which may include certain adaptations of our products to its needs.
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If the qualification process is successful, we enter into negotiations regarding the terms of a business relationship.
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In some cases, typically with the larger customers and with respect to Smart Cards, 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.
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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 OEMs whichthat 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 SD-WAN market, Cyber Security market, Data Storage market, Application Delivery market, Traffic managementManagement market, Network Monitoring market, data storage market, general servers market, WAN optimization market, SD-WANOptimization market and other server based applications markets. Our OEM customers sell their products to Telcos, Governments, Enterprises (headquarter and branch) and to Data Centers (regular and virtualized, including to the Cloud). Our strategy of carrying out strategic relationships with OEM customers continues to be the major 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. The majority of our revenues in 2017 were attributed to the sale of our products to OEM customers. In 2017 we have increased the proportion of our sales to Cloud/Virtualized data Center/SDN customers within our group of OEM customers, and we believe that we will continue to gradually increase the proportion of our sales to such customers. This isaddition, due to the fact that: (a)trends that we see in our industry, including primarily the market is moving towards running applications inshift to the Cloud; and (b) Cloud and web 2.0 companies are typically either using standard servers or design their own "white boxes" into boththe trend of which we offer our solutions. While there are no assurancesDisaggregation (non-proprietary standards that such solutions willallow separate parts of the network to be accepted by such Cloudpurchased separately) and Web 2.0 players, we believe that this trend has significant potential for us.
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 maintainedsimilar in our business model when we sell directly to Cloud players.
Our cooperation with Intel has resulted in material benefits to our selling process. Due to our close relationship with Intel, we mostly use their components in our products, and as such they provide us with assistance in the sales process, mostly with Smart Cards and Smart Platforms.
The loss of some of our OEM and/or Cloud customers, or any single key OEM or Cloud 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 OEMs or Cloud playersany such customer in the future. Payment terms of our OEM and Cloud customers are primarily up to 90 days net. Approximately 95%97% of our international sales are denominated in U.S. Dollars and may be subject to government controls and other risks, including, in some cases, export licenses, federal restrictions on export, currency fluctuations, political instability, trade restrictions and changes in tariffs and freight rates. We have experienced no material difficulties to date as a result of these factors.
Our arrangements with our OEM and Cloud 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 terminations other than with respect to products that newer technologies have eliminated the need for.
Our customers, including our OEM customers, Cloud 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, or reduction in sales to our Cloud customers could lead to reduced sales and could materially adversely affect our operating results. In addition, our business model also entails the risk that our customers will build up inventories in anticipation of a growth in deployments or sales. If such growth does not occur as anticipated, these customers may substantially decrease the amountnumber of products ordered from us in subsequent quarters, discontinue product orders or even attempt to return unused or unsold products. The loss of a major or key customer or group of customers, or a loss or ineffectiveness of severalsome of our OEM and/or Cloud relationships at approximately the same time, or the loss of any key Cloud or OEM customer, might have a material adverse effect on us.
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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’Appliance'. On June 12, 2012 we were issued 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 the bus slots of the motherboard adjacent to the rear side of the case.
On September 16, 2013, we acquired all of the intellectual property related to the unique Virtualization Off-Load Engine developed during the last two years by Net Perform Technology, Ltd., a privately held company registered in Hong Kong, China. Despite perceived exclusive access to this product, and our best efforts during the acquisition process to secure the same, internal or external parties may assert a claim of infringement regarding such intellectual property. We do not consider this intellectual property to be material for our operations.
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'Hybrid Networking Application Switch’Switch' from the United States Patent and Trademark Office. The patent relates to a unique solution for combining functionalities of a rack mounted networking switch and a rack mounted server into a single rack mounted enclosure comprising a hybrid networking application switch or an accelerated hybrid networking application switch.
For additional information regarding the risks to the Company with respect to patents and other intellectual property rights see the risk factor entitled "We may not be able to protect our intellectual proprietary rights" under Item 3.D3.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.
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We believe that our expanded feature set coupled with the general wide spectrum of solutions we offer gives us a competitive edge.
With respect to Server Adapters, until recently
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), Mellanox, Netronome, Napatech, Solarflare Myricom (a subsidiary of CSP), Bittware and Nallatech (both now a part of 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 Xilinx (acquired by AMD in 2020) 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 our Smart Cards sector, our main competitors are Cavium and Exar. In addition, Lanner, Portwell and Nexcom competewhile for other accounts they cooperate with our compute blades and network processor based cards.
In the Stand-alone ProductsSmart Platforms products sector, our competition is fragmented, and differs with respect to the specific solution 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),our uCPE products, to the best of our knowledge our main competitors are Net Optics (subsidiary of IXIA), Gigamon,Caswell, Lanner, Advantech and Interface Masters.Nexcom. With respect to our CPE/Edge/Low End Appliance products,the Integrated Distributed Units, while we face significant competition for the platform of a Distributed Unit only (by all server manufacturers) and competition for the Smart Cards which go inside (as mentioned above), there is only limited competition with respect to the best of our knowledgeintegrated solution we provide, which includes both the compute node and the Smart Cards which go inside, and we believe this approach provides us with an advantage over our main competitors are Portwell, Caswell, Lanner and Nexcom.
Governmental Regulation Affecting the Company
We are affected by the terms of research and development grants we have received from the IIA.
Under the terms of Israeli Government participation, a royalty of 3% or up to 5% of the net sales 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 commencement of sales of products developed with grant funds and ending when a dollar-linked amount equal to 100% of such grants plus interest at LIBOR is repaid. The terms of Israeli Government participation also impose significant restrictions on manufacturing outside Israel of products developed with government grants, in accordance with the terms and conditions of the pre-R&D Amendment regime. In addition, according to the pre-R&D Amendment regime the transfer to third parties of technologies developed through such projects is subject to approval of the OCS. Following the R&D Amendment there is currently much ambiguity regarding its implementation and its effect onLaw, research and development grants received prior thereto.
The terms of these grants prohibit the manufacture outside of Israel of the product developed in accordance with the program without the prior consent of the Research Committee. Such approval is generally subject to an increase in the total amount to be repaid to the IIA to between 120% and 300% of the amount granted, depending on the extent of the manufacturing that is conducted outside of Israel.
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The R&D Law, also provides that know-how from the research and development and any derivatives thereof, cannot be transferred or licensed to Israeli third parties without the approval of the Research Committee. The 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 with anlicense could be granted only if the Israeli company, withtransferee 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 related rights abroadthe obligation to pay royalties, if applicable.
Assignment of the know-how from the research and development and any derivatives thereof, cannot be permitted only in exceptional circumstances. In addition,transferred or licensed to non-Israeli third parties without the R&D Amendment determines thatapproval of the transferResearch Committee, whose approval is generally contingent on payment of manufacturing rights abroad, whether under a license or otherwise, shall only be allowed in special circumstances.
On May 7, 2017, the IIA published the Rules for Granting Authorization for Use of Know-How Outside of Israel (the "Licensing Rules""Licensing Rules"). The Licensing Rules enable the approval of out-licensing arrangements and other arrangements for granting of an authorization to an entity outside of Israel to use know-how developed under research and development programs funded by the IIA.IIA and any derivatives thereof. Subject to payment of a "License Fee" to the IIA, at a rate that will be determined by the IIA in accordance with the Licensing Rules, the IIA may now approve arrangements for the license of know-how outside of Israel. This allows companies that have received IIA support to commercialize know-how in a manner which was not previously available. In addition, the IIA has recently published a directive incorporating most of the former provisions, including those with respect to transfer of manufacturing rights, transfer of know-how and others.
In addition, we receive certain tax benefits and reduced tax rates from the Israeli government due to our status as a "Preferred Enterprise" under the Law for the Encouragement of Capital Investments-1959, as amended. See "Item 1010.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.
C.Organizational Structure
We have the following two wholly owned subsidiaries:
• Silicom Connectivity Solutions, Inc. – a private company incorporated in the United States; and • Silicom Denmark (Fiberblaze A/S) – a private company incorporated in Denmark. 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, being a 100% owned subsidiary of Fiberblaze. In October 2016, we commenced a voluntary liquidation process for the liquidation of Fiberblaze US LLC, which was completed in August 2017. In 2017, we changed the name of the company from Fiberblaze A/S to the company's current name – Silicom Denmark (Fiberblaze A/S) and all the rights related to the company's |
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D.Property, Plant and Equipment
We do not own any real property, but we lease property at six 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 offices and in Paramus, New Jersey, the United States, and our research and development facilities are located in Kfar Sava, Israel, in Søborg, Denmark, and in Charlottesville, Virginia, the United States.
Our executive offices in Kfar Sava which we are leasing for a period of five years, ending February 28, 2020, with an option to renew the term for an additional five-year period. This facility is approximately 1,500 square meters in size, and we are currently leasing it for a five-year term ending February 28, 2025. Our monthly rental payments for this office space (which include various maintenance services) are equal to approximately US$ 39,100. We are leasing additional office space in the same premise in Kfar Sava of approximately 258 square meters for a six-year term ending February 28, 2025, for which the monthly rental payments (which include various managementmaintenance services) are equal to approximately $35,000.
We have conducted our manufacturing in Yokne'am, Israel since 2000.
In January 2014, followingMarch 2020, we entered into a lease agreement for the termination our lease (in effect since January 2009) due to our decision not to exercise our option to renew it, we moved to a newof an approximately 4,000 square meter manufacturing facility in Yokne'am, which we are leasing pursuant to a sub-leaseIsrael for a period of three years, ending December 31, 2016, with an optionup to renew the term for an additional period of three years under the same terms, which we exercised on October 11, 2016 for a period of 36 additional months commencing January 1, 2017 under the same terms of the lease previously in effect. 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 as well as fees for various management and upkeepincluding maintenance services) arewill vary during the lease period from between approximately $45,000.
In AugustSeptember 2016, we entered into a Lease Agreementlease agreement with Naji Ezekiel & Sons - Management and Maintenance Ltd., for the lease of 450 square meters of storage space in Yokne'am Illit and the monthly payments are approximately $6,000. This agreement isUS$ 7,300 (which include participation in effect for a period of 24 months, with an option put in place to extendmaintenance and insurance). While the term of this lease agreement ended in September 2020, we are continuing to lease this space on a monthly basis on the same terms. We expect to terminate the lease by 12 months, twice at an increaseend of 5%June 2021. We are currently in rental fees per renewal period.
On October 29, 2019, we entered into a commercial lease agreement to lease office space in Charlottesville, Virginia, in the United States. The lease isStates for a 37-month period of 26 months endingcommencing on December 31, 2017. On June 7, 2017 we extended the lease for an additional one-year period starting January 1, 2018 under the same terms. This2019. The facility is approximately 929606 square meters in size and the monthly payments are approximately $11,000.
As of April 2017, we lease office space of approximately 2,500 square feet in the same building in which we previously sub-leased our office space, for the same purpose, from our affiliates, Zohar Zisapel Properties, Inc. and Yehuda Zisapel Properties, Inc.Paramus, New Jersey. Our current lease is until March 2022, and we have an option to renew it for an additional five-year term. Currently, the monthly rentrental payments (including utilities) for this space are approximately $3,800. See "Item 7 – Major Shareholders and Related Party Transactions."
In addition, we lease office space which we increased in 2017 fromof approximately 388 square meters to approximately 1,0001,800 square meters in Søborg, Denmark. The term of the lease agreement expires on September 30, 2020.November 1, 2025. The lease can be terminated by a six-month advanced notice to the landlord. The monthly rentrental payment (including maintenance services) for this space increased in 2017 as a result of our bigger leased space fromis approximately $9,000 to approximately $13,000.
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.
There are no unresolved staff comments.
General
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-performance networking and data infrastructure solutions. Designed primarily to improve performance and efficiency in Cloud and Data Center environments, our solutions increase throughput, decrease latency and boost the performance of servers and networking appliances, the infrastructure backbone that enables advanced Cloud architectures and leading technologies like NFV, SD-WAN and Cyber Security. Our products are used by major Cloud players, service providers, telcosTelcos and Mobile operators and OEMs as components of their infrastructure offerings, including both add-on adapters in the Data Center and stand-alone virtualized/universal CPE devices at the edge. In 2015, 20162018, 2019, and 20172020, we recorded sales from all of our networking and data infrastructure solutions of approximately $82.7US$ 133.8 million, $100.3US$ 105.2 million and $125.7US$ 107.4 million respectively. We primarily sell our products to major Cloud players, service providers, telcosTelcos and Mobile operators 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 accordanceconformity with accounting principles generally accepted in the United States.States of America. The preparation of the financial statements requires us to make estimates and judgmentsassumptions that affect the reported amountamounts of assets and liabilities revenues and expenses, and related disclosure of contingent assets and liabilities at the date of ourthe consolidated financial statements.statements and the reported amounts of revenues and expenses during the reporting period. Actual results maycould 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.
Revenue recognition – We recognize our revenues in accordance with ASU 2011-08, Testing GoodwillASC 606, Revenue from Contracts with Customers. The underlying principle of ASC 606 is to recognize revenue when a customer obtains control of the promised goods at an amount that reflects the consideration that is expected to be received in exchange for Impairment. ASU 2011-08 providesthose goods. It also requires increased disclosures including the nature, amount, timing, and uncertainty of revenues and cash flows related to contracts with customers. We adopted ASC 606 at the beginning of 2018, and implemented new accounting policies and internal controls necessary to support the requirements of ASC 606.
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We recognize revenue upon transfer of control of the promised goods in a contract with a customer in an entityamount that reflects the optionconsideration we expect to performreceive in exchange for those products. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment or once delivery and risk of loss has transferred to the customer. We account for a qualitative assessment to determinecontract 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. We identify separated contractual performance obligations and evaluate each distinct performance obligation within a contract, whether it is more likely than-not that the fair value ofsatisfied at 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 unit is greater than its carrying amount, the two-step goodwill impairment test is not required.
Revenue is determined by allocating the fair value of the reporting unitallocated among performance obligations in a manner that reflects the consideration that we expect to be entitled to for the promised goods based on standalone selling prices (SSP). SSP are estimated for each distinct performance obligation and judgment may be required in their determination. The best evidence of SSP is the observable price of the product when we sell the goods separately in similar circumstances and to a purchase pricesimilar customers.
Recent Accounting Pronouncements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which removes certain exceptions for recognizing deferred taxes for investments, performing intra-period tax 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, 2017, no impairments were found and therefore no impairment losses were recorded.
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A.Operating Results
You should read the following management’smanagement'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, | 2018 | 2019 | 2020 | |||||||||
Sales | 100 | % | 100 | % | 100 | % | ||||||
Cost of sales | 68.6 | 65.7 | 68.6 | |||||||||
Gross profit | 31.4 | 34.3 | 31.4 | |||||||||
Research and development expenses | 11.1 | 14.3 | 16.1 | |||||||||
Sales and marketing expenses | 5.0 | 6.3 | 5.8 | |||||||||
General and administrative expenses | 2.9 | 4.0 | 3.7 | |||||||||
Operating Income | 12.4 | 9.7 | 5.8 | |||||||||
Financial income, net | 0.7 | 1.6 | 1.0 | |||||||||
Income before income taxes | 13.1 | 11.3 | 6.8 | |||||||||
Income tax expenses | 2.2 | 1.6 | 1.4 | |||||||||
Net Income | 10.9 | 9.7 | 5.4 | |||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Sales | 100 | % | 100 | % | 100 | % | ||||||
| Cost of sales | 58.8 | 61.6 | 63.5 | |||||||||
| Gross profit | 41.2 | 38.4 | 36.5 | |||||||||
| Research and development expenses | 11.7 | 12.6 | 11.1 | |||||||||
| Sales and marketing expenses | 6.8 | 6.4 | 5.3 | |||||||||
| General and administrative expenses | 4.4 | 3.9 | 3.6 | |||||||||
| Contingent consideration expense (benefit) | (3.7 | ) | (0.3 | ) | (3.7 | ) | ||||||
| Operating Income | 22.0 | 15.8 | 20.2 | |||||||||
| Financial income, net | 0.3 | - | 0.2 | |||||||||
| Income before income taxes | 22.3 | 15.8 | 20.4 | |||||||||
| Income tax expenses | 2.3 | 2.7 | 3.1 | |||||||||
| Net Income | 20.0 | 13.1 | 17.3 | |||||||||
Sales in 2017 increased by 25.3% to $125,6902020 were US$ 107,398 thousand compared to $100,347US$ 105,240 thousand in 2016. The increase2019, reflecting the significant challenges presented in sales2020 by Covid-19 and the continuous impact of the main market trends on our business - the move to the Cloud and Disaggregation & Decoupling.
Sales in 2019 decreased by 21.3% to US$ 105,240 thousand compared to US$ 133,753 thousand in 2018. This decrease was mainly attributed to the lack of revenues from our successlargest-ever Cloud related Design Win we lost in our target markets, especially those driven by Cloud Computing. This achievementMarch 2018. During 2019 we had no revenues from this Design Win.
Gross profit in 2020 was part of our continued success in expanding our customer base and product offering supporting important market trends like Cloud Computing, Cyber security, SDN, NFV, Virtualization and SD-WAN.
Gross profit in 20162019 was $38,551US$ 36,094 thousand compared to $34,079US$ 42,056 thousand in 2015.2018. Gross profit as a percentage of sales in 20162019 was 38.4%34.3%, compared to 41.2%31.4% in 2015. Our gross profit is largely dependent on the mix of products we sell during a specific year.2018. The lowerhigher gross profit percentage in 20162019 compared to 20152018 was primarilymainly attributed to: (i) a resultUS$ 3.2 million write-off in 2018 related to the loss of our largest-ever Cloud related Design Win, which we announced on March 13, 2018, (ii) changes to the mix of products that we sold in 2016.2019, on which our gross profit is largely dependent. Gross profit was also affected by, among other factors, write-downs of inventory made with respect to any slow moving or obsolete inventory we can no longer use. Theuse (not including the above mentioned write-off); the inventory write-downs as a percentage of sales in 2016 increased2019 decreased to 3.2%2.0%, compared to 0.3%2.9% in 2015.2018.
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Research and development expenses in 20172020 increased by 9.9%14.4% to $13,915US$ 17,244 thousand compared to $12,663US$ 15,075 thousand in 2016.2019. This increase was mainly attributed to thean increase in the number of our research and development employeesemployees' related costs, required for our continued investment in new product development, enhancements to existing products and the development of new networking and connectivity technologies expanding our product offering to our target markets, which contributed approximately $827US$ 1,479 thousand to such increase, combined with the following factors: (i) capitalization of internal software development costs in the amount of US$ 822 thousand in 2020, compared to US$ 1,018 thousand in 2019, (ii) an increase in the share-based compensation which amounted to approximately US$ 959 thousand in 2020, compared to US$ 900 thousand in 2019, as well as to (iii) a weakening of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our research and development expenses are incurred in New Israeli Shekels and Danish Krone) which contributed approximately $498 thousand to the increase, offset by a slight decrease in amortization of acquired intangible assets, which amounted to approximately $1,251 thousand in 2017, compared to $1,324 thousand in 2016.
Research and development expenses in 20162019 increased moderately by 30.5%1.7% to $12,663US$ 15,075 thousand compared to $9,702US$ 14,820 thousand in 2015.2018. This increase was mainly attributed to thean increase in the number of our research and development employeesemployees' related costs, required for our continued investment in new product development, enhancements to existing products and the development of new networking and connectivity technologies expanding our product offering to our target markets, which contributed approximately $2,248US$ 1,169 thousand to such increase, and to an increaseoffset by the following factors: (i) a decrease in amortization of acquired intangible assets, which amounted to approximately $1,324US$ 0 in 2019, compared to US$ 655 thousand in 2016,2018, (ii) capitalization of internal software development costs in the amount of US$ 1,018 thousand in 2019, compared to $693US$ 928 thousand in 2015, combined with2018, (iii) a slightdecrease in the share-based compensation which amounted to approximately US$ 900 thousand in 2019, compared to US$ 953 thousand in 2018, and to (iv) the net effect of the strengthening of the US Dollar against the Danish Krone, on the one hand, offset by a weakening of the US Dollar against the New Israeli Shekel on the other hand, (since a significant portion of our research and development expenses are incurred in New Israeli Shekels)Shekels and Danish Krone), which contributedamounted to approximately $82 thousand to the increase.
Sales and marketing expenses in 2017 increased2020 decreased by 4.7%6.6% to $6,722US$ 6,209 thousand compared to $6,423US$ 6,647 thousand in 2016.2019. This decrease was mainly attributed to a decrease in the travel expenses in 2020 compared to 2019 as a result of the Covid-19 pandemic, which contributed approximately US$ 642 thousand, offset by an increase in the share-based compensation which amounted to approximately US$ 602 thousand in 2020, compared to US$ 493 thousand in 2019, and by a weakening of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our sales and marketing expenses are incurred in New Israeli Shekels and Danish Krone) which amounted to approximately US$ 95 thousand.
Sales and marketing expenses in 2019 increased slightly by 0.1% to US$ 6,647 thousand compared to US$ 6,642 thousand in 2018. This increase was mainly attributed to our continued investment in the promotion of our networking and data infrastructure solutions, to our target markets including those driven by trends like Cloud Computing, Cyber security, SDN, NFV, Virtualization, SD-WAN and other trends, by, among others, our continued effort to expand exposure of our product offering and expanding our customer base and product offering, which contributed approximately $164US$ 465 thousand, offset by a decrease in amortization of acquired intangible assets which amounted to such increase, combined withUS$ 0 in 2019, compared to US$ 384 thousand in 2018, as well as to a decrease in the share-based compensation which amounted to approximately US$ 493 thousand in 2019, compared to US$ 569 thousand in 2018.
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General and administrative expenses in 2020 decreased slightly by 2.3% to US$ 4,065 thousand compared to US$ 4,159 thousand in 2019. This decrease was mainly attributed to a decrease in payroll related expenses attributed to general and administrative activity which amounted to approximately US$ 203 thousand, offset by a weakening of the US Dollar against the New Israeli Shekel (since a significant portion of our sales and marketing expenses are incurred in New Israeli Shekels) which contributed approximately $144 thousand to the increase, offset by a slight decrease in amortization of acquired intangible assets which amounted to approximately $637 thousand in 2017, compared to $646 thousand in 2016.
General and administrative expenses in 20162019 increased by 9.9%5.5% to $3,969US$ 4,159 thousand compared to $3,611US$ 3,943 thousand in 2015.2018. This increase was mainly attributed to various general and administrative costs which amounted to approximately US$ 244 thousand, offset by the growth in our activity, which contributed approximately $327 thousand to such increase, combined withnet effect of the strengthening of the US Dollar against the Danish Krone, on the one hand, offset by a slight weakening of the US Dollar against the New Israeli Shekel, on the other hand (since a significant portion of our general and administrative expenses are incurred in New Israeli Shekels) ofShekels and Danish Krone), which amounted to approximately $31US$ 28 thousand.
Financial income, net in 2017 increased2020 decreased by 345.7%37.2% to $156US$ 1,034 thousand compared to $35US$ 1,646 thousand in 2016.2019. The increasedecrease resulted mainly from the net effect of the following factors: (i) a decrease in income from investment in marketable securities and bank deposits, which was attributed to lowera decrease in funds available for investment, which amounted to $310US$ 1,953 thousand in 20172020 compared to $393US$ 2,151 thousand in 2016,2019, and (ii) a decrease in bank fees, which contributed approximately $13 thousand to the increase, and (iii) to a lower offsetting effect of the weakening of the US Dollar against the New Israeli Shekel and the Danish Krone, which created a net financial expenseexpenses in US Dollars from exchange rate differences (a portion of our balance sheet assets and obligations are denominated in New Israeli Shekels as well as Danish Krone) of $45US$ 748 thousand in 20172020 compared to $236net financial expenses of US$ 357 thousand in 2016.
Financial income, net in 2016 decreased2019 increased by 84.1%78.3% to $35US$ 1,646 thousand compared to $220US$ 923 thousand in 2015.2018. The decrease was attributed to a decreaseincrease resulted mainly from the net effect of the following factors: (i) an increase in income from investmentsinvestment in marketable securities due to less funds being available for investment, and bank deposits, which was attributed to an increase in expenses attributedfunds available for investment, which amounted to a slightUS$ 2,151 thousand in 2019 compared to US$ 808 thousand in 2018, offset by (ii) the net effect of the weakening of the US Dollar against the New Israeli Shekel, on the one hand, offset by a strengthening of the US Dollar against the Danish Krone on the other hand, which created a net financial expenseexpenses in US Dollars from exchange rate differences (a portion of our balance sheet assets and obligations are denominated in New Israeli Shekels).
In 20172020 we recorded current income tax expenses of $3,474US$ 1,766 thousand and deferred income tax expensebenefit of $453US$ 61 thousand compared to current income tax expenses of $2,962US$ 2,343 thousand and deferred income tax benefit of $260US$ 699 thousand in 2016.2019. The increasedecrease in our current income tax expenses was mainly attributed to the increasea decrease in our activityincome and the resulting taxable income. The increasedecrease in the deferred income tax expensesbenefit was mainly attributed to an increasethe following factors: (i) a deferred income tax benefit relating to research and development costs, which amounted to US$ 262 thousand in 2020 compared to deferred income tax benefit in the amount of US$ 755 thousand in 2019, and (ii) deferred income tax expenses in relation to acquired goodwill, which amounted to $465US$ 210 thousand in 20172020 compared to $154US$ 72 thousand in 2016, as well as to an increase in deferred income tax expenses in relation to R&D expenses, which amounted to $103 thousand in 2017 compared to deferred income tax benefit of $209 thousand in 2016.2019. In addition, in 20172020 we recorded an income tax benefit relating to prior years in the amount of $59US$ 148 thousand, compared to an income tax expensebenefit relating to prior years in the amount of $26US$ 21 thousand in 2016.2019.
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In 20162019 we recorded current income tax expenses of $2,962US$ 2,343 thousand and deferred income tax benefit of $260US$ 699 thousand compared to similar current income tax expenses of $2,848US$ 3,231 thousand and deferred income tax benefitexpenses of $907US$ 5 thousand in 2015.2018. The decrease 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 tax benefit was mainly attributed to the following factors: (i) a deferred income tax benefit relating to research and development costs, which amounted to US$ 755 thousand in 2019 compared to deferred income tax expenses in the amount of US$ 4 thousand in 2018, (ii) a decrease in deferred income tax benefitsexpenses relating to share basedintangible assets, which amounted to US$ 40 thousand in 2019, compared to US$ 120 thousand in 2018, offset by (iii) a decrease in deferred income tax benefit relating to share-based compensation provided by us to our employees and directors, which amounted to $1US$ 26 thousand in 20162019, compared to $242US$ 135 thousand in 2015, as well as to tax loss carryforwards, which amounted to $161 thousand in 2016 compared to $179 thousand in 2015, and to an increase in deferred income tax expenses in relation to amortization of acquired goodwill, which amounted to $154 thousand in 2016 compared to $61 thousand in 2015.2018. In addition, in 20162019 we recorded an income tax expensebenefit relating to prior years in the amount of $26US$ 21 thousand, while in 2015 we recordedcompared to an income tax benefitsbenefit relating to prior years in the amount of $36 thousand.
In 20172020 we recorded net income of $21,714US$ 5,725 thousand compared to net income of $13,137US$ 10,236 thousand in 2016, an increase2019, a decrease of 65.3%44.1%. The increasedecrease was mainly attributed to the following factors: (i) an increaseour lower gross profit in our activity, and (ii) the increase in contingent consideration benefit we recorded in 2017, which amounted to $4,642 thousand,2020 compared to a contingent consideration benefit of $334 thousand in 2016.
In addition, in 20162019 we recorded a contingent consideration benefitnet income of $334US$ 10,236 thousand compared to a contingent consideration benefitnet income of $3,090US$ 14,637 thousand in 2015.
Impact of Inflation and Currency Fluctuations on Results of Operations, Liabilities and Assets
Since the majority of our revenues are denominated and paid in U.S. Dollars, we believe that inflation in Israel and in Denmark and fluctuations in the U.S. dollar exchange rates do not have any material effect on our revenue. Inflation in Israel or Denmark and the Israeli and Danish currency as well as U.S. dollar exchange rate fluctuations, may however, have an effect on our expenses and, as a result, on our net income/loss. The cost of our Israeli and Danish operations, as expressed in U.S. Dollars, is influenced by the extent to which any change in the rates of inflation in Israel or Denmark are not offset (or are offset on a lagging basis) by a change in valuation of the NIS or DKK in relation to the U.S. dollar.
We do not presently engage in any hedging or other transactions intended to manage the risks relating to foreign currency exchange rate or interest rate fluctuations. However, we may in the future undertake such transactions, if management determines that it is necessary to offset such risks.
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B.Liquidity and Capital Resources
As of December 31, 2017,2020, we had working capital of $104,401US$ 106,853 thousand and our current ratio (current assets to current liabilities) was 6.48.
Trade receivables (including trade receivable from related parties) increaseddecreased to $41,367US$ 21,660 thousand as of December 31, 2017,2020, compared to $27,722US$ 24,936 thousand as of December 31, 2016.2019. This decrease was mainly affected by a decrease in the average payment terms of our customers compared to the terms that were in 2019. Other receivables increased to US$ 6,126 thousand as of December 31, 2020, compared to US$ 4,964 thousand as of December 31, 2019.
Trade payables decreased to US$ 14,610 thousand as of December 31, 2020, compared to US$ 16,419 thousand as of December 31, 2019. This decrease was mainly attributed to a change of average payment terms with our suppliers. Other payables and accrued liabilities increased to US$ 12,953 thousand as of December 31, 2020, compared to US$ 8,823 thousand as of December 31, 2019. This increase was mainly attributed to thean increase in our revenue. Other receivablesadvance payments relating to customers.
Inventories increased to $5,823US$ 47,650 thousand as of December 31, 2017,2020, compared to $3,113US$ 36,491 thousand as of December 31, 2016.2019. This increase was mainly attributed to the increase of our activity.
Cash provided by operating activities in 2020 amounted to US$ 4,956 thousand compared to cash provided by operating activities in the amount of US$ 26,726 thousand in 2019. The cash provided by operating activities in 2020 was mainly the result of our net income, combined with changes in our inventory.
Capital expenditures on property and equipment for the year ended December 31, 20172020 were $2,118US$ 2,543 thousand, compared to $1,705US$ 1,635 thousand as of December 31, 2016.2019. This increase was mainly attributed to an increase in the investment in the equipment used for our production and research and development efforts.
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.
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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 the bus slots of the motherboard adjacent to the rear side of the case.
On September 16, 2013, we acquired all of the intellectual property related to the unique Virtualization Off-Load Engine developed during the last two years by Net Perform Technology, Ltd., a privately held company registered in Hong Kong, China.
As of December 2014, we own or have licenses or similar rights with respect to Silicom Denmark (Fiberblaze A/S), including Silicom Denmark (Fiberblaze A/S)'s high performance OEM hardware platform for Ethernet and network interface product family, registered names and domain name.
As of 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 Intel® silicon, registered names and domain name.
As of January 2018, we have a patent No. 9,858,227 entitled ‘Hybrid'Hybrid Networking Application Switch’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.
For additional information regarding the risks to the Company with respect to patents and other intellectual property rights see the risk factor entitled "We may not be able to protect our intellectual proprietary rights" under Item 3.D3.D. – "Risk Factors".Factors."
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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 OCS,IIA, recently 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 of 2% or up to 5% 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, 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 discretion in a new authority established to replace the OCSIIA and provided only guidelines regarding material terms such as royalty rates and transfer of know-how developed with government grants. The OCSIIA has previously provided funding in relation to our research and development efforts. As of the date hereof, we have received funding from the OCSIIA in the aggregate amount of approximately $4,388,000 (which together with accrued interest is approximately $6,788,000),US$ 4,388,000, and have paid the OCSIIA an aggregate amount of approximately $1,428,000US$ 1,428,000 in royalties in relation thereto. See "Item 4.B. – Information on the Company – Business Overview – Governmental Regulation Affecting the Company."
In August 2005, we received approval for a $54US$ 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 payment for every year following the first sale of the product will not exceed certain percentages of the amounts received from Koril-RDF. We received approximately 20%-30% of certain research and development expenditures for a particular projecttwo projects in 2003 and approximately 30% of such expenditures for a particular project in 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 OCS,IIA, IIA or Koril-RDF. As of December 31, 2017, 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, 2018,2021, we had 101127 employees engaged primarily in research and development and design activities of which 6076 employees in Israel, 2536 in Denmark and 1615 in the U.S.A.U.S. In 2015, 20162018, 2019 and 2017,2020, our research and development expenses were $9,702, $12,663US$ 14,820, US$ 15,075 and $13,915US$ 17,244 respectively, constituting approximately 11.7%11.08%, 12.7%14.32% and 11.07%16.06%, respectively, of our sales. The increase in our research and development expenses in 20172020 compared to 20162019 was mainly attributed to thean increase in the number of our research and development employees related costs, required for our continued investment in new product development, enhancements to existing products and the development of new networking and connectivity technologies expanding our product offering to our target markets, which contributed approximately US$ 1,479 thousand to such increase, combined with the following factors: (i) capitalization of internal software development costs in the amount of US$ 822 thousand in 2020, compared to US$ 1,018 thousand in 2019, (ii) an increase in the share-based compensation which amounted to approximately US$ 959 thousand in 2020, compared to US$ 900 thousand in 2019, as well as to (iii) a weakening of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our research and development expenses are incurred in New Israeli Shekels and Danish Krone), which amounted to approximately US$ 435 thousand.
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The increase in our research and development expenses in 2019, compared to 2018 was mainly attributed to an increase in our research and development employees related costs, required for our continued investment in new product development, enhancements to existing products and the development of new networking and connectivity technologies expanding our product offering to our target markets, which contributed approximately US$ 1,169 thousand to such increase, offset by the following factors: (i) a slight decrease in amortization of acquired intangible assets.
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 Mobile operators' and Telcos' worlds, where Mobile operators and Telcos have also 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. Mobile operators and Telcos have applied the same trends of Disaggregation and Decoupling to their 4G/5G infrastructure deployment. A significant indication in that direction was the adoption of O-RAN (Open RAN or Open Radio Access Networks), a process standardizing the interfaces in the mobile network, and as such, allowing both Disaggregation (not everything from one vendor) and Decoupling (obtaining the Hardware and the Software separately).
These trends are 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 appliances 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 power and storage. Such growing demand was the basis for the emerging technologies of virtualization, Cloud SDN, NFV and SD-WAN, all of which are targeting the implementation ofis a more effective model for all the above mentioned tasks.
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On the other hand, having such standardization increases the demand for Smart Cards as the standard servers, which constitute the Cloud, need enhanced connectivity as well as offload capabilitiesacceleration and offloading in order to addressincrease their performance.
Furthermore, the performance challenges realizedDisaggregation and Decoupling trends have created significant demand by the Mobile operators and Telcos for CPE devices used in connection with SD-WAN and NFV, and we are currently seeing the increasing demand for our CPE devices due to that trend.
As with the huge amountbasic trends, the impact of traffic,Disaggregation and Decoupling is impacting the high volumemobile 4G/5G infrastructure market through O-RAN, as Mobile operators and Telcos are not currently limited to buying all of data,their necessary parts from the need to encryptsame suppliers (for example, as sold by Nokia and Ericsson), but rather can split their networks into different components and as such, data,they may buy Distributed Units for their network from us. Also, the need to run in virtualized environment, which by itselffact that the Software is a challenge fordecoupled from the server CPU, and the need to include switchingHardware means that even within the server for high efficiency SDN. We anticipateDU, they can buy from us (and from companies like us) the Hardware only (including the Software which is related to the Hardware, rather than the full solution). Since the Hardware that consequently the demand for add-on adaptersis required under O-RAN needs acceleration, and vCPEs which address these challenges will grow. Power, heat and space limitations inwe have such environments increase the need for hardwareacceleration with our time synchronization products, FEC accelerators and other innovative solutions. Such systems require essential building blocks in their own generic severs, which canFPGA cards, we expect to be served by our products.
The sales cycles in the markets for our products are long. Continuing to achieveContinuous achievement of Design Wins according to the process described above and obtaining new customers is time consuming. However, each Design Win we have achieved and will continue to achieve, may represent an opportunity for sustained long-term revenues once we establish a relationship with a customer.
Although we expect our business and products to further develop in the coming years through these trends, there is no assurance that we will continue to generate significant sales in the areas in which we operate.
E.Off-Balance Sheet Arrangements
On July 22, 2002, our Audit Committeeaudit 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 Committeeaudit committee and Board of Directors approved a new form of Indemnification Agreement with our directors and officers so as to reflect this amendment. Our shareholders approved the terms of this new Indemnification Agreement in January 2008. The Indemnification Agreement provides that the directors and officers will be exempt from liability in certain circumstances. The Indemnification Agreement also provides for the indemnification by us for certain obligations and expenses imposed on the officer in connection with an act performed in his or her capacity as an officer of the Company. This right to indemnification is limited, and does not cover, among other things, a breach of an officer’sofficer's duty of loyalty, a willful breach of an officer’sofficer's duty of care, or a reckless disregard for the circumstances or consequences of a breach of duty of care. The right to indemnification also does not cover acts that are taken intentionally to unlawfully realize personal gain. The maximum amount of our liability under these Indemnification Agreements for any monetary obligation imposed on an officer or a director in favor of another person by a judgment is currently $3,000,000US$ 3,000,000 for each instance of a covered scenario. In addition, we would be liable to indemnify the officer or director for all reasonable litigation expenses with respect to certain proceedings. We are not aware of any material pending action that may result in anyone claiming such indemnification.
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An amendment in 2011 to the Israeli Securities Law, 5728-1968 (the "Israeli"Israeli Securities Law"Law"), and a corresponding amendment to the Companies Law, authorized the Israel Securities Authority (the "ISA""ISA") to impose administrative sanctions against Israeli public companies and their office holders for certain violations of the Israeli Securities Law or the Companies Law. These sanctions include monetary sanctions and certain restrictions on serving as a director or senior officer of a public company for certain periods of time. The Israeli Securities Law and the Companies Law provide that only certain types of such liabilities may be reimbursed by indemnification and insurance. Specifically, legal expenses (including attorneys' fees) incurred by an individual in the applicable administrative enforcement proceeding and certain compensation payable to injured parties for damages suffered by them are permitted to be reimbursed via indemnification or insurance, provided that such indemnification and insurance are authorized by the company's articles of association, and receive the requisite corporate approvals. In January 2012 each of our Audit Committeeaudit committee and Board of Directors approved a new form of Indemnification Agreement with our directors and officers serving in such capacities from time to time so as to reflect this amendment, and at the Annual General Meeting of the Shareholders held on April 11, 2012 our shareholders approved these amendments to the Company's Articles of Association (the "Articles""Articles of Association") and a revised form of Indemnification Agreement for directors serving in such capacity from time to time.
As per Amendment 20 to the Companies Law ("Amendment 20"20"), it was decided on July 31, 2013, at the Extraordinary General Meeting of the Shareholders to adopt the Executive Compensation Policy of the Company, which was recommended by our Compensation Committee and approved by our Board of Directors. The Executive Compensation Policy included the above referenced form of Indemnification Agreement to be entered into by the Company with our directors and officers serving in such capacities from time to time. The Executive Compensation Policy also noted that going forward, any change to the Indemnification Agreement, including any changes which materially depart from the key terms of the current agreement (provided that such changes apply equally to all executives of the Company, including directors) will be submitted to the Company’sCompany's Compensation Committee and the Board of Directors for their approval but shall not, unless required by law or the Company’sCompany's Articles, be presented at a General Meeting of the shareholders. As set forth in the Companies Law, an Executive Compensation Policy for a period exceeding three years has to be re-approved once every three years. Accordingly, our amendedAmended Executive Compensation Policy was brought for shareholders’shareholders' re-approval at the annual general meeting of our shareholders in 2016.
We are not a party to any other material off-balance sheet arrangements or contingent obligations.
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F.Tabular disclosure of contractual obligations
The following table shows our outstanding contractual obligations by category and by payments due as of December 31, 2017:2020:
Payments due by period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
(in thousands of U.S. dollars) | ||||||||||||||||||||
Operating Leases | 8,120 | 2,181 | 3,545 | 2,323 | 71 | |||||||||||||||
Purchase Obligations | 32,670 | 23,429 | 9,241 | |||||||||||||||||
Total | 40,790 | 25,610 | 12,786 | 2,323 | 71 | |||||||||||||||
| Contractual Obligations | Payments due by period | ||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |
| Operating Leases | $3,102 | $1,665 | $1,387 | $50 | |
| Purchase Obligations | $23,055 | $23,055 | |||
| Total | $26,157 | $24,720 | $1,387 | $50 | |
Our total outstanding contingencies in respect of OCSIIA or IIA royalty-bearing participations received or accrued, net of royalties paid or accrued before interest, amounted to approximately $2,960US$ 2,960 thousand as of December 31, 20172020, which are attributable to sales of certain discontinued products. As of the date of this annual report, all of our OCSIIA programs have been closed per our request. We are not anticipating any sales of our products developed with OCSIIA funding and accordingly don't expect to be required to pay any royalties to the OCS.IIA. In the unlikely event we do sell products developed using OCSIIA funding, we will be required to pay royalties to the IIA as set forth in the R&D Law.
Other Long-Term Liabilities Reflected on the Company's Balance Sheet:
The liability for employees’employees' severance benefits amounted to approximately $2,765US$ 3,256 thousand as of December 31, 2017.
The liability for employees’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’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.
A.Directors and Senior Management
The following table and notes thereto set forth information regarding our directors and senior management as of March 31, 2018:
Name | Age | Position with Company | ||
Avi Eizenman(1) | 63 | Active Chairman of the Board | ||
Shaike Orbach(2) | 69 | President, Chief Executive Officer, Director | ||
Ayelet Aya Hayak(3) | 51 | Director | ||
Ilan Erez(3) | 53 | Director | ||
Eli Doron(4) | 68 | Director | ||
Eran Gilad | 53 | Chief Financial Officer and Company Secretary |
(1)Was re-elected for an additional three-year term, commencing as of June 5, 2019.
(2)Was re-elected for an additional three-year term, commencing as of June 8, 2020.
(3)Was re-elected for an additional three-year term, commencing as of July 1, 2019.
(4)Was re-elected for an additional three-year term, commencing as of June 12, 2018.
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 theShaike Orbach
has been our President and Chief Executive Officer since April 2001. In December 2001, Mr. Orbach was named a Director, replacing Zohar Zisapel, who resigned from the Board of Directors. Prior to that, for a period of four and a half years, Mr. Orbach was President and CEO of Opgal Ltd., a high-tech subsidiary ofAyelet Aya Hayak
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Ilan Erez serves has served as an externala director since July 2010, when he was elected by our shareholders for an initial three-year term commencing July 2010 and was elected by the shareholders for a third three-year term commencing June 2016.2010. Mr. Erez has been CFO and General Manager of AlgoSec Inc. since October 2019. AlgoSec is a leading provider of business-driven security management software. Prior to that, Mr. Erez had been General Manager of 3D Systems Corporation's (NYSE: DDD) Software Business Unit sincefrom September 2016 to March 2019 and co-managed that business unit from May 2015 to September 2016. 3D Systems provides comprehensive 3D products and services, including 3D printers, print materials, on-demand manufacturing services and digital design and manufacturing tools. From 2005 to 2015, Mr. Erez served as Chief Financial Officer of Cimatron Ltd. (NASDAQ: CIMT) engaged in the design and sale of CAD/CAM software for the tool-making and discrete manufacturing industries. From 1998 to 2005 Mr. Erez served as the Chief Financial Officer of the Company. He also served as VP Operations of the Company from May 2001 to 2005. From 1996 to 1998 Mr. Erez served as Controller and Assistant to the Chief Executive Officer of Bio-Dar Ltd. From 1994 to 1996 Mr. Erez served as an auditor at Kesselman & Kesselman, a PWC member firm. Mr. Erez is a Certified Public Accountant in Israel and holds a B.A in Accounting and Economics from the Hebrew University and an LL.M. in Business Law from Bar-Ilan University.
Eli Doron is our Chief Financial Officer from May 2005the Co-founder and the SecretaryCTO of the Company from 2012. From 1995 to 2005 Mr. Gilad held senior financialCarteav, that develops and operational positions in various public and private companies operating in the high-tech field. Hemanufactures an autonomous low speed vehicle. Eli Doron 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.
Eran Gilad is 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.
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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, 2017.2020. All amounts are in USD.
Name and Position | Salary and Benefits(1) | Cash Bonus(2) | Equity-based Compensation(3) | Total | ||||||||||||
Avi Eizenman – Active Chairman | 546,598 | 224,669 | 478,287 | 1,249,554 | ||||||||||||
Yeshayahu ('Shaike') Orbach – CEO and President | 375,239 | 224,669 | 478,287 | 1,078,195 | ||||||||||||
Elad Blatt – Chief Strategy and Business Development Officer | 280,817 | 82,944 | 99,848 | 463,608 | ||||||||||||
Eran Gilad – CFO and Company Secretary | 246,285 | 27,102 | 99,848 | 373,235 | ||||||||||||
David Castiel – VP Engineering | 239,223 | 29,049 | 99,848 | 368,120 | ||||||||||||
| Name and Position | Salary and Benefits(1) | Cash Bonus(2) | Equity-based Compensation(3) | Total | ||||||||||||
| Avi Eizenman – Active Chairman | 499,447 | 350,000 | 573,910 | 1,423,357 | ||||||||||||
| Yeshayahu ('Shaike') Orbach – CEO and President | 365,459 | 350,000 | 573,910 | 1,289,369 | ||||||||||||
Elad Blatt –Chief Strategy and Business Development Officer | 231,895 | 77,608 | 107,800 | 417,303 | ||||||||||||
| David Castiel – VP Engineering | 218,386 | 55,536 | 107,800 | 381,722 | ||||||||||||
| David Hendel – VP Research and Development | 215,969 | 40,109 | 107,800 | 363,878 | ||||||||||||
(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.
(2)
"Cash Bonus" includes bonus payments as recorded in our financial statements for the year ended December 31, 2020.
(3)
"Equity-based Compensation" includes the expense recorded in our financial statements for the year ended December 31, 2020 with respect to equity-based compensation granted to the executive officers detailed above.
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, 20172020, was $3,1312,769 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, 20172020, was $ 1,197US$ 1,479 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 and re-approved by the shareholders, may entitle them, in certain circumstances, to additional payments. We 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.
Avi Eizenman and Shaike Orbach 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 commencing in 2017 on June 8, 2016. Mr. Eizenman and Mr. Orbach's annual cash bonuses may not exceed the value of 18 oftimes their monthly salaries, respectively. Mr. Eizenman and Mr. Orbach's annual cash bonus formulas were based on achieving one or more of the following thresholds: (i) the Company's actual annual revenue for each applicable year is 80% or more of the pre-determined budget target for the relevant year; and (ii) the Company's actual annual operating profit for each applicable year is 65% or more of the pre-determined budget target for the relevant year. The Compensation Committee may, in its sole discretion, raise or lower such annual cash bonuses by up to 30%. Furthermore, in accordance with the Company's recoupment policy, Mr. Eizenman and Mr. Orbach may be required to reimburse the Company for the cash bonuses (or any part thereof) paid in the previous 3 years, in the event such cash bonuses were based on financial data included in the Company's financial statements that were found to be inaccurate and were subsequently restated.
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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 Mr. Eli Doron and the externalour independent directors work full time forare employed by us. We do not currently grant any variable bonus or equity-based compensation, nor any separation payments to our non-employee directors. Certain of the compensation previously paid to our directors was paid in the form of options which were granted under share option plans which have expired including(including under the Share Option Plan (2004)), or options and RSU’sRSU's which were and couldmay be granted under the Silicom Ltd. - Global Share Incentive Plan (2013), as described below.
On December 30, 2004, our shareholders adopted our Share Option Plan (2004). Under the original terms of the Share Option Plan (2004) up to a maximum of 282,750 of our ordinary shares are reserved for issuance, subject to certain adjustments, upon the exercise of 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) was administered by the board of directors,, which designated the optionees, dates of grant, vesting periods and the exercise price of options. The options issued under the Share Option Plan (2004) were non-assignable except by the laws of descent. Certain tax advantages applied 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, 2018, we have granted a total of 1,036,000 options under the Share Option Plan (2004), of which the following were granted to directors and officers: (a) in 2004 a total of 150,000 options were granted with an exercise price of $2.53, and with an expiration date upon the tenth anniversary of the grant date, (b) in 2005 a total of 15,000 options were granted with an exercise price of $3.19, and with an expiration date upon the tenth anniversary of the grant date, (c) in 2008 a total of 91,250 options were granted with an exercise price of $3.82, and with an expiration date upon the earlier to occur of: (i) the eighth anniversary of the grant date; and (ii) the closing price of the shares falling below US$ 1.91, (d) in 2010 a total of 110,000 options were granted with an exercise price of $18.82 and with an expiration date upon the earlier to occur of: (i) the eighth anniversary of the grant date; and (ii) the closing price of the shares falling below US$ 9.41, and (e) in 2012 a total of 90,000 options were granted with an exercise price of $15.28 and with an expiration date upon the earlier to occur of: (i) the eighth anniversary of the grant date; and (ii) the closing price of the shares falling below US$ 7.64. As of March 31, 2018, a total of 36,625 of the options granted under the Share Option Plan (2004) were returned to the company after not being exercised following the cessation of employment of certain employees, as set forth in the terms of grant of such options, 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.2014. As of March 31, 2018,2019, there were no outstanding options under the Share Option Plan (2004) which were granted to directors and officers.
On October 21, 2013, our board of directors adopted our Global Share Incentive Plan (2013). On April 30, 2014, the annual general meeting of our shareholders approved the Global Share Incentive Plan (2013) to qualify for incentive stock options for U.S. tax purposes. The Global Share Incentive Plan (2013) is administered by the board of directors, which determines the number of our ordinary shares available for issuance under the plan, designates the award recipients and types of awards, dates of grant, vesting periods and the exercise price of awards. Under the Global Share Incentive Plan (2013) the Company may grant awards of options, restricted shares, restricted share units ("RSUs"RSUs") or other equity-based awards. The board of directors has determined that initially up to a maximum of 500,000 of our ordinary shares are reserved for issuance, subject to certain adjustments, upon the exercise of equity-based awards granted to employees, directors, 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 Global Share Incentive Plan (2013) by 600,000 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-based awards granted to them under Global Share Incentive Plan (2013).
As of December 31, 2016, our compensation committee and board of directors, respectively, have approved the grant of a total of 82,000 RSUs and 209,963 options under the Global Share Incentive Plan (2013), of which the following were granted to directors and officers:office holders: (a) in 2014 a total of 54,000 RSUs (all of which have been vested) were granted, (b) in 2015 a total of 29,999 options were granted with an exercise price of $26.91,US$ 26.91, and with an expiration date upon the earlier to occur of: (i) July 28, 2023; and (ii) the closing price of the shares falling below US$ 13.46 at any time after the date of grant, (c) in 2016 a total of 29,999 options were granted with an exercise price of $US$ 28.38, and with an expiration date upon the earlier to occur of: (i) June 8, 2024; and2024, or (ii) the closing price of the shares falling below US$ 14.19 at any time after the date of grant.
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In January 2017, our compensation committee and board of directors, respectively, approved a grant
under the Global Share Incentive Plan (2013) of a total of (a) 119,925 options of which a total of 29,999 options were granted to directors andIn addition, in April, 2018, our compensation committee and board of directors, respectively, approved the grant under the Global Share Incentive Plan (2013) of a total of 137,010 options under the Global Share Incentive Plan (2013), of which 29,999 options were granted to directors and
In January 2019, our compensation committee and board of directors, (which is alsorespectively, approved the grant date). Optionsunder the Global Share Incentive Plan (2013) of a total of 141,928 options under the Global Share Incentive Plan (2013), of which 29,999 options were granted to directors and office holders. The exercise price for the options (per ordinary share) is US$ 33.83. Such options shall expire, by their terms, on the earlier to occur of: (a) January 31, 2027, or (b) the closing price of the shares falling below US$ 16.92 at any time after the date of grant. The annual general meeting of our shareholders gave effect to such grants of options granted to directors in their meeting on June 5, 2019.
In January 2020, our compensation committee and board of directors, respectively, approved the grant of a total of 148,426 options and a total of 86,000 RSUs under thisthe Global Share Incentive Plan (2013), of which 29,999 options and 54,000 RSUs were granted to directors and office holders. The exercise price for the options (per ordinary share) is US$ 32.54. Such options shall expire, by their terms, on the earlier to occur of: (a) June 8, 2028, or (b) the closing price of the shares falling below US$ 16.27 at any time after the date of grant. The annual general meeting of our shareholders gave effect to 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 areof a total of 137,759 options under the Global Share Incentive Plan (2013), of which 29,999 options will be granted to directors and office holders, subject to the approval of our 20182021 Annual General Meeting.
As of March 31, 2018,2021, a total of 22,50383,116 of the options granted under the Global Share Incentive Plan (2013) were returned to the company after not being exercised following the cessation of employment of certain employees, as set forth in the terms of grant of such options.
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C.Board Practices
Avi Eizenman was re-elected to the boardBoard of directorsDirectors most recently on June 8, 20165, 2019, to serve until the Annual General Meeting to be held in the year 2019,2022, and until his successor has been duly elected, subject to the Companies Law and our Articles. Avi Eizenman is a founder of the Company and has served as a Director since our inception in 1987. Shaike Orbach was re-elected to hold office as a director most recently on June 5, 20178, 2020, to serve until the Annual General Meeting which will take place in 2020.2023. Eli Doron was re-elected to the board of directors most recently on June 8, 2016,12, 2018, to serve until the Annual General Meeting to be held in 2018.2021. 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 were re-elected as External Directors for a thirdfourth three-year term and secondthird three-year term, respectively, at the Annual General Meeting of our shareholders, which took place on June 8, 2016.
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 functions as the active Chairman of the Board and Shaike Orbach, who also functions as President and Chief Executive Officer (See "Item 6.B6.B. – Directors and Senior Management – Compensation" above).
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, and include the following main terms and conditions (identical with respect to each of Mr. Avi Eizenman and Mr. Shaike Orbach):
Notice of Termination
The termination of employment of Mr. Avi Eizenman or Mr. Shaike Orbach, 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’scompany's shares or assets, or a merger, acquisition, or other reorganization in which control of our company changes following such transaction.
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Severance Payments
If the employment of Mr. Avi Eizenman or Mr. Shaike Orbach 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"Severance Law Amount"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, it was decided at the Extraordinary General Meeting of the Shareholders on July 31, 2013, to adopt the Executive Compensation Policy of the Company, which included the above referenced extended notice provisions, and severance payments in the event of termination, with respect to each of Mr. Avi Eizenman and Mr. Shaike Orbach. The Amended Executive Compensation Policy was re-approvedapproved by our Annual General Meeting convened in June 2016.
Board of Directors
Our Articles 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, directorsDirectors are divided into three groups, Group A, Group B and Group C. Each group is brought for re-election once every three years, on a rotating basis, such that at each annual general meetingAnnual General Meeting of the shareholders a given group of directorsDirectors is brought for election, to serve on a continuous basis for a three-year term, until the annual general meetingAnnual General Meeting in three years' time and until their respective successors are duly elected, at which point their term in office shall expire. At each annual general meeting,Annual General Meeting, the annual general meetingAnnual General Meeting shall be entitled to elect directorsDirectors to replace the directorsDirectors whose three-year term in office has expired, and so on ad infinitum, so that each year, the term in office of one group of directors shall expire. Other officersoffice holders serve at the discretion of the boardBoard of directors.Directors. The Amendedamended and Restatedrestated 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 directorDirector 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.
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External Directors
Under the Companies Law, companies registered under the laws of Israel, the shares of which have been offered to the public in or outside of Israel, are required to appoint no less than two external directors. No person may be appointed as an external director if such person is a relative (as defined in the Companies Law) of a "controlling shareholder" or if such person, or the person’sperson's relative, partner, employer or any entity under the person’sperson's control, has or had, on or within the two years preceding the date of the person’sperson'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, or relatives of such person. The term "affiliation""affiliation" includes:
•
An employment relationship;
•
A business or professional relationship maintained on a regular basis;
•
Control; and
•
Service as an office holder.
The Israeli Minister of Justice, in consultation with the ISA, may determine that certain matters will not constitute an affiliation, and has issued certain regulations with respect thereof.
If the company does not have a "controlling shareholder" or a shareholder who holds company shares entitling him to vote at least 25% of the votes in a shareholders meeting, then the company may not appoint as an external director any person or such person’sperson's relative, partner, employer or any entity under the person’sperson's control, who has or had, on or within the two years preceding the date of the person’sperson's appointment to serve as external director, any affiliation with the Chairman of the Board, Chief Executive Officer, a substantial shareholder who holds at least 5% of the issued and outstanding shares of the company or voting rights which entitle him to vote at least 5% of the votes in a shareholders meeting, or the Chief Financial Officer.
A person shall be qualified to serve as an external director only if he or she possesses "expertise in finance and accounting" or "professional qualifications".qualifications." At least one external director must possess "expertise in finance and accounting".
A director can satisfy the requirements of having "expertise in finance and accounting" if due to his or her education, experience and qualifications he or she has acquired expertise and understanding in business and accounting matters and financial statements, in a manner that allows him or her to understand, in depth, the company’scompany's financial statements and to spur a discussion regarding the manner in which the financial data is presented.
A public company's board of directors must evaluate the proposed external director's "expertise in finance and accounting", by considering, among other things, such candidate’scandidate's education, experience and knowledge in the following: (i) accounting and auditing issues typical to the field in which the company operates and to companies of a size and complexity similar to such company; (ii) the company's independent public accountant’saccountant's duties and obligations; (iii) preparation of the company’scompany's consolidated financial statements and their approval in accordance with the Companies Law and the Israeli Securities Law.
A director is deemed to be "professionally qualified" if he or she meets any of the following criteria: (i) has an academic degree in any of the following professions: economics, business administration, accounting, law or public administration; (ii) has a different academic degree or has completed higher education in a field that is the company’scompany's main field of operations, or a field relevant to his or her position; or (iii) has at least five years' experience in any of the following, or has at least a cumulative total of at least five years' experience in any two of the following: (A) a senior position in the business management of a corporation with a significant extent of business, (B) a senior public position or a senior position in public service, or (C) a senior position in the company's main field of operations. As with a candidate’scandidate's "expertise in finance and accounting", the board of directors here too must evaluate the proposed external director's "professional qualification" in accordance with the criteria set forth above.
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The declaration required by law to be signed by a candidate to serve as an external director must include a statement by such candidate concerning his or her education and experience, if relevant, in order that the board of directors may properly evaluate whether such candidate meets the requirements of having "expertise in finance and accounting" or being "professionally qualified" as set forth in the regulations. Additionally, the candidate should submit documents and certificates that support the statements set forth in the declaration.
No person may serve as an external director if the person’sperson's position or other business activities create, or may create, a conflict of interest with the person’sperson's responsibilities as an external director or may otherwise interfere with the person’sperson's ability to serve as an external director. Additionally, no person may serve as an external director if the person, the person’sperson'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’shareholders' meeting, provided that either:
•
the majority includes at least a majority of the shares held by non-controlling and disinterested shareholders who are present and voting at the meeting; or
•
the total number of shares held by non-controlling and disinterested shareholders that voted against the election of the director does not exceed two percent of the aggregate voting rights in the company.
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External directors may be re-elected for two additional terms of three years each, provided that with respect to the appointment for each such additional three-year term, one of the following has occurred: (i) the reappointment of the external director has been proposed by one or more shareholders holding together 1% or more of the aggregate voting rights in the company and the appointment was approved at the general meeting of the shareholders by a simplethe requisite majority, provided that: (1)(a) in calculating the majority, votes of controlling shareholders or shareholders having a personal interest in the appointment as a result of an affiliation with a "controlling shareholder" and abstentions are disregarded, and (b)(2) the total number of shares of shareholders who do not have a personal interest in the appointment as a result of an affiliation with a "controlling shareholder" and/or who are not controlling shareholders, present and voting in favor of the appointment exceed 2% of the aggregate voting rights in the company, and (2) pursuant to a recently enacted amendment to the Companies Law ("Amendment 22"), effective as of January 10, 2014,(3) the external director who has been nominated in such fashion is not a "linked or competing shareholder", and does not have or has not had, on or within the two years preceding the date of such person’sperson's appointment to serve asfor another term as external director, any affiliation with a linked or competing shareholder. The term "linked or competing shareholder" means the shareholder(s) who nominated the external director for reappointment or a material shareholder of the company holding more than 5% of the shares in the company, provided that at the time of the reappointment, such shareholder(s) of the company, the "controlling shareholder" of such shareholder(s) of the company, or a company under such shareholder(s) of the company’scompany's control, has a business relationship with the company or are competitors of the company; the Israeli Minister of Justice, in consultation with the ISA, may determine that certain matters will not constitute a business relationship or competition with the company; (ii) the reappointment of the external director has been proposed by the board of directors and the appointment was approved by the majority of shareholders required for the initial appointment of an external director; or (iii) pursuant to a recently enacted amendment to the Companies Law ("Amendment 26"), effective as of November 25, 2014, the external director has proposed himself for reappointment and the reappointment was approved in accordance with Sub-section (i) above.
However, under regulations promulgated pursuant to the Companies Law, companies whose shares are listed for trading on specified exchanges outside of Israel, including the NASDAQ Global Select, Global and Capital Markets, may elect external directors for additional terms that do not exceed three years each, beyond the three three-year terms generally applicable, provided that, if an external director is being re-elected for an additional term or terms beyond three three-year terms: (i) the audit committee and board of directors must determine that, in light of the external director’sdirector's expertise and special contribution to the board of directors and its committees, the re-election for an additional term is to the company’scompany's benefit; (ii) the external director must be re-elected by the required majority of shareholders and subject to the terms specified in the Companies Law; and (iii) the term during which the nominee has served as an external director and the reasons given by the audit committee and board of directors for extending his or her term of office must be presented to the shareholders prior to their approval.
Further to these regulations, a recentan amendment to the Companies Regulations (Relief for Companies Whose Shares are Registered for Trading Outside of Israel) – 2000, (the "Amendment"Amendment to the Relief Regulations"Regulations"), provides additional exemptions for such companies whose shares are listed for trading on specified exchanges outside of Israel, including the NASDAQ Global Select, Global and Capital Markets, provided that: (i) such company does not have a "controlling shareholder"; and (ii) the company complies with the requirements of the foreign securities laws and stock exchange regulations applicable to companies which are incorporated under the laws of such foreign countries with regard to appointing independent directors and composition of the compensation and audit committees. Any company that satisfies the above criteria and elects to comply with the applicable foreign securities laws and stock exchange regulations, shall be exempt from the following rules under the Companies Law: (i) to have at least 2 external directors appointed to serve in a public company; (ii) at least one of the external directors is required to have financial and accounting expertise and the rest are required to have professional expertise; (iii) the external directors shall be appointed by the general meeting and subject to certain voting thresholds; (iv) if all of the board members who are not controlling shareholders are of one sex, the appointed external director shall be of the other sex; (v) all of the board committees which are empowered and authorized to exercise any of the board's authorities must consist of at least one external director. The exemption from these rules under Amendment 1 requires that the board be composed of both male and female directors.
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External directors may be removed only by the same percentage of shareholders as is required for their election, or by a court, and then only if the external directors cease to meet the statutory qualifications for their appointment, violate their duty of loyalty to the company or are found by a court to be unable to perform their duties on a full time basis. External directors may also be removed by an Israeli court if they are found guilty of bribery, fraud, administrative offenses in a company or use of inside information. Each committee of a company’scompany's board of directors which has been granted any authority normally reserved for the board of directors must include at least one external director; provided, however, that the audit committee and compensation committee must each include all external directors then serving on the board of directors.
Following termination of service as an external director, a public company, a "controlling shareholder" thereof and any entity controlled by a "controlling shareholder", may not grant any benefit, directly or indirectly, to any person who served as an external director of such public company, or to his or her spouse or child, including, not appointing such person, or his or her spouse or child, as an office holder of such public company or of any entity controlled by a "controlling shareholder" of such public company, not employing such person or his or her spouse or child and not receiving professional services for pay from such person, either directly or indirectly, including through a corporation controlled by such person, all until the lapse of two years from termination of office with respect to the external director, his or her spouse or child; and with respect to other relatives of the former external director - until the lapse of one year from termination of office.
An external director is entitled to compensation as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with service provided as an external director. At
In accordance with the Annual Shareholders MeetingAmendment to the Relief Regulations and in compliance with the terms described above in connection therewith, in July 2020, the Company elected to take advantage of the Company held on June 8, 2016, the shareholdersaforementioned exception and has chosen to opt out of the requirement to appoint external directors and regarding the composition of the audit committee and compensation committee, subject to the following conditions: (i) none of the Company's shareholders is a controlling shareholder; (ii) the Company re-electedcomplies with NASDAQ rules and regulations with respect to the composition of the Company's audit and compensation committees; (iii) the Company complies with NASDAQ rules and regulations with respect to the requirements of independent directors. For so long as the Company meets the requisite requirements, the Company intends to apply the exemption from appointing at least two external directors under the Companies Law. Accordingly, Mr. Ilan Erez as an external director for a third three-year term and re-elected Ms. Ayelet Aya Hayak who were originally elected by our shareholders as an external director for a second three-year term.directors under the Companies Law, are no longer classified as external directors, but have continued to serve on the Company's board of directors as independent directors under the NASDAQ rules.
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Audit Committee
The Companies Law requires public companies to appoint an audit committee. The responsibilities of the audit committee pursuant to the Companies Law include identifying irregularities in the management of our business and approving related party transactions as required by law, classifying company transactions as extraordinary transactions or non-extraordinary transactions and as material or non-material transactions in which an officeroffice holder has an interest (which will have the effect of determining the kind of corporate approvals required for such transaction), assessing the proper function of the company’scompany's internal audit regime and determining whether its internal auditor has the requisite tools and resources required to perform his or her role and to regulate the company's rules on employee complaints, reviewing the scope of work of the company’scompany's independent accountants and their fees, and implementing a whistleblower protection plan with respect to employee complaints of business irregularities. Pursuant to Amendment 22, effective as of January 10, 2014,In addition, the responsibilities of the audit committee under the Companies Law also include the following matters: (i) to establish procedures to be followed in respect of related party transactions with a "controlling shareholder" (where such are not extraordinary transactions), which may include, where applicable, the establishment of a competitive process for such transaction, under the supervision of the audit committee, or individual, or other committee or body selected by the audit committee, in accordance with criteria determined by the audit committee; and (ii) to determine procedures for approving certain related party transactions with a "controlling shareholder", which were determined by the audit committee not to be extraordinary transactions, but which were also determined by the audit committee not to be negligible transactions.
Under the Companies Law, an audit committee must consist of at least three directors, including all the external directors of the company, and a majority of the members of the audit committee must be independent or external directors. The Companies Law defines independent directors as either external directors or directors who: (1) meet the requirements of an external director, other than the requirement to possess accounting and financial expertise or "professional qualifications", with Audit Committeeaudit committee confirmation of such; (2) have been directors in the company for an uninterrupted duration of less than 9 years (and any interim period during which such person was not a director which is less than 2 years shall not be deemed to interrupt the duration); and, (3) were classified as such by the company.
The following persons may not be a member of the audit committee:
•
The chairman of the board of directors;
•
Any director employed by or otherwise providing services to the company or to the "controlling shareholder" or entity under such controlling shareholder's control;
•
Any director who derives his salary primarily from a controlling shareholder;
•
A "controlling shareholder"; or
•
Any relative of a "controlling shareholder."
According to the Companies Law, (1) the chairman of the audit committee must be an external director, (2) the required quorum for audit committee meetings and decisions is a majority of the committee members, of which the majority of members present must be independent and external directors, and (3) any person who is not eligible to serve on the audit committee is further restricted from participating in its meetings and votes, unless the chairman of the audit committee determines that such person’sperson's presence is necessary in order to present a certain matter, provided however, that company employees who are not controlling shareholders or relatives of such shareholders may be present in the meetings but not for the actual votes, and likewise, company counsel and company secretary who are not controlling shareholders or relatives of such shareholders may be present in the meetings and for the decisions if such presence is requested by the audit committee.
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Pursuant to the Amendment to the Relief Regulations, companies whose shares are listed for trading on specified exchanges outside of Israel, including the NASDAQ Global Select, Global and Capital Markets, and which satisfy the criteria detailed above, are exempt from the following rules regarding the audit committee under the Companies Law: (i) the committee shall be comprised of at least 3 members, who shall include all of the external directors, and the majority of the members shall be independent; (ii) the audit committee may not include the chairman of the board, or any director employed by the Company, by a controlling shareholder or by any entity controlled by a controlling shareholder, or any director providing services to us, to a controlling shareholder or to any entity controlled by a controlling shareholder on a regular basis, or any director whose income is primarily dependent on a controlling shareholder, and may not include a controlling shareholder or any relatives of a controlling shareholder; (iii) the controlling shareholder or his relatives shall not be members of the audit committee; (iv) the chairman of the audit committee shall be an external director; (v) a person who is prohibited from being a member of the audit committee shall not be present at the committee's meetings; (vi) if the committee also serves as a financials committee, the rules applicable to the financials committee shall apply; (vii) the legal quorum shall be the majority of the committee members, provided that the majority of directors present are independent, at least one of whom is an external director.
Currently, Ms. Ayelet Aya Hayak, Mr. Ilan Erez and Mr. Eli Doron serve as members of our audit committee, and Mr. Ilan Erez serves as the chairperson.
Compensation Committee
Pursuant to which,the Companies Law, the Board of Directors of Israeli publicly traded companies are required to appoint a compensation committee comprised of at least three members, including all external directors, who must also comprise a majority of the members of the compensation committee. In addition, the chairman of the compensation committee must be an external director. Following the compensation committee's recommendations, the Board of Directors is required to establish a compensation policy, which includes a framework for establishing the terms of office and employment of the office holders and guidelines with respect to the structure of the variable pay of office holders. Such guidelines are the basis for adequate balance between the components of compensation, which exists when a linkage is maintained between compensation and performance and the creation of value for shareholders in the Company, while maintaining the Company’sCompany's ability to recruit and maintain talented officeholders and incentivizing them to pursue the Company’sCompany's objectives. In particular, an appropriate balance between the fixed component (base salary and additional benefits) and the variable component and capital compensation avoids placing an exaggerated emphasis on one component.
The following persons may not be a member of the compensation committee:
•
The chairman of the board of directors;
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•
Any director employed by or otherwise providing services to the company or to the controlling shareholder or entity under such controlling shareholder's control;
•
Any director who derives his salary primarily from a "controlling shareholder;"
•
A "controlling shareholder"; or
•
Any relative of a "controlling shareholder."
The responsibilities of the compensation committee include the following:
1.
To recommend to the Board of Directors as to a compensation policy for office holders of the company, as well as to recommend, once every three years to extend the compensation policy subject to receipt of the required corporate approvals;
2.
To recommend to the Board of Directors as to any updates to the compensation policy which may be required;
3.
To review the implementation of the compensation policy by the company;
4.
To approve transactions relating to terms of office and employment of certain company office holders, which require the approval of the compensation committee pursuant to the Companies Law; and
5.
To exempt, under certain circumstances, a transaction relating to terms of office and employment from the requirement of approval of the shareholders meeting.
In December 2012, our Board of Directors changed the composition of the members of our compensation committee by removing Mr. Avi Eizenman from the compensation committee, and appointing the Company’sCompany's two external directors, Mr. Ilan Erez and Ms. Einat Domb-Har to our compensation committee, and appointing Mr. Ilan Erez as chairman of our compensation committee. On July 1, 2013, following the election of Ms. Ayelet Aya Hayak as an external director instead of Ms. Einat Domb-Har, Ms. Aya Hayak replaced Ms. Domb-Har on our compensation committee. Following the election of Mr. Eli Doron as a member of our board of directors, Mr. Eli Doron replaced Mr. Zohar Zisapel on our compensation committee. Our compensation committee has been chargednominated and empowered by the Board of Directors to act in accordance with the powers and prerogatives delegated to it by the Companies Law and take any decisions and make any recommendations to the Board all as set forth in the Companies Law.
Pursuant to Amendment 27 to the Companies Law, effective as of April 3, 2016 ("Amendment 27"27"), the audit committee may serve as the company's compensation committee, provided that it meets the composition requirements of the compensation committee.
Pursuant to the Amendment to the Relief Regulations, companies whose shares are listed for trading on specified exchanges outside of Israel, including the NASDAQ Global Select, Global and Capital Markets, and satisfying the criteria detailed above, are exempt from the following rules regarding the Compensation Committee under the Companies Law: (i) the board of a public company is required to appoint a compensation committee; (ii) the compensation committee shall be comprised of at least 3 members, all of the external directors shall be members and shall constitute the majority of its members and the rest of the members shall be members whose terms of service are as required under the Companies Law.
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Under Section 267B(a) and Parts A and B of Annex 1A of the Companies Law, which were legislated as part of Amendment 20, a company’scompany's compensation policy shall be determined based on, and take into account, the following parameters:
a.
Advancement of the goals of the company, its working plan and its long term policy;
b.
The creation of proper incentives for the office holders while taking into consideration, inter alia, the company's risk management policies;
c.
The company's size and nature of its operations;
d.
The contributions of the relevant office holders in achieving the goals of the company and profit in the long term in light of their positions;
e.
The education, skills, expertise and achievements of the relevant office holders;
f.
The role of the office holders, areas of their responsibilities and previous agreements with them;
g.
The correlation of the proposed compensation with the compensation of other employees of the company, and the effect of such differences in compensation on the employment relations in the company; and
h.
The long term performance of the office holder.
In addition, the compensation policy should take into account that in the event the compensation paid to office holders shall include variable components – it should address the ability of the board of directors to reduce the value of the variable component from time to time or to set a cap on the exercise value of convertible securities components that are not paid out in cash. Additionally, in the event that the terms of office and employment include grants or payments made upon termination – such grants should take into consideration the length of the term of office or period of employment, the terms of employment of the office holder during such period, the company’scompany's success during said period and the office holder’sholder's contribution to obtaining the company’scompany's goals and maximizing its profits as well as the circumstances and context of the termination.
In addition, the compensation policy must set forth standards and rules on the following issues: (a) with respect to variable components of compensation - basing the compensation on long term performance and measurable criteria (though a non-material portion of the variable components can be discretionary awards taking into account the contribution of the officeroffice holder to the company. Pursuant to Amendment 27, variable components in the amount of up to a three month salary of the relevant office holder, on an annual basis, shall be considered a non-material portion of the variable components); (b) establishing the appropriate ratio between variable components and fixed components and placing a cap on such variable components (including a cap on the grant date value of convertible securities components that are not paid out in cash); (c) setting forth a rule requiring an office holder to return amounts paid, in the event that it is later revealed that such amounts were paid on the basis of data which prove to be erroneous and resulted in an amendment and restatement of the company’scompany's financial statements; (d) determining minimum holding or vesting periods for equity based variable components of compensation, while taking into consideration appropriate long term incentives; and (e) setting a cap on grants or benefits paid upon termination.
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The board of directors of a company is obligated to adopt a compensation policy after considering the recommendations of the compensation committee. The final adoption of the compensation committee is subject to the approval of the shareholders of the company, which such approval is subject to certain special majority requirements, as set forth in the Israeli Companies Law, pursuant to which one of the following must be met:
(i)
the majority of the votes includes at least a majority of all the votes of shareholders who are not controlling shareholders of the company or who do not have a personal interest in the compensation policy and participating in the vote; abstentions shall not be included in the total of the votes of the aforesaid shareholders; or
(ii)
the total of opposing votes from among the shareholders described in Sub-section (i) above does not exceed 2% of all the voting rights in the company.
Nonetheless, even if the shareholders of the company do not approve the compensation policy, the board of directors of a company may approve the compensation policy, provided that the compensation committee and, thereafter, the board of directors determined, based on detailed, documented, reasons and after a second review of the compensation policy, that the approval of the compensation policy is for the benefit of the company.
Executive Compensation Policy
On July 31, 2013, an Extraordinary General Meeting of the Shareholders of the Company took place, approving the Executive Compensation Policy as later amended at the Annual General Meeting of the Shareholders held on June 5, 2019 (the "Policy""Policy"), which had been recommended by the Compensation Committee and approved by the Board of Directors, for the Company’sCompany's directors and office holders, in accordance with the requirements of the Companies Law. The Policy was re-approvedapproved by our shareholders at the Annual General Meeting of our shareholders, which took place on June 8, 2016.
The Policy includes, among other issues prescribed by the Companies Law, a framework for establishing the terms of office and employment of the office holders, a recoupment policy, and guidelines with respect to the structure of the variable pay of office holders.
Each of our compensation committee and board of directors may engage compensation advisors and other professionals to assist in formulating compensation packages in line with the Policy, including, without limitation, to assist in collecting relevant data, framing the appropriate factors to be considered and evaluating the different factors being considered.
All compensation arrangements of office holders are to be approved in the manner prescribed by applicable law. Our office holders, including External Directors or Independent Directors, may waive their entitlement to their compensation, subject to applicable law.
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Our recoupment policy relating to office holder compensation allows for the recovery of all or a portion of any compensation paid to our office holders paid during the previous three years on the basis of financial data included in our financial statements in any fiscal year that were found to be inaccurate and were subsequently restated. In such event, we will seek reimbursement from the office holders to the extent such office holders would not have been entitled to all or a portion of such compensation, based on the financial data included in the restated financial statements. Our compensation committee will be responsible for approving the amounts to be recouped and for setting terms for such recoupment from time to time. Notwithstanding the aforesaid, the recoupment policy will not be triggered in the event of a financial restatement due to changes in the applicable reporting or accounting standards. The above noted recoupment policy does not derogate from any relevant recoupment or clawbackclaw-back provisions under any applicable law or regulatory rules which apply to us.
All of our office holders (other than non-employee directors) may be incentivized through cash bonuses and long-term equity-based incentives to provide the office holder with a stake in our success – thus linking the office holder’sholder's long-term financial interests with the interests of our shareholders. In accordance with the Policy, the incentives are developed through a program that sets performance targets based on each office holder’sholder's role and scope. Actual payments are driven by the business and individual performance vis-à-vis the performance targets set at the beginning of the year. The formula for the performance targets and the maximum variable components payable to each office holder (other than directors) shall be presented and recommended by our Chief Executive Officer and reviewed and approved by our compensation committee and our board of directors. The formula for the performance targets and the maximum variable components payable to any employee office holders who are also directors shall be presented and recommended by our compensation committee and reviewed and approved by our board of directors and our shareholders. The maximum value of the variable compensation components for an office holder at the Company shall not exceed eighty percent of such office holder’sholder's total compensation package on an annual basis. The maximum annual value of the equity-based long-term compensation components and cash bonuses of all of our office holders shall not exceed two percent of our market cap.
Unless otherwise specified in the terms of the variable compensation of an office holder, our Policy dictates that the board of directors shall not have discretion to unilaterally reduce such office holder's variable compensation. Equity based compensation may be granted in any form permitted under our equity incentive plans, as in effect from time to time (collectively, the "Equity"Equity Incentive Plans"Plans"), including stock options, restricted share units and restricted stock. Equity grants to office holders shall be made in accordance with the terms of the Equity Incentive Plans. All equity-based incentives granted to our office holders shall be subject to vesting periods in order to promote long-term retention of the awarded office holders. Unless determined otherwise in a specific award agreement approved by the compensation committee and the board of directors, grants to our office holders other than directors shall vest gradually over a period of between two to four years. We do not have any equity ownership guidelines that require any of our office holders to hold a stated number or fixed percentage of our ordinary shares, nor do they have to continue to hold for any period of time shares in the Company which they acquired as a result of the exercise of fully vested equity grants. The value of the equity-based compensation shall be calculated on the grant date, according to acceptable valuation practices at the time of grant. The board of directors shall not have discretion to limit the value of the equity-based compensation at the time of exercise. The board of directors may, following approval by our compensation committee, extend the period of time for which an award to an office holder is to remain exercisable, or make provisions with respect to the acceleration of the vesting period of any office holder’sholder's awards, including, without limitation, in connection with a corporate transaction involving a change of control.
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Our compensation committee will periodically review the Policy and monitor its implementation, and recommend to our board of directors and shareholders to amend the Policy as it deems necessary from time to time. The term of the Policy shall be three years as of the date of its re-adoption on June 8, 2016,5, 2019, during which, the Board of Directors is required to examine the Policy and revise it from time to time, if the circumstances under which it had been adopted have materially changed.
Following such three yearthree-year term, the Policy, including any revisions recommended by our compensation committee and approved by our board of directors, as applicable, will be brought once again to the shareholders for approval.
Internal Auditor
Under the Companies Law, the board of directors of a public company must appoint an internal auditor, who is nominated by the audit committee. The role of the internal auditor is to examine, among other matters, whether our actions comply with the law and orderly business procedure. Under the Companies Law, the internal auditor may be an employee of the company but not an office holder (as defined in Item 10 below), nor an affiliate, nor a relative of an office holder or affiliate, and he or she may not be our independent accountant or its representative. Doron CohenYisrael Gewirtz of Fahn Kaneh Control Management Ltd. (a subsidiary of Fahn Kanne & Co. - Grant Thornton Israel) serves as our internal auditor.
D.Employees
The number of employees over the last three financial years is set forth in the table below.
As of December 31, | 2018 | 2019 | 2020 | |||||||||
Total Employees | 270 | 260 | 289 | |||||||||
Marketing, Sales, Customer Services | 24 | 25 | 24 | |||||||||
Research & Development | 106 | 106 | 123 | |||||||||
Manufacturing | 125 | 110 | 124 | |||||||||
Corporate Operations and Administration | 15 | 19 | 18 | |||||||||
| As of December 31 | 2015 | 2016 | 2017 | |||||||||
| Total Employees | 238 | 240 | 255 | |||||||||
| Marketing, Sales, Customer Services | 26 | 24 | 23 | |||||||||
| Research & Development | 81 | 79 | 93 | |||||||||
| Manufacturing | 114 | 121 | 123 | |||||||||
| Corporate Operations and Administration | 17 | 16 | 16 | |||||||||
As of March 31, 2018,2021, we had 264292 employees, including 24 in marketing, sales and customer services, 101127 in research and development, 123 in manufacturing, and 1618 in corporate operations and administration. All such employees, except for 2422 employees of our subsidiaries in the United States and 3346 employees of our subsidiary in Denmark, are based in Israel. We consider our relations with our employees excellent and have never experienced a labor dispute, strike or work stoppage. None of our employees isare represented by a labor union. We do not employ a significant number of temporary employees, but we do use temporary employees from time to time, as necessary.
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In Israel we are subject to certain labor statutes and national labor court precedent rulings, as well as to certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations including the Industrialists' Associations. These provisions of collective bargaining agreements are applicable to our Israeli employees by virtue of expansion orders issued in accordance with relevant labor laws by the Israeli Ministry of Labor and Welfare, and which apply such agreement provisions to our employees even though they are not directly part of a union that has signed a collective bargaining agreement. The laws and labor court rulings that apply to our employees principally concern the minimum wage laws, procedures for dismissing employees, determination of severance pay, leaves of absence (such as annual vacation or maternity leave), sick pay and other conditions for employment. The expansion orders which apply to our employees principally concern the requirement for length of the work day and workweek, mandatory contributions to a pension fund, annual recreation allowance, travel expenses payment and other conditions of employment. We generally provide our employees with benefits and working conditions beyond the required minimums.
Israeli Severance Pay Law, 1963law generally requires severance pay, which may be funded by managers' insurance and/or a pension fund described below, upon the retirement or death of an employee or termination of employment without cause (as defined in the law). The payments to the managers’managers' insurance and/or pension fund in respect of severance pay amount to approximately 8.33% of an employee’semployee's wages, in the aggregate. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the United States Social Security Administration. Such amounts also include payments for national health insurance. The payments to the National Insurance Institute (including payments for healthcare insurance) are paid on a differential basis, such that with respect to the part of the employer's wage which is equal to up to 60% of the average wage in Israel, the employer is required to pay an amount equal to 3.45% of such part of the employee's wage and the employee is required to pay an amount equal to 3.50% of such part of the employee's wage, and for the remainder of the employee's wage, the employer is required to pay an amount equal to 7.50% of such part of the employee's wage and the employee is required to pay an amount equal to 12% of such part of the employee's wage.
As required by applicable law, we contribute to either a fund known as managers' insurance or to a pension fund, or to a combination of both. Such practice was further reinforced in July 1, 2008, when we entered into agreements with a majority of itsour employees in order to implement Section 14 to the Severance Pay Law ("Section 14"), according to which the payment of monthly deposits by us into managers’managers' insurance and/or pension fund are in respect of severance obligation to such employees. See Note 911 of our consolidated financial statements. These funds provide a combination of savings plan, insurance and severance pay benefits to the employee, giving the employee a lump sum payment upon retirement and securing the severance pay or part of it, if legally entitled, upon termination of employment. Each employee contributes an aggregate amount equal to 6% of his or her base salary to such funds, and we contribute, in the aggregate, an additional 12.5%14.83% to 14.83%15.83% of the employee’semployee's base salary, with such amount including the 8.33% which is contributed as severance pay as noted above. The monthly contributions as mentioned above constitute a majority of the required payment for severance pay. For employees without a Section 14 arrangement as of their commencement date, the Company designates a separate portion of its funds and attributes them to its severance payment obligations. Additionally, the Company makes provisions in its books concerning any additional severance payments liability.
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E.Share Ownership
The following table sets forth, as of March 31, 20182021, the number of shares owned by our officers,office holders, directors and senior management. The percentages shown are based on 7,549,5316,909,804 ordinary shares outstanding as of March 31, 2018:
| Name and Address | Number of Shares and Options Owned1 | Percent of Outstanding Shares | ||||||||||||||
Name | Number of Shares and Options Owned1 | Percent of Outstanding Shares | ||||||||||||||
| Avi Eizenmann | 240,751 | 3.17 | % | 319,083 | 4.51 | % | ||||||||||
| Shaike Orbach | * | * | * | * | ||||||||||||
| Eli Doron | * | * | * | * | ||||||||||||
| Ayelet Aya Hayak | * | * | * | * | ||||||||||||
| Ilan Erez | * | * | * | * | ||||||||||||
| Eran Gilad | * | * | * | * | ||||||||||||
| All directors and officers as a group | 240,751 | 3.17 | % | |||||||||||||
All directors and office holders as a group | 372,415 | 5.26 | % | |||||||||||||
* | Denotes ownership of less than 1% of the outstanding shares. |
(1) | The table above includes the number of shares and options that are exercisable within 60 days of March 31, |
See also "Item 6 – Directors and Senior Management – Compensation." |
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A.Major Shareholders
The shareholders of the Company who beneficially own over 5% or more of each class of shares, as well as the number of shares owned and the percentage of outstanding shares owned by each, and additional information, is set forth below. The percentages shown are based on 6,909,804 ordinary shares outstanding as of March 31, 2021. The voting rights of our major shareholders do not differ from the voting rights of other holders of our ordinary shares. All of the information with respect to beneficial ownership of the Ordinary Shares is given to the best of our knowledge.
| Name of Shareholder | Number of Shares and Options Owned1 | Percentage of Outstanding Shares | ||||||
Zohar Zisapel2 | 1,511,722 | 20.02 | % | |||||
Dov Yelin/Yair Lapidot/Yelin Lapidot Holdings Management Ltd.3 | 615,748 | 8.16 | % | |||||
Wellington Management Group LLP4 | 424,489 | 5.62 | % | |||||
Name of Shareholder | Number of Shares and Options Owned(1) | Percentage of Outstanding Shares | ||||||
Wellington Management Group LLP(2) | 749,560 | 10.85 | % | |||||
Ibex Investors LLC/ Justin B. Borus, Ibex Israel Fund LLLP/Ibex GP LLC/Ibex Investment Holdings LLC/Ibex Investment Holdings II LLC(3) | 594,528 | 8.60 | % | |||||
First Wilshire Securities Management, Inc.(4) | 388,994 | 5.63 | % | |||||
(1) | The table above includes the number of shares and options that are exercisable within 60 days of March 31, |
(2) | As reported on |
Those clients have the right to receive, or the power to direct the receipt of, dividends from, or the proceeds from the sale of, such securities. No such client is known to have such right or power with respect to more than 5% of this class of securities, | |
As reported on Schedule 13G filed by Wellington with the SEC on February 3, 2021, those securities as to which the Schedule was filed by Wellington , in its capacity as investment adviser, are owned of record by its clients. Those clients have the right to receive, or the power to direct the receipt of, dividends from, or the proceeds from the sale of, such securities. No such client is known to have such right or power with respect to more than five percent of |
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(3) | As reported on Schedule 13G |
(4) | As reported on Schedules 13G filed by First Wilshire Securities Management, |
The Company's major shareholders do not have different voting rights.
As of March 31, 2018,2021, there were approximately 5 record holders of ordinary shares, including approximately 2 record holders in the United States. Collectively, these 2 record holders in the United States held less than 1% of the outstanding ordinary shares.
B.Related Party Transactions
All related party transactions and arrangements (or modifications of existing ones) with members of the "Rad Group",our related parties, transactions in which office holders of the Company have a personal interest, or transactions which raise issues of such office holders’holders' fiduciary duties, could require additionalare subject to the applicable corporate approvals as applicable under the Companies Law.
On July 22, 2002, our audit committee and the Board of Directors approved an Indemnification Agreement with our directors and officers.office holders. Our shareholders approved the terms of this agreement in a General and Extraordinary Meeting held on January 7, 2004. In Amendment 3 to the Companies Law, effective as of 2005, the instances in which a company may indemnify its officersoffice holders and directors were broadened. In December 2007, each of our audit committee and Board of Directors approved a new form of Indemnification Agreement with our directors and officersoffice holders so as to reflect this amendment. Our shareholders approved the terms of this new Indemnification Agreement in January 2008. According to Amendment 16 to the Israeli Securities Law, and to a corresponding amendment to the Companies Law, both effective as of 2011, the ISA is authorized to impose administrative sanctions against companies like ours and their office holders for certain violations of the Israeli Securities Law or the Companies Law. These sanctions include monetary sanctions and certain restrictions on serving as a director or senior officeroffice holder of a public company for certain periods of time. The Israeli Securities Law and the Companies Law provide that only certain types of such liabilities may be reimbursed by indemnification and insurance. Specifically, legal expenses (including attorneys' fees) incurred by an individual in the applicable administrative enforcement proceeding and certain compensation payable to injured parties for damages suffered by them are permitted to be reimbursed via indemnification or insurance, provided that such indemnification and insurance are authorized by the company's articlesCompany's Articles of association,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 officersoffice holders so as to reflect this amendment, and our shareholders approved these amendments to the Articles of Association and a revised form of Indemnification Agreement for directors at the Annual General Meeting of the Shareholders held on April 11, 2012.
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The Indemnification Agreement provides that our directors and officersoffice holders will be exempt from liability in certain circumstances. The Indemnification Agreement also provides for the indemnification by the Company for certain obligations and expenses imposed on the officeroffice holder in connection with actacts performed in his or her capacity as an officeroffice holder of the Company. This right to indemnification is limited, and does not cover, among other things, a breach of an officer’soffice holder's duty of loyalty, a willful breach of an officer’soffice holder's duty of care, or a reckless disregard for the circumstances or consequences of a breach of a duty of care. The right to indemnification also does not cover acts that are taken intentionally to unlawfully realize personal gain. The maximum amount of our liability under these Indemnification Agreements for any monetary obligation imposed on an officeroffice holder or a director in favor of another person by a judgment is currently $3,000,000US$ 3,000,000 for each instance of a covered scenario. In addition, we would be liable to indemnify the officeroffice holder or director for all reasonable litigation expenses with respect to certain proceedings. We have maintained liability insurance for our directors and officers.office holders. On September 23, 2007, our shareholders approved the procurement of a policy, which provides for total coverage of up to $4,000,000.US$ 4,000,000. All of our directors are parties to our Indemnification Agreements and are covered by our directors and officersoffice holders' insurance policy.
As per Amendment 20, it was decided on July 31, 2013, at the Extraordinary General Meeting of the Shareholders to adopt the Executive Compensation Policy of the Company, which was recommended by our compensation committeeCompensation Committee and approved by our boardBoard of directors.Directors, and was re-approved by our Compensation Committee, Board of Directors and Shareholders on June 8, 2016. Our approved Executive Compensation Policy includes the above referenced form of Indemnification Agreement to be entered into by the Company with our directors and officersoffice holders serving in such capacities from time to time, as well as the above referenced directors and officersoffice holders liability insurance policy. Under the Executive Compensation Policy, any change to the Indemnification Agreement or the insurance policy, including the cost and/or any changes which materially depart from the key terms of the current agreement and/or insurance policy (provided that such changes apply equally to all executives of the Company, including directors) will be submitted to the Company’sCompany's compensation committee and the boardBoard of directorsDirectors for their approval but shall not, unless required by law or the Company’sCompany's Articles of Association, be presented at a General Meeting of the shareholders.
See also "Item 6 – Directors and Senior Management – Compensation."
Item 8.FINANCIAL INFORMATION
A.Consolidated Statements and Other Financial Information
Our
consolidated financial statements and other financial information are included herein on pages F-1 throughA1.See Item 18 for our consolidated financial statements.
A2.See Item 18 for our consolidated financial statements, which cover the last three financial years.
A3.See page F-3 for the audit report of our accountants, entitled "Report of Independent Registered Public Accounting Firm."
A4.Not applicable.
A5.Not applicable.
A6.See Note 12A13A to our audited consolidated financial statements included in Item 18 of this annual report for the geographic distribution of our sales based on the location of the customer.
A7.Litigation
As of the asserted patents and the claimsdate of the patents were invalid and/or unenforceable. While one of our switch suppliers (which was also named as a defendant in the aforesaid lawsuit) agreed to indemnify us with respect to certain liabilities, there was no certainty that we would have been ultimately able to collect all or any amounts under such indemnity should we would have been found liable under the lawsuit. On September 4, 2012, the Court granted the defendants' motion to stay the pending litigation and on April 28, 2015, the lawsuit was dismissed with prejudice by the Court.
A8.Dividend Policy
On January 14, 2013, we announced that our Board of Directors has adopted a policy for distributing dividends, subject to all applicable laws. According to this policy, each year we will distribute a dividend of up to 50% of our annual distributable profits. As part of the stated policy, the Company'sOur Board of
B.Significant Changes
Since the date of the annual financial statements included in this Annual Report, no significant changes have occurred.
A.Offer and listing details
Markets and Share Price History
Following our delisting from trading on the TASE, the only trading market for our ordinary shares is the NASDAQ Global Select Market, where our shares have been listed and traded under
the symbol SILC since January 2, 2014. Prior thereto, our shares were listed and traded on the NASDAQ Global Market (previously NASDAQ National Market) under the symbol SILC (previously SILCF) from February 11, 2008. Prior thereto, our shares were listed and traded on the NASDAQ Capital Market (previously known as the NASDAQ Small-Cap).81
The table below sets forth the high and low reported sales prices in Dollars of our ordinary shares, as reported by NASDAQ during the indicated periods:
PERIOD | LOW | HIGH | ||||||
LAST 6 CALENDAR MONTHS | ||||||||
March 2021 | 43.10 | 52.00 | ||||||
February 2021 | 42.36 | 59.27 | ||||||
January 2021 | 41.03 | 48.01 | ||||||
December 2020 | 38.27 | 42.55 | ||||||
November 2020 | 35.90 | 39.17 | ||||||
October 2020 | 31.00 | 37.90 | ||||||
FINANCIAL QUARTERS DURING THE PAST TWO YEARS | ||||||||
First Quarter 2021 | 41.03 | 59.27 | ||||||
Fourth Quarter 2020 | 31.00 | 42.55 | ||||||
Third Quarter 2020 | 29.24 | 39.52 | ||||||
Second Quarter 2020 | 25.09 | 36.88 | ||||||
First Quarter 2020 | 20.93 | 37.60 | ||||||
Fourth Quarter 2019 | 29.30 | 35.02 | ||||||
Third Quarter 2019 | 28.58 | 34.03 | ||||||
Second Quarter 2019 | 28.63 | 39.70 | ||||||
FIVE MOST RECENT FULL FINANCIAL YEARS | ||||||||
2020 | 20.93 | 42.55 | ||||||
2019 | 28.59 | 40.36 | ||||||
2018 | 32.00 | 77.95 | ||||||
2017 | 34.86 | 77.05 | ||||||
2016 | 25.48 | 44.00 | ||||||
| PERIOD | LOW | HIGH | ||||||
| LAST 6 CALENDAR MONTHS | ||||||||
| March 2018 | 32.00 | 64.18 | ||||||
| February 2018 | 60.73 | 67.15 | ||||||
| January 2018 | 62.75 | 77.95 | ||||||
| December 2017 | 67.83 | 73.15 | ||||||
| November 2017 | 67.77 | 77.05 | ||||||
| October 2017 | 56.99 | 73.68 | ||||||
| FINANCIAL QUARTERS DURING THE PAST TWO YEARS | ||||||||
| First Quarter 2018 | 32.00 | 77.95 | ||||||
| Fourth Quarter 2017 | 56.99 | 77.05 | ||||||
| Third Quarter 2017 | 43.75 | 59.43 | ||||||
| Second Quarter 2017 | 43.56 | 55.66 | ||||||
| First Quarter 2017 | 34.86 | 50.00 | ||||||
| Fourth Quarter 2016 | 34.46 | 42.69 | ||||||
| Third Quarter 2016 | 27.06 | 44.00 | ||||||
| Second Quarter 2016 | 25.48 | 34.35 | ||||||
| FIVE MOST RECENT FULL FINANCIAL YEARS | ||||||||
| 2017 | 34.86 | 77.05 | ||||||
| 2016 | 25.48 | 44.00 | ||||||
| 2015 | 24.86 | 48.43 | ||||||
| 2014 | 26.00 | 73.44 | ||||||
| 2013 | 17.97 | 46.15 | ||||||
On December 27, 2005, our shares commenced trading on the TASE in Israel under the symbol "SILC". "SILC." On October 26, 2015, our Board of Directors resolved to act to delist the Company’sCompany's shares from trading on the TASE. The last trading day in our shares on the TASE was January 26, 2016,, and on January 28, 2016, our shares were delisted from trading on the TASE. The following table sets forth, for the periods indicated, the high and low reported sales prices, in NIS, of the ordinary shares on the TASE, until delisted from trading as set forth above:
| PERIOD | LOW | HIGH | ||||||
| FINANCIAL QUARTERS DURING THE PAST TWO YEARS | ||||||||
First Quarter 20161 | 125.00 | 169.00 | ||||||
| FIVE MOST RECENT FULL FINANCIAL YEARS | ||||||||
| 2015 | 96.01 | 189.60 | ||||||
| 2014 | 89.74 | 257.20 | ||||||
| 2013 | 66.50 | 166.60 | ||||||
| 2012 | 51.60 | 73.00 | ||||||
| 2011 | 44.16 | 80.64 | ||||||
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Not applicable
B.Memorandum and Articles of Association
Articles of Association
Our shareholders approved our Amendedamended and Restatedrestated Articles of Association on January 24, 2008, as well as
We have currently outstandinghave only one class of outstanding shares, our Ordinary Shares, having a nominal value
Our Articles of Association require that we hold our annual general meeting of shareholders each year no later than 15
months from the last annual meeting, at a time and place, either within or without the State of Israel, determined by the board of directors, upon 21In general, a
simple majority is required to amend ourPursuant to
the•
Appointment or termination of our auditors;
•
Appointment and dismissal of external directors, unless the company elects to opt-in to the exemptions promulgated under the Amendment to the Relief Regulations as detailed above, under which there is no requirement to appoint external directors;
•
Approval of interested party acts and transactions requiring general meeting approval as provided in Sections 255 and 268 to 275 of the Companies Law;
•
A merger as provided in Section 320(a) of the Companies Law;
•
The exercise of the powers of the board of directors, if the board of directors is unable to exercise its powers and the exercise of any of its powers is vital for our proper management, as provided in Section 52(a) of the Companies Law;
83
•
Amendments to our Articles of Association; and
•
Approval of an increase or decrease of the registered share capital.
An extraordinary general meeting may be convened by demand of two directors or by written request of one or more shareholders holding at least 5% of our issued share capital and 1% of the voting rights or one or more shareholders holding at least 5% of the voting rights. Shareholders requesting a special meeting must include in their request all relevant information, including the reason that such subject is proposed to be brought before the special meeting.
Our ordinary shares may generally be freely transferred under our amended and restated Articles of Association, unless the transfer is restricted or prohibited by applicable law or the rules of the stock exchange on which the shares are traded. The ownership or voting of our ordinary shares by
The Companies Law
We are subject to the provisions of the Companies Law. The Companies Law codifies the fiduciary duties that "office holders", including directors and executive officers,office holders, owe to a company. An office holder, as defined in the Companies Law, is a general manager (also referred to as the "chief executive officer"), chief business manager, deputy general manager, vice general manager, executive Vice-President, Vice-President, any other person assuming the responsibilities of any of the foregoing positions without regard to such person's title, as well as a director, or another manager directly subordinate to the general manager. Each person listed in the table in "Item 6
The Companies Law requires that an office holder of a company promptly disclose, no later than the first board meeting in which such transaction is discussed, any personal interest that he or she
may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company. In addition, if the transaction is an extraordinary transaction, the office holder must also disclose any personal interest held by the officeIn the case of a transaction in which an office holder of the company has a personal interest and which is not an extraordinary transaction, after the office holder complies with the above disclosure
requirement,84
Subject to certain exceptions provided for in the regulations to the Companies Law, agreements regarding directors’directors' terms of compensation require the approval of the compensation committee, board of directors and the shareholders of the company. The transaction must be for the benefit of the company.
In matters concerning an extraordinary transaction in which a person has a personal interest, as well as matters concerning his or her terms of compensation, he or she shall not be permitted to vote on the matter or be present in the audit committee or board of directors meeting in which the
matter is considered, however, with respect to an office holder, he/she may be present at the meeting discussions if the chairman determines that the presence of the office holder is necessary in order to present the matter. However, if a majority of the audit committee or of the board of directors has a personal interest in the matter then:•
All of the directors are permitted to vote on the matter and attend the meeting in which the matter is considered; and
•
The matter requires approval of the shareholders at a general meeting.
According to the Companies Law, the personal interest disclosure requirements discussed above also apply to a "controlling shareholder" of a public company. Such requirements also apply to certain shareholders of a public company who have a personal interest in the adoption by the shareholders of certain proposals with respect to (i) certain private placements that will increase their relative holdings in the company, (ii) certain special tender offers or forced bring along share purchase transactions, (iii) election of external directors, (iv) approval of a compensation policy governing the terms of employment and compensation of office holders, (v) approval of the terms of employment and compensation of the general manager, (vi) approval of the terms of employment and compensation of office holders of the company when such terms deviate from the compensation policy previously approved by the company’scompany's shareholders, and (vii) approving the appointment of either (1) the chairman of the board or his/her relative as the chief executive officer of the company, or (2) the chief executive officer or his/her relative as the chairman of the board of directors of the company. If any shareholder casting a vote at a shareholders meeting in connection with such proposals as aforesaid does not notify the company if he, she or it has a personal interest with respect to such proposal, his, her or its vote with respect to the proposal will be disqualified.
The term "controlling shareholder" is defined as a shareholder who has the ability to direct the activities of a company, other than if this power derives solely from the shareholder’sshareholder's position on the board of directors or any other position with the company, and the definition of "
85
In general, extraordinary transactions with a "controlling shareholder" or in which a "controlling
The shareholder approval for such matters requiring shareholder disclosure of a personal interest as noted above, generally must either include at least a majority of the shares held by non-controlling and disinterested shareholders who actively participate in the voting process (without taking abstaining votes into account), or, alternatively, the total shareholdings of the non-controlling and disinterested shareholders who vote against the transaction must not represent more than two percent of the voting rights in the company. The shareholder approval for approving the appointment of either (1) the chairman of the board or his/her relative as the chief executive officer of the company, or (2) the chief executive officer or his/her relative as the chairman of the board of directors of the company, must either include at least two-thirds of the shares held by non-controlling and disinterested shareholders who actively participate in the voting process (without taking abstaining votes into account), or, alternatively, the total shareholdings of the non-controlling and disinterested shareholders who vote against the transaction must not represent more than two percent of the voting rights in the company. Agreements and extraordinary transactions with a "controlling shareholder" or in which a "controlling shareholder" has a personal interest, or agreements relating to any employment terms of a "controlling shareholder" (or relative if such) or to the provision of services to the company by such "controlling shareholder" (or relative if such), as aforesaid, with duration exceeding three years, are subject to re-approval once every three years by the audit committee (or compensation committee, as applicable), the board of directors and the shareholders of the company. Extraordinary transactions with a "controlling shareholder" or in which a "controlling shareholder" has a personal interest may be approved in advance for a period exceeding three years if the audit committee determines such approval reasonable under the circumstances. In addition, agreements and extraordinary transactions with duration exceeding three years which were approved prior to Amendment 16 to the Companies Law, which was passed by the Israeli legislature, the Knesset, in March 2011, and which came into effect gradually during the year 2011 (the "("Amendment 16"16"), will need to be re-approved by the proper corporate actions at the later of (i) the first general meeting held after May 14, 2011, (ii) November 14, 2011, or (iii) the expiration of three years from the date on which they were originally approved, even though they were properly approved prior to the passing of the Amendment 16.
The board of directors of an Israeli company whose shares or debentures are publicly traded is obligated to adopt a compensation policy governing the terms of office and employment of office holders, after considering the recommendations of the compensation committee. The final adoption of the compensation policy is subject to the approval of the shareholders of the company. Such shareholder approval is subject to certain special majority requirements, as set forth in the Companies Law, pursuant to which the shareholder majority
approval must also either include at least a majority of the shares held by non-controlling and disinterested shareholders who actively participate in the voting process (without taking abstaining votes into account), or, alternatively, the total shareholdings of the non-controlling and disinterested shareholders who voted against the transaction must not represent more than two percent of the voting rights in the company.86
Nonetheless, even if the shareholders of the company do not approve the proposed compensation policy, the board of directors of a company may approve the proposed compensation policy, provided that the compensation committee and, thereafter, the board of directors resolved, based on detailed, documented, reasons and after a second review of the compensation policy, that the approval of such compensation policy is for the benefit of the company.
Pursuant to the Companies Law, the terms of office and employment of an office holder in a public company
should be in accordance with theTerms of office and employment of office holders who are neither directors nor the general manager and which comply with the company’scompany's compensation policy require approval by the (i) compensation committee; and (ii) the board of directors. Approval of terms of office and employment for such office holders which do not comply with the compensation policy may nonetheless be approved subject to two cumulative conditions: (i) the compensation committee
Terms of office and employment of the general manager which comply with the company’scompany's compensation policy require approval by the (i) compensation committee; (ii) the board of directorsdirectors; and (iii) the shareholders of the company by means of the special majority required for approving the compensation policy (as detailed above). Approval of terms of office and employment for the general manager which do not comply with the compensation policy may nonetheless be approved subject to two cumulative conditions: (i) the compensation committee and thereafter the board of directors, approved the terms after having taken into account the various policy considerations and mandatory requirements set forth in the Companies Law with respect to office holder compensation, and (ii) the shareholders of the company approved the terms of office and employment for the general manager which deviate from the compensation policy by means of the special majority required for approving the compensation policy (as detailed above). Notwithstanding the foregoing, a company may be exempted from receiving shareholder approval with respect to the terms of office and employment of a proposed candidate for general manager if such candidate meets certain independence criteria, the terms of office and employment are in
87
Terms of office and employment of office holders (including the general manager) that are not directors may nonetheless be approved by the company despite shareholder rejection, provided that a company’scompany's compensation committee and thereafter the board of directors have determined to approve such terms of office and employment based on detailed reasoning, after having re-examined the proposed terms of office and employment, and having taken the shareholder rejection into consideration.
Terms of office and employment of directors which comply with the company’scompany's compensation policy require approval by the (i) compensation committee; (ii) the board of directors and (iii) the shareholders of the company. Approval of terms of office and employment for directors of a company which do not comply with the compensation policy may nonetheless be approved subject to two
Private
placements in a public company require approval by a1.A private placement that meets all of the following conditions:
•
The private placement will increase the relative holdings of a shareholder that holds five percent or more of the company's outstanding share capital, assuming the exercise of all of the securities convertible into shares held by that person, or that will cause any person to become, as a result of the issuance, a holder of more than five percent of the company's outstanding share capital.
•
20 percent or more of the voting rights in the company prior to such issuance are being offered.
•
All or part of the consideration for the offering is not cash or registered securities, or the private placement is not being offered at market terms.
2.A private placement which results in anyone becoming a "controlling shareholder" of the public company.
In addition, under the Companies Law, certain transactions or a series of transactions
are considered to be one private placement. A private placement that meets all of the above conditions, and which must be approved by the shareholders, must also be for the benefit of the company.Any placement of securities that does not fit the above description may be issued at the discretion of the board of directors.
88
Under the Companies Law, a shareholder has a duty to act in good faith towards the company and other shareholders when exercising his or her rights and refrain from abusing his power in the company, including, among other things, voting in the general meeting of shareholders on the following matters:
•
Any amendment to the articles of association;
•
An increase of the company's authorized share capital;
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A merger; or
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Approval of interested party acts and transactions that require general meeting approval as provided in Sections 255 and 268 to 275 of the Companies Law.
Furthermore, the Companies Law requires that a shareholder refrain from acting in a discriminatory
manner towards other shareholders.The Companies Law does not describe the substance of the aforementioned duties of shareholders, but provides that laws applicable to a breach of contract, adjusted according to the
circumstances shall apply to a breach of such duties. With respect to the obligation to refrain from acting discriminatorily, a shareholder that is discriminated against can petition the court to instruct the company to remove or prevent the discrimination, as well as provide instructions with respect to future actions.In addition, any "controlling shareholder", any shareholder who knows that it possesses power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of a company's articles of association, has the power to appoint or prevent the appointment of an office holder in the company is under a duty to act with fairness towards the
The Companies Law requires that specified types of transactions, actions and arrangements be
approved as provided for in aIn addition, the Israeli legislature, the Knesset, approved Amendment 16Companies Law includes a code of recommended corporate governance practices, which was added to the Companies Law following the enactment of Amendment 16. In the explanatory notes to Amendment 16, the Knesset noted that an "adopt or disclose non-adoption" regulation would be issued by the ISA with respect to such code. As of the date of this Annual Report, the ISA has issued reporting instructions with respect to this code which came into effect during 2011, Amendment 20 which came into effect at the end of 2012, and Amendment 22 which came into effect at the beginning of 2014 and Amendment 26 which came into effect at the end of 2014. The purposes of these amendmentsare applicable only to the Companies Law were to revise and enhance existing provisions governing corporate governance practices of Israeli companies, to regulate executive pay in Israeli publicly traded companies whose securities are traded solely on the Tel Aviv Stock Exchange and to revise and enhance existing provisions governing approval of executive compensation. The principal provisions set forth in these amendmentswhich report solely to the Companies Law are incorporated into the above discussions of the Company. Additional changesISA.
The ISA is authorized to impose fines on any person or company performing a violation, in connection with a publicly traded company which reports to the Companies Law pursuant to these recently passed amendments include:
Although we expect to be in compliance with the Companies Law, there is no assurance
that we will not be required to adjust our current corporate governance practices, as discussed in this annual report, pursuant to the provisions of the Companies89
The Israeli Securities Law
The Israeli Securities Law and the Securities Law Amendment
Furthermore, the Securities Law Amendment requires that the chief executive officer of a company supervise and
Under the Securities Law, Amendment, a company cannot obtain insurance against or indemnify a third party (including its officersoffice holders and/or employees) for any administrative procedure and/or monetary fine (other than for certain legal expenses and payments of damages to an injured party). The Securities Law Amendment permits insurance and/or indemnification for expenses
We continue to examine the implications of the Securities Law Amendment and toperiodically review all of our internal policies and procedures in order to ensure compliance with all the securities laws to which we are subject; however, its effect and consequences, as well as our scope of exposure, are yet to be entirely determined in practice.subject. There is no assurance that we will not be required to take certain actions in order to enhance our compliance with the provisions of the
NASDAQ Listing Rules and Home Country Practices
Below is a concise summary of the significant ways in which our corporate practices, which are in
accordance with Israeli law and practice, including the provisions of the Companies Law, differ from the requirements which may be applicable to domestic U.S. listed companies:•
Distribution of annual and quarterly reports to shareholders – Under Israeli law we are not required to distribute annual and quarterly reports directly to shareholders and the generally accepted business practice in Israel is not to distribute such reports to shareholders. We do however make our audited financial statements available to our shareholders prior to our annual general meeting and furnish our quarterly and annual financial results with the SEC on Form 6-K.
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Independence, Nomination and Compensation of Directors – A majority of our board of directors may not necessarily be comprised of independent directors as defined in NASDAQ Listing Rule 5605(a)(2). Our board of directors contains two external directors in accordance with the provisions of the Companies Law. Israeli law does not require, nor do our external directors conduct, regularly scheduled meetings at which only they are present. In addition, with the exception of our external directors, our directors are elected to our board of directors in accordance with the provisions set forth in our amended and restated Articles of Association, as approved by our shareholders on the Annual General Meeting which took place on June 8, 2016. According to our amended and restated Articles of Association, directors are divided into three groups, Group A, Group B and Group C. Each group is brought for re-election once every three years, on a rotating basis, such that at each annual general meeting of the shareholders a given group of directors is brought for election, to serve on a continuous basis for a three-year term, until the third annual general meeting following the meeting on which such group was elected for service and until their respective successors are duly elected, at which point their term in office shall expire. At each annual general meeting, the annual general meeting shall be entitled to elect directors to replace the directors whose three-year term in office has expired, and so on ad infinitum, so that each year, the term in office of one group of directors shall expire. The nominations for director which are presented to our shareholders are generally made by our board of directors. One or more shareholders of a company holding at least one percent of the voting power of the company may nominate a currently serving external director for an additional three-year term. Israeli law does not require the adoption of, and our board has not adopted, a formal written charter or board resolution addressing the nomination process and related matters. Compensation of our directors and other office holders of the Company is determined in accordance with Israeli law.
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Audit Committee – Our audit committee does not meet with all the requirements of NASDAQ Listing Rule 5605. We are of the opinion that the members of our audit committee comply with the requirements of NASDAQ Listing Rule 5605(c)(3) and Rule 10A-3(b) of the general rules and regulations promulgated under the Securities Act of 1933 and all requirements under Israeli law. Our audit committee has not adopted a formal written audit committee charter specifying the items enumerated in NASDAQ Listing Rule 5605(c)(1).
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Compensation Committee – We follow the provisions of the Companies Law with respect to matters in connection with the composition and responsibilities of our compensation committee, office holder compensation, and any required approval by the shareholders of such compensation. Israeli law, and our amended and restated Articles of Association, do not require that a compensation committee composed solely of independent members of our board of directors determine (or recommend to the board of directors for determination) an executive officer's compensation, as required under NASDAQ's listing standards related to compensation committee independence and responsibilities; nor do they require that the Company adopt and file a compensation committee charter. Instead, our compensation committee has been established and conducts itself in accordance with provisions governing the composition of and the responsibilities of a compensation committee as set forth in the Companies Law. Furthermore, the compensation of office holders is determined and approved by our compensation committee and our Board of Directors, and in certain circumstances by our shareholders, either in consistency with our previously approved Executive Compensation Policy or, in special circumstances in deviation therefrom, taking into account certain considerations set forth in the Companies Law. The requirements for shareholder approval of any office holder compensation, and the relevant majority or special majority for such approval, are all as set forth in the Companies Law. Thus, we will seek shareholder approval for all corporate actions with respect to office holder compensation requiring such approval under the requirements of the Companies Law, including seeking prior approval of the shareholders for the Executive Compensation Policy and for certain office holder compensation, rather than seeking approval for such corporate actions in accordance with NASDAQ Listing Rules.
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Quorum – Under Israeli law a company is entitled to determine in its articles of association the number of shareholders and percentage of holdings required for a quorum at a shareholders meeting. Our Articles of Association provide that a quorum of two or more shareholders, present in person or by proxy, holding shares conferring in the aggregate more than thirty three and a third (33 1/3 %) percent of the voting power of the Company is required for commencement of business at a general meeting.
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Approval of Related Party Transactions – All related party transactions are approved in accordance with the requirements and procedures for approval of interested party acts and transactions, set forth in Sections 268 to 275 of the Companies Law.
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Shareholder Approval – We seek shareholder approval for all corporate action requiring such approval, in accordance with the requirements of the Companies Law.
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Equity Compensation Plans – We do not necessarily seek shareholder approval for the establishment of, and amendments to, stock option or equity compensation plans (as set forth in NASDAQ Listing Rule 5635(c)), as such matters are not subject to shareholder approval under Israeli law. We will attempt to seek shareholder approval for our stock option or equity compensation plans (and the relevant annexes thereto) to the extent required in order to ensure they are tax qualified for our employees in the United States. However, even if such approval is not received, then the stock option or equity compensation plans will continue to be in effect, but the Company will be unable to grant options to its U.S. employees that qualify as Incentive Stock Options for U.S. federal tax purpose. Our stock option or other equity compensation plans are also available to our non-U.S. employees, and provide features necessary to comply with applicable non-U.S. tax laws.
C.Material Contracts
All of our contracts over the past two years have been entered into in the ordinary course of business, except for some of our real property leases.
Fiberblaze Share Purchase Agreement
On December 10, 2014, we entered into the Fiberblaze SPA with Fiberblaze, Fiberblaze Holding, Hilmer, Jakob Hilmer and Nikolaj Herman (Fiberblaze Holding and Hilmer together, the "
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ADI Engineering Asset Purchase Agreement
On September 30, 2015, we, together with one of our wholly owned subsidiaries, Silicom Connectivity Solutions, Inc., entered into the ADI APA with ADI, Steve Yates and Patricia Yates. Under the ADI APA, we
purchased ADI's assets in consideration for an amount equal toInformation regarding our
real property leases is provided in "Item 4 – Information on the Company – Property, Plant and Equipment" and "Item 19 –D.Exchange Controls
Under current Israeli laws and regulations, any dividends or other distributions paid in respect of our ordinary shares purchased by nonresidents of Israel with certain non-Israeli currencies (including U.S. Dollars) and any amounts payable upon the dissolution, liquidation or winding up of our
affairs,There are currently no Israeli currency control restrictions on remittances of dividends on our ordinary shares, proceeds from the sale of the shares or interest or other payments to non-residents of Israel,
except under certain circumstances, for shareholders who are subjects of countries that are, or have been, in a state of war with Israel.E.Taxation
The following is a summary of some of the current tax law applicable to companies in Israel, with special reference to its effect on us. The following also contains a discussion of specified Israeli tax consequences to our shareholders and government programs from which we benefit. To the extent that the discussion is based on tax legislation (including the legislation passed as part of the
recent tax reform in Israel) that has not been subject to judicial or administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax authorities or courts.93
The discussion is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.
Holders of our ordinary shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of our ordinary shares, or receipt of any dividend distributions made to our shareholders, including, in particular, the effect of any foreign, state or local taxes, including pursuant to the Tax Act (as defined below), and of any taxes withheld at source by the Company.
General Corporate Tax
Israeli companies are subject to corporate tax at the rate of 25% as of 2016, 24% as of 2017, and 23% as from 2018. However, the effective tax rate payable by a company which derives income from a "Benefited Enterprise"
or from a "Preferred Enterprise" (as further discussed below) may be considerably less.In 2006, transfer pricing regulations came into force, following the introduction of Section 85A of the Israeli Income Tax
Ordinance (New Version), 5721-1961, referred to herein as the Israeli Tax Ordinance, under Amendment 132. In principal, the transfer pricing rules require that cross-border transactions between related parties be carried out implementing anIn 2008, an amendment to the Income Tax Law (Inflationary Adjustments), 1985 was enacted which limits the scope of the law starting in 2008 and thereafter. Starting in 2008, the revenues for tax purposes are measured in nominal values, excluding certain adjustments for changes in the Israeli Consumer Price Index carried out in the period up to December 31, 2007. The amended law includes, among other provisions, the elimination of the inflationary additions and deductions and the additional deduction for depreciation for the period starting in 2008.
The Encouragement of Capital Investments Law, 1959
Pursuant to the Investment Law, a "Preferred Enterprise" is entitled to a reduced corporate flat tax rate of 15% with respect to its preferred income derived by its "Preferred Enterprise" in 2011-2012, unless the "Preferred Enterprise" is located in a certain development zone, in which came into effect as of April 1, 2005 (the "
"
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"Preferred Enterprise"Enterprise" is defined as an Industrial Enterprise (including, inter alia, an enterprise which develops software, an enterprise which provides approved R&D services to foreign residents and an enterprise which the Chief ScientistIIA confirmed is carrying out R&D in the field of alternative energy), which generally more than 25% of its business income is from export to market consisting more than 14 million residents. As mentioned above, the new tax incentives no longer depend on minimum qualified investments nor on foreign ownership.
Chapter B2 of the Investment Law determines the conditions and limitations applying to the tax benefits offered to a "Special Preferred Enterprise".Enterprise." Chapter B2 determines that a "Special Preferred Enterprise" is entitled to benefited corporate income tax rate: of 5% if located in a preferred zone and 8% if not.
"
Special PreferredDividends paid out of income attributed to a "Preferred Enterprise" are generally subject to withholding tax at source at a rate of 20% (15% until 2014) or such lower rate as may be provided in an applicable tax treaty, subject to the submission and approval of a request submitted on behalf of the recipient of such dividends to the Israel Tax Authority. However, if such dividends are paid to an Israeli company no tax will be withheld. Such an exemption may apply under the transition rules also to
The Company elected in 2014 to apply the provisions of the Second Amendment tobe taxed as a "Preferred Enterprise" under the Investment Law, to its income commencing with the 2014 fiscal year. Thus, as from the 2014 fiscal year, we are no longer entitled to the existing tax incentives provided under the First Amendment, such as the
There can be no assurance that we will comply with the conditions of the Investment Law in the future or that we will be entitled to any additional benefits under the amended Investment Law and whether the influence of theany changes to the Investment Law will be beneficial to the Company or not.
On December 29, 2016 the Israeli Parliament (the "Knesset") enacted the "Economic Efficiency Law (Legislative Amendments for Achieving Budget Objectives in the Years 2017 and 2018) – 2016" in which the Investment Law was also amended (hereinafter: “the Amendment”). The Amendment added new tax benefit tracks for a “preferred technological enterprise” and a “special preferred technological enterprise” which award reduced tax rates to a technological industrial enterprise for the purpose of encouraging activity relating to the development of qualifying intangible assets.
The benefits will be awarded to a “preferred company” that has a “preferred technological enterprise” or a “special preferred technological enterprise” with respect to taxable “preferred technological income” per its definition in the Investment Law.
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Preferred technological income that meets the conditions required in the law, will be subject to a reduced corporate tax rate of 12%, and if the preferred technological enterprise is located in "Development Area A" in Israel - to a reduced tax rate of 7.5%. A company that owns a special preferred technological enterprise will be subject to a reduced corporate tax rate of 6% regardless of the development area in which the enterprise is located. The Amendment is effective as from January 1, 2017.
On June 14, 2017 the Knesset Finance Committee approved "Encouragement of Capital Investment Regulations (Preferred Technological Income and Capital Gain of Technological Enterprise) – 2017" (hereinafter: “the Regulations”), which provides rules for applying the “preferred technological enterprise” and “special preferred technological enterprise” tax benefit tracks, including the Nexus formula that provides the mechanism for allocating the technological income eligible for the benefits.
Should the Company derive income from sources other than the “preferred technological enterprise”, such income will be taxable at the "Preferred Company" tax rate (for manufacturing activity in Israel) or regular corporate tax rates for the applicable year.
As a result of the aforesaid legislation, starting 2021 the Company is expected to implement the “preferred technological enterprise” tax benefit track; however, the transition to this tax benefit track is not expected to significantly change the Company's effective tax rate and the deferred tax liabilities and deferred tax assets that were recognized.
Law for the Encouragement of Industrial Research, Development and Development,Technological Innovation in Industry, 1984
Under the terms of the pre-R&D Amendment regime, research and development programs approved by the Research Committee (the "
The terms of these grants prohibited the manufacture outside of Israel of the product developed in accordance with the program without the prior consent of the Research Committee of the OCS.IIA. Such
The R&D Law, as in effect prior to the R&D Amendment, also provided that know-how from the research and development, which is used to produce the product, may not be transferred to Israeli third parties without the approval of the Research Committee. Until 2005, the Research Law stated that such know-how may not be transferred to non-Israeli third parties at all. An amendment to the Research Law set forth certain exceptions to this rule; however, the practical implications of such exceptions were quite limited. The R&D Law, as in effect prior to the R&D Amendment, stressed that it is not just transfer of know-how that is prohibited, but also transfer of any rights in such know-how. Such restriction did not apply to exports from Israel of final products developed with such technologies. It was possible to receive approval of the transfer only if the 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. There could be no assurance that such consent, if requested, would be granted or, if granted, that such consent would be on reasonable commercial terms. For additional information regarding the R&D Law and R&D Amendment, see "Item 4.B. – Information on the Company – Business Overview – Governmental Regulation Affecting the96
Tax Benefits for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction in the year incurred for expenditures (including capital expenditures) in scientific research and development projects, if the expenditures are approved by the relevant Israeli Government Ministry (determined by the field of research) and the research and development is for the promotion of the enterprise and is carried out by or on behalf of the company seeking such deduction. Such expenditures not so approved are required to be deducted over a three-year period. Though we received such approvals for the years 2006, 2007 and 2008 and could deduct the expenditures in the year the expenditures were incurred, we chose to deduct the expenditures over a three-year period. We also received such approvals for the years 2009, 2010, 2011 and 2012 and deducted such expenditures in the year the expenditures were incurred.
Law for the Encouragement of Industry (Taxes), 1969
Under the Law for the Encouragement of Industry (Taxes), 1969 (the "Industry"Industry Encouragement Law"Law"), Industrial Companies (as defined below) are entitled to the following tax benefits:
(a)
Amortization of expenses incurred in connection with certain public securities issuances over a three-year period; and
(b)
Accelerated depreciation rates on know-how, patents and/or right to use a patent or certain other intangible property rights.
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. Under the Industry Encouragement Law, an "
We believe that we currently qualify as an "Industrial Company" within the definition of the Industry Encouragement Law. No assurance can be given that we will continue to qualify as an "Industrial Company" or that the benefits described above will be available in the future.
Calculation of Results for Tax Purposes
The Israeli Income Tax Regulations (Rules for Maintaining Accounting Records of Foreign Investors’Investors' Companies and Certain Partnerships and Determining Their Taxable Income), 1986, provide that as a "Foreign Investors’Investors' Company" (as defined in the Investment Law described above) is eligible to calculate its taxable income in accordance with these regulations, and therefore, if we elect to follow such regulations, our taxable income or loss is to be calculated in US Dollars. We have elected to apply these regulations and accordingly our taxable income or loss is calculated in US Dollars in the manner set forth in such regulations.
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Taxation of our Shareholders
Capital Gains Taxes Applicable to Israeli Resident Shareholders
In general, an individual is subject to a 25% tax rate on real capital gains derived from the sale of shares, as long as the individual is not a "substantial shareholder" in the company issuing the shares. A "substantial shareholder" is generally a person who alone, or together with his relative or another person who collaborates with him on a permanent basis, holds, directly or indirectly, at least 10% of any of the "Means of control" of the corporation. "Means of control" generally include the right to vote, receive profits, nominate a director or an officer,office holder, receive assets upon liquidation, or order someone who holds any of the aforesaid rights how to act, and all regardless of the source of such right.
A "substantial shareholder" will be subject to a withholding tax at a rate of 30% in respect of real capital gains derived from the sale of shares issued by a company in which he or she is a "substantial shareholder".shareholder." The determination of whether the individual is a "substantial shareholder" will be made on the
Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders
Shareholders that are not Israeli residents are generally exempt from Israeli capital gains tax on any gains derived from the sale, exchange or disposition of our shares, provided that such
In addition, under the U.S.-Israel Income Tax Treaty, 1995, or the U.S.-Israel Tax Treaty, the sale, exchange or disposition of our shares by a shareholder who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) holding the shares as a capital asset is exempt from Israeli capital gains tax unless either (i) the shareholder holds, directly or indirectly, shares representing 10% or more of our voting capital during any part of the 12-month period preceding such sale, exchange or disposition; or (ii) the capital gains arising from such sale are attributable to a permanent establishment of the shareholder located in Israel; or (iii) the shareholder, being an individual, was present in Israel for a period of time or several periods of time, which aggregate to a total of 183 days or more, during a single taxable year. In either case, the sale, exchange or disposition of the shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, the U.S. resident would be
permitted to claim a credit for the tax against the U.S. federal income tax imposed with respect to the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes.Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding of tax at source at the time of sale.
Taxation of Israeli Shareholders on Receipt of Dividends.
Residents of Israel who are individuals are generally subject to Israeli income tax on the receipt of dividends paid on our shares at the rate of 25%, which tax will be withheld at the source. With respect to a
person who is a "substantial shareholder" at the time of receiving the dividend or on any date within the 12 months preceding such date, the applicable tax rate is 30%.98
Israeli resident corporations are generally exempt from Israeli tax for dividends paid on our shares.
In case of dividends paid out of the profits of a "Preferred Enterprise", the applicable tax rate is 20% for an individual and 0% for a corporation.
Taxation of Non-Israeli Shareholders on Receipt of Dividends
Non-residents of Israel are generally subject to Israeli income tax on the receipt of dividends paid on our shares at the rate of 25% or 30%, if such person (including a non-Israeli corporation) is a "substantial shareholder" at the time of recipient of the dividend or on any date in the 12 months preceding such date, which tax will be withheld at the source, unless a different rate is provided in a tax treaty between Israel and the shareholder’sshareholder's country of residence. Under the U.S.-Israel Tax Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our ordinary shares who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) is 25% or 15% for a US corporation in the case of dividends paid out of the profits of a "Benefitedan "Approved Enterprise" (as such term is defined in the Investment Law), subject to certain conditions. However, generally, the maximum rate of withholding tax on dividends that are paid to a U.S. corporation holding 10% or more of our outstanding voting capital throughout the tax year in which the dividend is distributed as well as the previous tax year and the dividend is not paid from the profits of a "Benefitedan "Approved Enterprise", the Israeli tax withheld may not exceed 12.5%, subject to certain conditions. A non-resident of Israel who receives dividends from which tax was withheld is generally exempt from the duty to file returns in Israel in respect of such income, provided such income was not derived from a business conducted in Israel by the taxpayer, and the taxpayer has no other taxable sources of income in Israel.
In case of dividends paid out of the profits of a "Preferred Enterprise", the applicable tax rate is 20%.
Residents of the
United States will generally have taxes in Israel withheld at source.| Source | % of Dividend | Individual Tax % | Corporations Tax % | Foreign Resident Tax % | ||||||||||||
| Dividend Distributed on April 17, 2013 | ||||||||||||||||
| Regular Income | 34.6031 | 25 | 0 | 25 | ||||||||||||
| Benefited Enterprise | 65.3969 | 15 | 15 | 15 | ||||||||||||
| Dividend Distributed on April 17, 2014 | ||||||||||||||||
| Regular Income | 52.9928 | 25 | 0 | 25 | ||||||||||||
| Benefited Enterprise | 47.0071 | 15 | 15 | 15 | ||||||||||||
| Dividend Distributed on April 21, 2015 | ||||||||||||||||
| Regular Income | 5.5888 | 25 | 0 | 25 | ||||||||||||
| Benefited Enterprise | 12.7771 | 15 | 0 | 15 | ||||||||||||
| Preferred Enterprise | 81.6341 | 20 | 0 | 20 | ||||||||||||
| Dividend Distributed on April 14, 2016 | ||||||||||||||||
| Regular Income | 0 | 25 | 0 | 25 | ||||||||||||
| Preferred Enterprise | 100.0000 | 20 | 0 | 20 | ||||||||||||
| Dividend Distributed on April 5, 2017 | ||||||||||||||||
| Regular Income | 0 | 25 | 0 | 25 | ||||||||||||
| Preferred Enterprise | 100.0000 | 20 | 0 | 20 | ||||||||||||
Excess Tax.
Individuals who are subject to tax in Israel are also subject to an additional tax at a rate of 3% in 2017 and thereafter (2% in 2016)2013-2016) on annual income exceeding a certain threshold (NIS 647,640 as of 2021, NIS 651,600 as of 2020, NIS 649,560 as of 2019, NIS 641,880 as of 2018, and NIS 640,000 as of 2017 and NIS 803,520 as of 2016)2017), including, but not limited to, dividends, interest and capital gains.
Passive Foreign Investment Company Status under U.S. Federal Income Tax Law
In general, a non-U.S. corporation will be classified for U.S. tax purposes as a passive foreign investment company (hereafter also referred to as a "
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If we are classified as a passive foreign investment company, highly complex rules will apply to our U.S. shareholders. Accordingly, U.S. shareholders are urged to consult their tax advisors regarding the application of such rules.
If a corporation is a passive foreign investment company, a U.S. shareholder will be subject to one of three
alternative taxing regimes:The simplest is the "QEF" regime. If the shareholder elects to treat the PFIC as a QEF, then each year the shareholder includes in its gross income a proportionate share of the PFIC’sPFIC's ordinary income and net capital gain. We do not currently intend to prepare or provide the information that would enable you to make a Qualified Election Fund election. A second regime may be elected if the PFIC stock is "marketable"."marketable." The U.S. shareholder may elect to "mark the stock to market" each year. At the end of each taxable year, the shareholder recognizes gain equal to the excess of the fair market value of the PFIC stock over the shareholder’sshareholder's tax basis in the stock. Losses may also be recognized to the extent of previously recognized gains.
A U.S. shareholder making neither of these elections is subject to the "excess distribution" regime. The tax is triggered when the shareholder receives an "excess distribution" from the PFIC. An "excess distribution" is either (1) a distribution with respect to stock that is greater than 125% of the average of such distributions over the preceding three years, or (2) 100% of the gain from the disposition of shares in the PFIC.
An "excess distribution" is subject to special tax rules. In most cases, only a portion of it is included in the gross income of the U.S. shareholder and taxed at normal rates. The remainder is never so included, but is used as the basis for calculating a "deferred tax amount", which is simply
added to theThe deferred tax amount is computed as follows. The "excess distribution" is first ratably allocated, share by share, to each day of the shareholder’sshareholder's holding period. Portions allocated to the current year, and to any pre-PFIC years (that is, years before 1987, when there were no PFICs, or years before the first year in which the company was a PFIC with respect to that shareholder), are
A U.S. person who inherits shares in a foreign corporation that was a PFIC in the hands of the decedent (who(other than a decedent who was a nonresident alien at all times during his holding period in the shares) who did not make either of the elections described above),above, is denied the otherwise available step-up in
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Although a determination as to a corporation’scorporation's PFIC status is made annually, an initial determination that a corporation is a PFIC for any taxable year generally will cause the above-described consequences to apply for all future years as to U.S. shareholders who held shares in the corporation at any time during the PFIC taxable year and who made neither a valid QEF election with respect to such shares nor a valid election to mark such shares to market. This will be true even if the corporation loses its PFIC status in later years. However, with respect to a PFIC that does not make any distributions or deemed distributions, the above tax treatment would apply only to gains realized on the disposition of such shares by a U.S. shareholder.
If we are classified as a PFIC, complicated rules will apply to our U.S. shareholders. Our status in future years will depend on our assets and activities in those years, although shareholders will be treated as continuing to own an interest in a passive foreign investment company if we are a passive foreign investment company in any year in which a shareholder owns our shares, unless certain elections are made.
This discussion does not address all aspects of U.S. federal income taxation that may be relevant to a U.S. shareholder in light of his or her particular circumstances or to a U.S. shareholder subject to
special treatment under U.S. federal income tax law. We do not currently intend to prepare or provide the information that would enable you to make a Qualified Election Fund election. U.S. shareholders are urged to consult their tax advisors about the U.S. federal income taxation rules to which they will be subject, as well as the PFIC rules, including the advisability, procedure and timing of making a mark-to-market election, in connection with their holding of our shares, including warrants or rights to acquire our shares.Certain Reporting Requirements
Certain U.S. investors are required to file IRS Form 926, Return by U.S. Transferor of Property to a Foreign Corporation, and
certain U.S. Investors may be required to file IRS Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, reporting transfers of cash or other property to us and information relating to the U.S. investor and us. Substantial penalties may be imposed upon a U.S. investor that fails to comply. Each U.S. investor should consult its own tax advisor regarding these requirements.In addition, recently enacted legislation imposes new reporting requirements for the holder of certain foreign financial assets, including equity of foreign entities, if the aggregate value of all of these assets exceeds certain thresholds. Our shares are expected to be subject to these new reporting
requirements unless the shares are held in an account at a domestic financial institution. Penalties may apply to any failure to comply with such reporting requirements. U.S. investors should consult their own tax advisors regarding the application of this legislation.Backup Withholding Tax and Information Reporting Requirements
Generally, information reporting requirements will apply to distributions with respect to our shares or proceeds on the disposition of our shares paid within the United States (and, in certain cases, outside the United States) to U.S. investors other than certain exempt recipients, such as corporations. Furthermore, backup withholding (currently at 28%24%) may apply to such amounts if the U.S. investor fails to (i) provide a correct taxpayer identification number, (ii) report interest and dividends required to be shown on its U.S. federal income tax return, or (iii) make other appropriate certifications in the required manner. U.S. investors who are required to establish their exempt status generally must provide such certification on IRS Form W-9.
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Backup withholding is not an additional tax. Amounts withheld as backup withholding from a payment may be credited against a U.S. investor’sinvestor's U.S. federal income tax liability and such U.S. investor may obtain a refund of any excess amounts withheld by filing the appropriate claim for refund with the IRS and furnishing any required information in a timely manner.
Tax Assessment
The company
and its subsidiaries file income tax returns in Israel, U.S.A and Denmark.The Israeli tax
returns of the Company are open for examination by the Israeli Tax Authority for tax years beginning inThe Federal tax returns of our U.S. subsidiary are open for examination by the Federal Tax Authorities for tax years beginning in 2014.2017. The New Jersey state tax returns of the U.S. subsidiary are open tofor examination by the New Jersey State Tax Authority for the tax years beginning in 2013.2016. The California State Tax returns of the U.S. subsidiary are open tofor examination by the California State Tax Authority for tax years beginning in 2013.2016. The Virginia State Tax
The Danish tax returns of our Danish subsidiary are open for examination by the Danish Tax Authority for tax years beginning on SeptemberJanuary 1, 2013.
Tax Cuts and Jobs Act
On December 22, 2017, President Trump signed into law H.R. 1, originally known as the “Tax"Tax Cuts and Jobs Act”Act" (the "
F.Dividends and Paying Agents
Not applicable
G.Statement by experts
Not applicable
H.Documents on Display
We are required to file reports and other information with the SEC under the Securities Exchange Act of 1934 (the "
102
You may review a copy of our filings with the SEC, including any exhibits and schedules, at the SEC’sSEC's public reference room at 100 F Street N.E., Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for further information on the public reference room. As a foreign private issuer, all documents which were filed after November 4, 2002 on the SEC's EDGAR system will be available for retrieval on the SEC's website at www.sec.gov. These SEC filings are also available to the public on (i) the ISA’s Magna website at www.magna.isa.gov.il, (ii) the Tel Aviv Stock Exchange website at http://www.maya.tase.co.il, and (iii) from commercial document retrieval services. The documents referred to in this document may be inspected at the Company’sCompany's offices, located at 14 Atir Yeda Street, Kfar Sava, Israel 4464323.
Any statement in this annual report about any of our contracts or other documents is not necessarily complete. If the contract or document is filed as an exhibit to the annual report the contract or document is deemed to modify the description contained in this annual report. We urge you to review the exhibits themselves for a complete description of the contract or document.
Our website is
http://www.silicom.co.il. We do not intend for any information contained on our internet website to be considered part of this annual report, and we have included our website address in this annual report solely as an inactive textual reference. We will post on our website any materials required to be posted on such website under applicable corporate or securities laws and regulations, including posting any XBRL interactive financial data required to be filed with the SEC, and any notices of general meetings of our shareholders.I.Subsidiary information
Not applicable
Market risk is the risk of loss related to changes in market prices, including interest rates and foreign exchange rates, of financial instruments that may adversely impact our consolidated financial position, results of
operations or cash flows. Our primary market risk exposures relate to our investment portfolio and fluctuation of the exchange rate of the US Dollar, which is the primary currency in which we conduct our operations, against the NIS with respect to the Company's Israeli operations, and against the DKK and Euro with respect to Danish operations.Interest Rate Risk
As of December 31, 2017,2020, our investment portfolio consisted of approximately $13.7US$ 50.4 million invested in corporate and government debt securities.
For quantitative information
on the Company's marketable securities, please see Note 5 to our consolidated financial statements included elsewhere in this annual report.103
As of December 31, 2017,2020, we did not have any short or long term interest bearing loans or debts, hence with respect to the Company's business operations, we do not have any exposure to interest rate risk.
Foreign Currency Exchange Risk
Most of our revenues are generated in U.S. Dollars. In addition, most of our costs are denominated and determined in U.S. Dollars and NIS. According to the salient economic factors indicated in ASC 830 "Foreign Currency Matters" (formerly SFAS No. 52), "Foreign Currency Translation", our cash flow, sale price, sales market, expense, financing and inter-company transactions, and arrangement indicators, are predominantly denominated in U.S. Dollars, and so, the U.S. dollar is the primary currency of the economic environment in which we operate.
Thus,As of December 31, 20172020, we had accounts receivable in NIS or in funds linked thereto in the amount of $6,429US$ 4,210 thousand.
As of December 31, 20172020, we had accounts receivable in EURO and DKK, or in funds linked thereto, in the amount of $558US$ 591 thousand. Market risk was estimated as the potential decrease in balance resulting from a hypothetical 10% increase in the year-end Dollar exchange rate. Assuming such increase in the Dollar exchange rate, the balance of our accounts receivable would decrease by $51US$ 54 thousand. As of December 31, 20172020, we had accounts payable in EURO and DKK, or linked thereto, in the amount of $679US$ 1,363 thousand. Market risk was estimated as the potential increase in balance resulting from a hypothetical 10% decrease in the year-end Dollar exchange rate. Assuming such decrease in the Dollar exchange rate, the balance of our accounts payable would increase by $75US$ 151 thousand.
In 20172020, there was a decrease of 9.83%6.97% in the Dollar exchange rate to the NIS which resulted in an aggregate increase in the fair value of our assets of $892US$ 469 thousand and an aggregate increase in the fair value of our liabilities of $1,120US$ 983 thousand.
Since the majority of our revenues is denominated and paid in U.S. Dollars, we believe that fluctuations in the U.S. Dollar exchange rate do not have a significant effect on our accounts receivable. Inflation in Israel and the Israeli currency as well as U.S. Dollar exchange rate fluctuations may
have only a limited effect on our accounts payable, as described above. Inflation in Denmark and the Danish currency as well as U.S. Dollar exchange rate fluctuations are expected to have only a limited effect on our accounts payable.104
Our operating expenses may be affected by fluctuations in the value of the U.S. dollar as it relates to the NIS. By way of example, a hypothetical 10% weakening in the value of the U.S. Dollar relative to the NIS in 20172020 would have resulted in an increase in operating expenses of approximately $793US$ 1,101 thousand for the year ended December 31, 2017.2020. In addition, our operating expenses may be affected by fluctuations in the value of the U.S. Dollar as it relates to the DKK. By way of example, a hypothetical 10% weakening in the value of the U.S. dollar relative to the DKK in 20172020, would have resulted in an increase in operating expenses of approximately $509US$ 610 thousand for the year ended December 31, 2017.
As of December 31, 2017,2020, all of our investments, other than a portion of our cash and cash equivalents comprising a small portion of our overall investment portfolio, consisted of investments denominated in U.S. Dollars, and our portfolio is therefore not subject to significant exposure to foreign currency exchange risk.
As of December 31, 2017,2020, we were not engaged in any hedging or other transactions intended to manage the risks
Credit Risk
Our investment portfolio includes "held to maturity" marketable securities. These securities include investments issued by highly rated corporations. As of December 31, 2017,2020, the rating of the securities in our portfolio was at least A.BBB+ . Nonetheless, these investments are subject to general credit and counterparty risks (such as that the counterparty to a financial instrument fails to meet its contractual obligations), which were exacerbated by the recent turmoil that has affected the financial markets and the global economy and caused credit issues for a number of reputable financial institutions. Any changes in fair value of our investment securities due to credit risk do not affect our profit or loss unless there is OTTI (referredother than temporary impairment (see Note 2G to in ASC 320-10)our financial statements for the year ended December 31, 2020).
As of December 31, 2017,2020, we were not required to adjust the carrying value of our investment securities since there were no
Our top three of our customers accounted for approximately 62%36% of our accounts
Not Applicable.
None.
None.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time
periods specified in theManagement's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally accepted accounting principles.Management assessed our internal control over financial reporting as of December 31, 2017,2020, the end of our fiscal year. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control — Integrated Framework (2013).".
Based on our assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 20172020, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting
This annual report includes, on page F-3F-4 of this form 20-F, an attestation report of the Company's
Inherent Limitations on Effectiveness of Controls
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of
such limitation, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.106
Changes in Internal Control over Financial Reporting
There was no change in our internal controls over financial reporting that occurred during the period covered by
this annual report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.Not Applicable.
Our board of directors had determined that both Ms. Ayelet Aya Hayak and Mr. Ilan Erez were our audit committee financial experts.
Our company has adopted a code of ethics, which applies to all our employees, officersoffice holders and directors, including our Chief Executive Officer, our Chief Financial Officer, our VP Finance, Director of Finance and our Corporate Controller.
The following
table presents fees for professional services for the audit of the| 2017 | 2016 | 2020 | 2019 | |||||||||||||
Audit Fees(1) | $ | 127,000 | $ | 120,000 | $ | 120,000 | $ | 120,000 | ||||||||
Audit-Related Fees(2) | $ | 6,500 | -- | $ | 5,900 | - | ||||||||||
Tax Fees(3) | $ | 19,000 | $ | 55,000 | $ | 77,522 | $ | 9,234 | ||||||||
(1) | Audit |
(2) | Audit-Related Fees consist of accounting consultation and consultation on financial accounting standards, not arising as part of the |
(3) | Tax Fees are the aggregate fees billed for professional services rendered for tax compliance, transfer pricing studies, and tax advice other than in connection with the Audit. Tax compliance involves audit of original and amended tax returns, tax planning and tax advice. |
107
Audit committee's pre-approval policies and procedures
We are required to obtain the approval of our audit committee (and subsequently the consent of the boardBoard of directorsDirectors and shareholders) before engaging our independent auditors, Somekh Chaikin, a member firm of KPMG International, to audit our consolidated financial statements, as well as to provide other audit or permitted non-audit services to us. This policy, which is designed to assure that such engagements do not impair the independence of our auditors, requires pre-approval from the audit committee on an annual basis for the various audit and non-audit services that may be performed by our auditors. Our audit committee is not permitted to approve the engagement of our auditors for any services that would be inconsistent with maintaining the auditor's independence or that are not permitted by applicable law.
Item 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEESNot Applicable.
108
Item 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Period | Total Number of Shares Purchased | Average Price Paid per Share (US$) | Total Number of Shares Purchased as Part of Publicly Announced Plan | Approximate Dollar Value that May Yet Be Purchased Under the Plan (US$) |
| |||||||||||
January 1, 2020 - January 31, 2020(1) | 40,164 | 35.631 | 292,552 | 5,616,603 |
| |||||||||||
February 1, 2020 - February 28, 2020(1) | 43,176 | 33.619 | 335,728 | 4,165,059 |
| |||||||||||
March 1, 2020 - March 31, 2020(1) | 75,070 | 26.235 | 410,798 | 2,195,622 |
| |||||||||||
April 1, 2020 - April 30, 2020(1) | 70,602 | 28.666 | 481,400 | 171,768 |
| |||||||||||
May 1, 2020 - May 1, 2020(1) | 4,542 | 31.308 | 485,942 | 29,567 |
| |||||||||||
May 6, 2020 - May 31, 2020(2) | 24,276 | 32.837 | 510,218 | 14,202,848 |
| |||||||||||
May 1, 2020 - May 31, 2020(1)(2) | 28,818 | 32.596 | 510,218 | 14,202,848 |
| |||||||||||
June 1, 2020 - June 30, 2020(2) | 33,589 | 34.919 | 543,807 | 13,029,951 |
| |||||||||||
July 1, 2020 - July 31, 2020(2) | 29,311 | 37.636 | 573,118 | 11,926,800 |
| |||||||||||
August 1, 2020 - August 31, 2020(2) | 31,408 | 37.415 | 604,526 | 10,751,657 |
| |||||||||||
September 1, 2020 - September 30, 2020(2) | 39,687 | 32.757 | 644,213 | 9,451,632 |
| |||||||||||
October 1, 2020 - October 31, 2020(2) | 32,586 | 34.316 | 676,799 | 8,333,409 | ||||||||||||
November 1, 2020 - November 30, 2020(2) | 40,166 | 37.540 | 716,965 | 6,825,592 | ||||||||||||
December 1, 2020 - December 31, 2020(2) | 38,582 | 40.774 | 755,547 | 5,252,446 | ||||||||||||
(1) On May 2, 2019, our Board of Directors authorized and began implementation of a one-year share repurchase plan of Ordinary Shares from the Company's shareholders, for a total amount which shall not exceed $15,000,000. Repurchases may be made through May 1, 2020, in the open market and will be in accordance with applicable securities laws and regulations. The timing and amount of each repurchase transaction was subject to a variety of factors and did not obligate the Company to acquire any specific number of ordinary shares and authorized management to determine at its discretion, at any time, whether to continue, suspend, or terminate the plan. An aggregate of 485,942 of our ordinary shares were repurchased between May 22, 2019 and May 1, 2020.
(2) On April 30, 2020, our Board of Directors determined that it is in the Company's best interest to pursue a new repurchase plan of Ordinary Shares from the Company's shareholders, for a total amount which shall not exceed $15,000,000, upon similar terms to the prior plan, and which shall be in effect for a one-year period commencing on May 4, 2020, unless otherwise determined by the Board of Directors.
109
Not Applicable.
Our corporate governance practices differ from those followed by domestic companies as required under the listing standards of the NASDAQ Global Market, due to an exemption that we obtained from NASDAQ as foreign private issuer which enables us to comply with our home country laws of the State of Israel, including the provisions of the Companies Law, in lieu of NASDAQ Listing Rules. Below is a concise summary of the significant ways in which our corporate governance practices differ from the corporate governance requirements of NASDAQ applicable to domestic U.S. listed companies:
•
We are not required to distribute annual and quarterly reports directly to shareholders, but we do make our audited financial statements available to our shareholders prior to our annual general meeting and furnish our quarterly and annual financial results with the SEC on Form 6-K;
•
A majority of our Board of Directors may not necessarily be comprised of independent directors as defined in the NASDAQ Listing Rules, however, a majority of our audit committee are independent directors in accordance with NASDAQ Listing Rule 5605(a)(2). Our directors are elected to our Board of Directors in accordance with the new directors voting mechanism approved by our shareholders on the Annual General Meeting which took place on June 8, 2016. According to said directors voting mechanism, directors are divided into three groups, Group A, Group B and Group C. Each group is brought for re-election once every three years, on a rotating basis, such that at each annual general meeting of the shareholders a given group of directors is brought for election, to serve on a continuous basis for a three-year term, until the third annual general meeting following the meeting on which such group was elected for service and until their respective successors are duly elected, at which point their term in office shall expire. At each annual general meeting, the annual general meeting shall be entitled to elect directors to replace the directors whose three-year term in office has expired, and so on ad infinitum, so that each year, the term in office of one group of directors shall expire. The nominations for director which are presented to our shareholders are generally made by our board of directors. Pursuant to the Companies Law, one or more shareholders of a company holding at least one percent of the voting power of the company may nominate a currently serving external director for an additional three-year term. Israeli law does not require the adoption of, and our board has not adopted, a formal written charter or board resolution addressing the nomination process and related matters. Compensation of our directors and other office holders of the Company is determined in accordance with Israeli law;
•
Our audit committee has not adopted a formal written audit committee charter specifying the items enumerated in NASDAQ Listing Rule 5605(c)(1). We believe that the members of our audit committee comply with the requirements of the Israeli law, as well as NASDAQ Listing Rule 5605(c)(3) and Rule 10A-3(b) of the general rules and regulations promulgated under the Securities Act of 1933. For a detailed discussion please refer to "Item 6 – Directors, Senior Management and Employees – Audit Committee";
110
•
As opposed to NASDAQ Listing Rule 5620(c)(3), which sets forth a minimum quorum for a shareholders meeting, under Israeli law a company is entitled to determine in its articles of association the number of shareholders and percentage of holdings required for a quorum at a shareholders meeting. Our current Articles of Association provide that a quorum of two or more shareholders, present in person or by proxy, holding shares conferring in the aggregate more than thirty-three and a third (33 1/3 %) percent of the voting power of the Company is required;
•
All related party transactions are approved in accordance with the requirements and procedures for approval of interested party acts and transactions set forth in the Companies Law, and are not subject to the review process set forth in NASDAQ Listing Rule 5630. For a detailed discussion please refer to "Item 10 – Additional Information – the Companies Law";
•
We seek shareholder approval for all corporate action requiring such approval in accordance with the requirements of the Companies Law rather than under the requirements of the NASDAQ Marketplace Rules, including (but not limited to) the appointment or termination of auditors, appointment and dismissal of directors, approval of interested party acts and transactions requiring general meeting approval as discussed above and a merger;
•
We follow the provisions of the Companies Law with respect to matters in connection with the composition and responsibilities of our compensation committee, office holder compensation, and any required approval by the shareholders of such compensation. Israeli law, and our amended and restated Articles of Association, do not require that a compensation committee composed solely of independent members of our board of directors determine (or recommend to the board of directors for determination) an executive officer's compensation, as required under NASDAQ listing standards related to compensation committee independence and responsibilities; nor do they require that the Company adopt and file a compensation committee charter. Instead, our compensation committee has been established and conducts itself in accordance with provisions governing the composition of and the responsibilities of a compensation committee as set forth in the Companies Law. Furthermore, the compensation of office holders is determined and approved by our compensation committee and our board of directors, and in certain circumstances by our shareholders, either in consistency with our previously approved Executive Compensation Policy or, in special circumstances in deviation therefrom, taking into account certain considerations set forth in the Companies Law. The requirements for approval by the shareholders for any office holder compensation, and the relevant majority or special majority for such approval, are all as set forth in the Companies Law. Thus, we will seek shareholder approval for all corporate actions with respect to office holder compensation requiring such approval under the requirements of the Companies Law, including seeking prior approval of the shareholders for the Executive Compensation Policy and for certain office holder compensation, rather than seeking approval for such corporate actions in accordance with NASDAQ Listing Rules; and
111
•
We do not necessarily seek shareholder approval for the establishment of, and amendments to, stock option or equity compensation plans (as set forth in NASDAQ Listing Rule 5635(c)), as such matters are not subject to shareholder approval under Israeli law. We will attempt to seek shareholder approval for our stock option or equity compensation plans (and the relevant annexes thereto) to the extent required in order to ensure they are tax qualified for our employees in the United States. However, if such approval is not received, then the stock option or equity compensation plans will continue to be in effect, but the Company will be unable to grant options to its U.S. employees that qualify as Incentive Stock Options for U.S. federal tax purpose. Our stock option or other equity compensation plans are also available to our non-U.S. employees, and provide features necessary to comply with applicable non-U.S. tax laws.
•
Our Board of Directors determined that the Company meets all of the requirements of the Israeli Companies Regulations (Relief for Companies Whose Shares Are Registered for Trading Outside of Israel), 2000 (the "Regulations"), pursuant to which Israeli companies which meet all of the following conditions may opt-out of certain Israeli regulations governing the appointment of external directors and the composition of the audit and compensation committees (the "Israeli Dahatz Rules"): (1) the Company's shares are listed on a foreign stock exchange which is referenced in Section 5A(c) of the Regulations, which includes, among others, the New York Stock Exchange (NYSE); NASDAQ Global Select Market; and NASDAQ Global Market; (2) the Company does not have a controlling shareholder; and (3) the Company complies with the requirements of the foreign securities laws and stock exchange regulations relating to appointment of independent directors and composition of the audit and compensation committees as applicable to companies which are incorporated under the laws of such foreign countries. The Board of Directors approved the opt-out of the Israeli Dahatz Rules and follow the requirements of the NASDAQ Listing Rules and the rules under the Securities Act relating to appointment of independent directors and composition of the audit and compensation committees which are applicable to companies which are incorporated under the laws of the United States, effective July 29, 2020.
Item 16H.
MINE SAFETY DISCLOSURENot Applicable.
Not Applicable.
See pages F-1 to F-46.F-54.
113
(*) | Filed herewith. |
114
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
SILICOM LIMITED | |||
By: | /s/ Shaike Orbach | ||
Shaike Orbach | |||
Chief Executive Officer | |||
April 28, 2021 | |||
115
Silicom Ltd.
and its Subsidiaries
Consolidated
Financial Statements
As of and for the year ended
December 31, 2017
Silicom Ltd. and its Subsidiaries
Consolidated Financial Statements as of December 31, 2017
Contents
Page | ||
F - 3 | ||
F - 5 | ||
F - 7 | ||
F - 8 | ||
F - 9 | ||
F - 10 |
F - 2
To the Shareholders and Board of Directors of
Silicom Ltd.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Silicom Ltd. and subsidiaries (the Company) as of December 31, 20162019 and 2017,2020, the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017,2020, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2017,2020, based on “criteriacriteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission”.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20162019 and 2017,2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017,2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on “criteriacriteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission”.
Change in accounting principle
As discussed in Note 2N to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of ASC 842 Leases.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Form 6-K. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
F - 3
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Determination of the pattern of revenue recognition for customer contracts
As described in Note 2O to the consolidated financial statements, the Company derives revenues primarily from the sale of networking and data infrastructure solutions. Revenue is recognized over time for sales of goods manufactured to unique customer specifications, in which the Company’s performance does not create an asset with an alternative use to the Company and the Company has an enforceable right to payment for performance completed to date if the customer were to terminate the contract. Revenue recognized over time is measured by the costs incurred to date relative to the estimated total direct costs to fulfill each contract.
We identified the assessment of the determination of the pattern of revenue recognition for customer contracts as a critical audit matter. Evaluating whether the Company transfers control of products over time requires the application of subjective auditor judgment. This judgment includes the determination of whether the promised goods have no alternative use to the Company and whether the Company has an enforceable right to payment, inclusive of a reasonable margin, for performance completed to date if the customer were to terminate the contract. The determination of whether control is transferred over time significantly influences the amount and timing of revenue recognized.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s revenue recognition process. This included a control related to the determination of whether the Company transfers control of certain products over time as they are manufactured. We evaluated the Company’s assessment of the revenue recognition patterns for a selection of customer contracts, including contracts for sales of products manufactured to unique customer specifications. For selected contracts, we inquired of the Company’s product and engineering department to understand whether the Company would incur practical limitations on its ability to readily direct the goods for another use, such as selling it to a different customer. We compared the facts and circumstances of the selected customer contracts per the Company’s assessment to significant terms and specifications per customer contracts, results of inquiries, and other relevant documents.
Somekh Chaikin
Member Firm of KPMG International
We have served as the Company’s auditor since 1997.
Tel Aviv, Israel
March 15, 2018
F - 4
Silicom Ltd. and its Subsidiaries
Consolidated Balance Sheets as of December 31
2019 | 2020 | |||||||||||
Note | US$ thousands | US$ thousands | ||||||||||
| ||||||||||||
Assets | ||||||||||||
| ||||||||||||
Current assets | ||||||||||||
Cash and cash equivalents | 4 | 16,469 | 20,676 | |||||||||
Short-term bank deposits | 2F | 13,542 | 5,000 | |||||||||
Marketable securities | 2G, 5 | 14,045 | 35,117 | |||||||||
Accounts receivable: | ||||||||||||
Trade, net | 2H | 24,936 | 21,660 | |||||||||
Other | 6 | 4,964 | 6,126 | |||||||||
Inventories | 7 | 36,491 | 47,650 | |||||||||
| ||||||||||||
Total current assets | 110,447 | 136,229 | ||||||||||
| ||||||||||||
Marketable securities | 2G, 5 | 46,542 | 15,281 | |||||||||
| ||||||||||||
Assets held for employees' severance benefits | 11 | 1,640 | 1,833 | |||||||||
| ||||||||||||
Deferred tax assets | 15G | 1,798 | 1,790 | |||||||||
| ||||||||||||
Property, plant and equipment, net | 8 | 3,574 | 4,110 | |||||||||
| ||||||||||||
Intangible assets, net | 9 | 1,718 | 1,170 | |||||||||
| ||||||||||||
Operating leases right-of-use, net | 10 | 3,783 | 9,913 | |||||||||
| ||||||||||||
Goodwill | 25,561 | 25,561 | ||||||||||
| ||||||||||||
Total assets | 195,063 | 195,887 | ||||||||||
| 2016 | 2017 | |||||||||||
| Note | US$ thousands | US$ thousands | ||||||||||
| Assets | ||||||||||||
| Current assets | ||||||||||||
| Cash and cash equivalents | 4 | 11,917 | 17,021 | |||||||||
| Marketable securities | 2F, 5 | 16,263 | 7,752 | |||||||||
| Accounts receivable: | ||||||||||||
| Trade, net | 2G | 27,305 | 40,742 | |||||||||
| Other | 3,113 | 5,823 | ||||||||||
| Related parties | 417 | 625 | ||||||||||
| Inventories | 6 | 44,280 | 51,487 | |||||||||
| Total current assets | 103,295 | 123,450 | ||||||||||
| Marketable securities | 2F, 5 | 7,769 | 5,945 | |||||||||
| Assets held for employees' severance benefits | 9 | 1,436 | 1,591 | |||||||||
| Deferred tax assets | 14G | 1,537 | 899 | |||||||||
| Property, plant and equipment ("PPE"), net | 7 | 3,915 | 4,121 | |||||||||
| Intangible assets, net | 8 | 2,924 | 1,047 | |||||||||
| Goodwill | 25,561 | 25,561 | ||||||||||
| Total assets | 146,437 | 162,614 | ||||||||||
Avi Eizenman | ||||
Chairman of the Board of Directors | Shaike Orbach Chief Executive Officer | Eran Gilad Chief Financial Officer |
Kfar-Saba, Israel
March 15, 2018
The accompanying notes are an integral part of these consolidated financial statements.
F - 5
Silicom Ltd. and its Subsidiaries
Consolidated Balance Sheets as of December 31 (Continued)
2019 | 2020 | |||||||||||
Note | US$ thousands | US$ thousands | ||||||||||
| ||||||||||||
| ||||||||||||
Liabilities and shareholders' equity | ||||||||||||
| ||||||||||||
Current liabilities | ||||||||||||
Trade accounts payable | 16,419 | 14,610 | ||||||||||
Other accounts payable and accrued expenses | 8,823 | 12,953 | ||||||||||
Operating lease liabilities | 10 | 1,090 | 1,813 | |||||||||
| ||||||||||||
Total current liabilities | 26,332 | 29,376 | ||||||||||
| ||||||||||||
Long-term liabilities | ||||||||||||
Operating lease liabilities | 10 | 2,693 | 8,282 | |||||||||
Liability for employees' severance benefits | 11 | 2,910 | 3,256 | |||||||||
Deferred tax liabilities | 15G | 205 | 136 | |||||||||
| ||||||||||||
Total liabilities | 32,140 | 41,050 | ||||||||||
| ||||||||||||
Shareholders' equity | 12 | |||||||||||
Ordinary shares, ILS 0.01 par value; 10,000,000 shares authorized; 7,618,676 and 7,670,033 issued as at December 31, 2019 and 2020, respectively; 7,351,317 and 6,899,515 outstanding as at December 31, 2019 and 2020, respectively | 22 | 22 | ||||||||||
Additional paid-in capital | 57,130 | 60,117 | ||||||||||
Treasury shares (at cost) 267,359 and 770,518 ordinary shares as at December 31, 2019 and 2020, respectively | (8,009 | ) | (24,807 | ) | ||||||||
Retained earnings | 113,780 | 119,505 | ||||||||||
| ||||||||||||
Total shareholders' equity | 162,923 | 154,837 | ||||||||||
| ||||||||||||
Total liabilities and shareholders’ equity | 195,063 | 195,887 | ||||||||||
| 2016 | 2017 | |||||||||||
| Note | US$ thousands | US$ thousands | ||||||||||
| Liabilities and shareholders' equity | ||||||||||||
| Current liabilities | ||||||||||||
| Trade accounts payable | 10,476 | 12,619 | ||||||||||
| Other accounts payable and accrued expenses | 7,484 | 6,420 | ||||||||||
| Related parties | 4 | 10 | ||||||||||
| Total current liabilities | 17,964 | 19,049 | ||||||||||
| Long-term liabilities | ||||||||||||
| Contingent consideration | 3 | 4,642 | - | |||||||||
| Liability for employees' severance benefits | 9 | 2,439 | 2,765 | |||||||||
| Total liabilities | 25,045 | 21,814 | ||||||||||
| Commitments and contingencies | 10 | |||||||||||
| Shareholders' equity | 11 | |||||||||||
| Ordinary shares, ILS 0.01 par value; 10,000,000 shares authorized; 7,396,584 and 7,564,502 issued as at December 31, 2016 and 2017, respectively; 7,381,613 and 7,549,531 outstanding as at December 31, 2016 and 2017, respectively | 22 | 22 | ||||||||||
| Additional paid-in capital | 46,833 | 51,909 | ||||||||||
| Treasury shares (at cost) - 14,971 ordinary shares as at December 31, 2016 and 2017 | (38 | ) | (38 | ) | ||||||||
| Retained earnings | 74,575 | 88,907 | ||||||||||
| Total shareholders' equity | 121,392 | 140,800 | ||||||||||
| Total liabilities and shareholders’ equity | 146,437 | 162,614 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 6
Silicom Ltd. and its Subsidiaries
Consolidated Statements of Operations for the Year Ended December 31
2018 | 2019 | 2020 | ||||||||||||||
US$ thousands | ||||||||||||||||
Note | Except for share and per share data | |||||||||||||||
| ||||||||||||||||
Sales* | 2O, 13 | 133,753 | 105,240 | 107,398 | ||||||||||||
Cost of sales | 91,697 | 69,146 | 73,632 | |||||||||||||
| ||||||||||||||||
Gross profit | 42,056 | 36,094 | 33,766 | |||||||||||||
| ||||||||||||||||
Operating expenses | ||||||||||||||||
Research and development** | 14,820 | 15,075 | 17,244 | |||||||||||||
Sales and marketing | 6,642 | 6,647 | 6,209 | |||||||||||||
General and administrative | 3,943 | 4,159 | 4,065 | |||||||||||||
| ||||||||||||||||
Total operating expenses | 25,405 | 25,881 | 27,518 | |||||||||||||
| ||||||||||||||||
Operating income | 16,651 | 10,213 | 6,248 | |||||||||||||
Financial income, net | 14 | 923 | 1,646 | 1,034 | ||||||||||||
| ||||||||||||||||
Income before income taxes | 17,574 | 11,859 | 7,282 | |||||||||||||
| ||||||||||||||||
Income taxes | 15 | 2,937 | 1,623 | 1,557 | ||||||||||||
| ||||||||||||||||
Net income | 14,637 | 10,236 | 5,725 | |||||||||||||
| ||||||||||||||||
Income per share: | ||||||||||||||||
Basic income per ordinary share (US$) | 2U | 1.938 | 1.361 | 0.804 | ||||||||||||
| ||||||||||||||||
Diluted income per ordinary share (US$) | 1.912 | 1.352 | 0.800 | |||||||||||||
| ||||||||||||||||
Weighted average number of ordinary shares used to compute basic income per share (in thousands) | 7,552 | 7,520 | 7,118 | |||||||||||||
| ||||||||||||||||
Weighted average number of ordinary shares used to compute diluted income per share (in thousands) | 7,657 | 7,573 | 7,157 | |||||||||||||
* Including sales to related parties in the amount of |
** Including services from related parties in the |
| 2015 | 2016 | 2017 | ||||||||||||||
| US$ thousands | ||||||||||||||||
| Note | Except for share and per share data | |||||||||||||||
| Sales* | 12 | 82,738 | 100,347 | 125,690 | ||||||||||||
| Cost of sales | 48,659 | 61,796 | 79,762 | |||||||||||||
| Gross profit | 34,079 | 38,551 | 45,928 | |||||||||||||
| Operating expenses | ||||||||||||||||
| Research and development** | 9,702 | 12,663 | 13,915 | |||||||||||||
| Sales and marketing | 5,651 | 6,423 | 6,722 | |||||||||||||
| General and administrative | 3,611 | 3,969 | 4,507 | |||||||||||||
| Contingent consideration benefit | 3 | (3,090 | ) | (334 | ) | (4,642 | ) | |||||||||
| Total operating expenses | 15,874 | 22,721 | 20,502 | |||||||||||||
| Operating income | 18,205 | 15,830 | 25,426 | |||||||||||||
| Financial income, net | 13 | 220 | 35 | 156 | ||||||||||||
| Income before income taxes | 18,425 | 15,865 | 25,582 | |||||||||||||
| Income taxes | 14 | 1,905 | 2,728 | 3,868 | ||||||||||||
| Net income | 16,520 | 13,137 | 21,714 | |||||||||||||
| Income per share: | ||||||||||||||||
| Basic income per ordinary share (US$) | 2S | 2.273 | 1.789 | 2.912 | ||||||||||||
| Diluted income per ordinary share (US$) | 2.242 | 1.767 | 2.856 | |||||||||||||
| Weighted average number of ordinary shares used to compute basic income per share (in thousands) | 7,269 | 7,344 | 7,456 | |||||||||||||
| Weighted average number of ordinary shares used to compute diluted income per share (in thousands) | 7,368 | 7,435 | 7,602 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 7
Silicom Ltd. and its Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Ordinary shares | Additional paid-in capital | Treasury shares | Retained earnings | Total shareholders’ equity | ||||||||||||||||||||
Number of shares(1) | US$ thousands | |||||||||||||||||||||||
| ||||||||||||||||||||||||
Balance at January 1, 2018 | 7,549,531 | 22 | 51,909 | (38 | ) | 88,907 | 140,800 | |||||||||||||||||
| ||||||||||||||||||||||||
Exercise of options and RSUs(2) | 9,674 | *0- | 288 | 0- | 0- | 288 | ||||||||||||||||||
Share-based compensation | - | - | 2,424 | - | - | 2,424 | ||||||||||||||||||
Net income | - | - | - | - | 14,637 | 14,637 | ||||||||||||||||||
| ||||||||||||||||||||||||
Balance at December 31, 2018 | 7,559,205 | 22 | 54,621 | (38 | ) | 103,544 | 158,149 | |||||||||||||||||
| ||||||||||||||||||||||||
Exercise of options and RSUs(2) | 44,500 | *0- | 154 | 0- | 0- | 154 | ||||||||||||||||||
Purchase of treasury shares | (252,388 | ) | - | - | (7,971 | ) | - | (7,971 | ) | |||||||||||||||
Share-based compensation | - | - | 2,355 | - | - | 2,355 | ||||||||||||||||||
Net income | - | - | - | - | 10,236 | 10,236 | ||||||||||||||||||
| ||||||||||||||||||||||||
Balance at December 31, 2019 | 7,351,317 | 22 | 57,130 | (8,009 | ) | 113,780 | 162,923 | |||||||||||||||||
| ||||||||||||||||||||||||
Exercise of options and RSUs(2) | 51,357 | *0- | 276 | 0- | 0- | 276 | ||||||||||||||||||
Purchase of treasury shares | (503,159 | ) | - | - | (16,798 | ) | - | (16,798 | ) | |||||||||||||||
Share-based compensation | - | - | 2,711 | - | - | 2,711 | ||||||||||||||||||
Net income | - | - | - | - | 5,725 | 5,725 | ||||||||||||||||||
| ||||||||||||||||||||||||
Balance at December 31, 2020 | 6,899,515 | 22 | 60,117 | (24,807 | ) | 119,505 | 154,837 | |||||||||||||||||
| Ordinary shares | Additional paid-in capital | Treasury shares | Retained earnings | Total shareholders’ equity | ||||||||||||||||||||
Number of shares(1) | US$ thousands | |||||||||||||||||||||||
| Balance at January 1, 2015 | 7,218,633 | 21 | 41,245 | (38 | ) | 59,504 | 100,732 | |||||||||||||||||
Exercise of options and RSUs(2) | 65,711 | *- | 943 | - | - | 943 | ||||||||||||||||||
| Share-based compensation | - | - | 1,913 | - | - | 1,913 | ||||||||||||||||||
Dividend (US $1.00 per share) | - | - | - | - | (7,274 | ) | (7,274 | ) | ||||||||||||||||
| Net income | - | - | - | - | 16,520 | 16,520 | ||||||||||||||||||
| Balance at December 31, 2015 | 7,284,344 | 21 | 44,101 | (38 | ) | 68,750 | 112,834 | |||||||||||||||||
Exercise of options and RSUs(2) | 97,269 | 1 | 951 | - | - | 952 | ||||||||||||||||||
| Share-based compensation | - | - | 1,781 | - | - | 1,781 | ||||||||||||||||||
Dividend (US $1.00 per share) | - | - | - | - | (7,312 | ) | (7,312 | ) | ||||||||||||||||
| Net income | - | - | - | - | 13,137 | 13,137 | ||||||||||||||||||
| Balance at December 31, 2016 | 7,381,613 | 22 | 46,833 | (38 | ) | 74,575 | 121,392 | |||||||||||||||||
Exercise of options and RSUs(2) | 167,918 | *- | 2,651 | - | - | 2,651 | ||||||||||||||||||
| Share-based compensation | - | - | 2,425 | - | - | 2,425 | ||||||||||||||||||
Dividend (US $1.00 per share) | - | - | - | - | (7,382 | ) | (7,382 | ) | ||||||||||||||||
| Net income | - | - | - | - | 21,714 | 21,714 | ||||||||||||||||||
| Balance at December 31, 2017 | 7,549,531 | 22 | 51,909 | (38 | ) | 88,907 | 140,800 | |||||||||||||||||
(1) | Net of | and Silicom Ltd. | ||||
(2) | Restricted share units (hereinafter - "RSUs") | |||||
* | Less than 1 thousand. |
The accompanying notes are an integral part of these consolidated financial statements.
F - 8
Silicom Ltd. and its Subsidiaries
Consolidated Statements of Cash Flows for the Year Ended December 31
2018 | 2019 | 2020 | ||||||||||
US$ thousands | ||||||||||||
Cash flows from operating activities | ||||||||||||
Net income | 14,637 | 10,236 | 5,725 | |||||||||
| ||||||||||||
Adjustments required to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||
Depreciation and amortization | 3,293 | 1,997 | 2,384 | |||||||||
Impairment of intangible assets | 0- | 0- | 1,657 | |||||||||
Write-down of obsolete inventory | 6,211 | 2,106 | 1,578 | |||||||||
Discount on marketable securities, net | 32 | 144 | 244 | |||||||||
Share-based compensation expense | 2,424 | 2,355 | 2,711 | |||||||||
Deferred taxes, net | 5 | (699 | ) | (61 | ) | |||||||
Changes in assets and liabilities: | ||||||||||||
Accounts receivable - trade | 16,985 | (1,441 | ) | 3,467 | ||||||||
Accounts receivable - other | (3,384 | ) | 4,385 | (1,362 | ) | |||||||
Accounts receivable - related parties | 261 | 364 | 0- | |||||||||
Change in liability for employees' severance benefits, net | (79 | ) | 175 | 153 | ||||||||
Inventories | 2,540 | 3,529 | (13,336 | ) | ||||||||
Trade accounts payable | 3,059 | 769 | (2,076 | ) | ||||||||
Other accounts payable and accrued expenses | (314 | ) | 2,824 | 3,872 | ||||||||
Accounts payable - related parties | 8 | (18 | ) | 0- | ||||||||
Net cash provided by operating activities | 45,678 | 26,726 | 4,956 | |||||||||
| ||||||||||||
Cash flows from investing activities | ||||||||||||
Investment in short-term bank deposits, net | 0- | (13,542 | ) | 8,542 | ||||||||
Purchase of property, plant and equipment | (1,345 | ) | (1,441 | ) | (1,694 | ) | ||||||
Investment in intangible assets | (1,022 | ) | (1,018 | ) | (1,487 | ) | ||||||
Proceeds from maturity of marketable securities | 7,750 | 1,997 | 16,629 | |||||||||
Purchases of marketable securities | (41,670 | ) | (15,604 | ) | (6,558 | ) | ||||||
Net cash provided by (used in) investing activities | (36,287 | ) | (29,608 | ) | 15,432 | |||||||
| ||||||||||||
Cash flows from financing activities | ||||||||||||
Exercise of options | 288 | 154 | 276 | |||||||||
Purchase of treasury shares | 0- | (7,971 | ) | (16,798 | ) | |||||||
Net cash provided by (used in) financing activities | 288 | (7,817 | ) | (16,522 | ) | |||||||
| ||||||||||||
Effect of exchange rate changes on cash balances held | 108 | 360 | 341 | |||||||||
| ||||||||||||
Increase (decrease) in cash and cash equivalents | 9,787 | (10,339 | ) | 4,207 | ||||||||
| ||||||||||||
Cash and cash equivalents at beginning of year | 17,021 | 26,808 | 16,469 | |||||||||
Cash and cash equivalents at end of year | 26,808 | 16,469 | 20,676 | |||||||||
| ||||||||||||
Supplementary cash flow information | ||||||||||||
A. Non-cash transactions: | ||||||||||||
Investments in property, plant and equipment | 146 | 97 | 347 | |||||||||
B. Cash paid during the year for: | ||||||||||||
Income taxes | 3,260 | 1,103 | 1,284 | |||||||||
| 2015 | 2016 | 2017 | ||||||||||
| US$ thousands | ||||||||||||
| Cash flows from operating activities | ||||||||||||
| Net income | 16,520 | 13,137 | 21,714 | |||||||||
Adjustments required to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||
| Depreciation and amortization | 2,767 | 3,856 | 3,799 | |||||||||
| Write-down of obsolete inventory | 219 | 3,170 | 2,918 | |||||||||
| Change in liability for employees' severance benefits, net | (112 | ) | 126 | 171 | ||||||||
| Discount on marketable securities, net | 561 | 358 | 217 | |||||||||
| Share-based compensation expense | 1,998 | 1,550 | 2,425 | |||||||||
| Deferred taxes income | (907 | ) | (260 | ) | 453 | |||||||
| Capital gain | (3 | ) | - | - | ||||||||
| Changes in assets and liabilities: | ||||||||||||
| Accounts receivable - trade | (4,850 | ) | (4,007 | ) | (13,237 | ) | ||||||
| Accounts receivable - other | 127 | (1,832 | ) | (2,475 | ) | |||||||
| Accounts receivable - related parties | (83 | ) | 56 | (208 | ) | |||||||
| Inventories | (939 | ) | (21,426 | ) | (10,287 | ) | ||||||
| Trade accounts payable | 234 | 1,809 | 1,698 | |||||||||
| Other accounts payable and accrued expenses | 853 | 1,098 | (1,144 | ) | ||||||||
| Contingent consideration benefit | (3,090 | ) | (334 | ) | (4,642 | ) | ||||||
| Accounts payable - related parties | (8 | ) | (8 | ) | 6 | |||||||
| Net cash provided by (used in) operating activities | 13,287 | (2,707 | ) | 1,408 | ||||||||
| Cash flows from investing activities | ||||||||||||
| Proceeds from short term bank deposits, net | 4,000 | - | - | |||||||||
| Sale of property, plant and equipment | 19 | - | - | |||||||||
| Purchase of property, plant and equipment | (2,984 | ) | (1,441 | ) | (1,690 | ) | ||||||
| Investment in intangible assets | - | - | (11 | ) | ||||||||
| Proceeds from maturity of marketable securities | 15,100 | 8,575 | 16,175 | |||||||||
| Purchases of marketable securities | (12,935 | ) | - | (5,961 | ) | |||||||
| Business acquisition, net of acquired cash (see Note 3) | (10,000 | ) | - | - | ||||||||
| Net cash provided by (used in) investing activities | (6,800 | ) | 7,134 | 8,513 | ||||||||
| Cash flows from financing activities | ||||||||||||
| Exercise of options | 943 | 952 | 2,651 | |||||||||
| Dividend | (7,274 | ) | (7,312 | ) | (7,382 | ) | ||||||
| Payment made in connection with contingent consideration | - | (4,463 | ) | - | ||||||||
| Net cash used in financing activities | (6,331 | ) | (10,823 | ) | (4,731 | ) | ||||||
| Effect of exchange rate changes on cash balances held | 132 | 135 | (86 | ) | ||||||||
| Increase (decrease) in cash and cash equivalents | 288 | (6,261 | ) | 5,104 | ||||||||
| Cash and cash equivalents at beginning of year | 17,890 | 18,178 | 11,917 | |||||||||
| Cash and cash equivalents at end of year | 18,178 | 11,917 | 17,021 | |||||||||
| Supplementary cash flow information | ||||||||||||
| A. Non-cash transactions: | ||||||||||||
| Investments in PPE and intangible assets | 72 | 39 | 119 | |||||||||
| B. Cash paid during the year for: | ||||||||||||
| Income taxes | 4,487 | 4,648 | 4,584 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 9
Note 1 - General
Silicom Ltd. is an Israeli corporation engaged in designing, manufacturing, marketing and supporting high performance networking and data infrastructure solutions for a broad range of servers, server based systems and communications devices.
The Company's shares have been traded in the United States on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") since February 1994. Since January 2, 2014 the Company's shares have been traded on the NASDAQ Global Select Market (prior thereto they were traded on the NASDAQ Global Market). The Company's shares were traded in Israel on the Tel Aviv Stock Exchange ("TASE") from December 2005 through January 26, 2016, after which, on January 28, 2016, the Company delisted from trading on the TASE.
In these financial statements the terms "Company" or "Silicom" refer to Silicom Ltd. and its wholly owned subsidiaries, Silicom Connectivity Solutions, Inc. (hereinafter - "Silicom Inc.") and Silicom Denmark A/S (Fiberblaze A/S) (hereinafter – "Silicom Denmark"), whereas the term "subsidiaries" refers to Silicom Inc. and Silicom Denmark.
Note 2 - Summary of Significant Accounting Policies
The significant accounting policies, which are applied consistently throughout the periods presented, are as follows:
A.Financial statements in US dollars
Substantially all sales of the Company are made outside of Israel (see Note 12A13A regarding geographical distribution), in US dollars ("dollars"). Most purchases of materials and components, and a significant part of the marketing costs are made or incurred, primarily in dollars. Therefore, the functionaldollar is the currency ofthat represents the principal economic environment in which the Company operates and is the dollar.
Transactions and monetary balances in other currencies are translated into the functional currency using the current exchange rate.
All exchange gains and losses from remeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected in earnings when they arise.
B.Basis of significant Accounting Policies (cont’d)
The accompanying consolidated financial statements have been prepared with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
F - 10
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of significant Accounting Policies (cont’d)
C.Estimates and assumptions
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include revenue recognition over time, income taxes, inventories, marketable securities, goodwill, intangible assets and share-based compensation.
D.Business combinations
The Company accounts for business combination in accordance with ASC No. 805, "Business Combinations". ASC No. 805 requires recognition of assets acquired and liabilities assumed at the acquisition date, measured at their fair values as of that date. Any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded in the consolidated statements of operations.
E.Cash and cash equivalents
The Company considers highly liquid investments with original maturities of three months or less from the date of deposit to be cash equivalents.
F.Short-term bank deposits
Short term bank deposits consist of bank deposits with original maturities of more than three months and up to twelve months. As of December 31, 2020, the Company's short-term bank deposits consist of bank deposits in US dollars carrying a weighted average interest rate of 2.05%.
These short-term bank deposits are held with a major Israeli bank, and their use and withdrawal are not subject to any restrictions.
G.Marketable securities
The Company classifies its marketable securities as held-to-maturity as they are debt securities in which the Company has the intent and ability to hold to maturity. Held-to-maturity (HTM) debt securities are recorded at amortized cost adjusted for the amortization or accretion of premiums or discounts.
Premiums and discounts on debt securities are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective interest method.
F - 11
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of significant Accounting Policies (cont’d)
G.Marketable securities (cont’d)
When other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss.
A decline in the market value of HTM security below cost that is deemed to be other than temporary results in an impairment to reduce the carrying amount to fair value. To determine whether an impairment is other than temporary, the Company considers all available information relevant to the collectibility of the security, including past events, current conditions, and reasonable and supportable forecasts when developing estimate of cash flows expected to be collected. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in.
If the Company intends to sell the security or it is 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 investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company 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.
H.Trade accounts receivable, net
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and its customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns.
As of December 31, 20162019 and 2017,2020, the provision for doubtful accounts receivable amounted to US$ 20 thousand.
I.Inventories
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the "weighted average-cost" method.
The Company writes down obsolete or slow moving inventory to its market value, on a quarterly basis.
F - 12
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of significant Accounting Policies (cont’d)
J.Assets held for employees’ severance benefits
Assets held for employees’ severance benefits represent contributions to severance pay funds and cash surrender value of insurance policies. The assets are recorded at their current cash redemption value.
K.Property, plant and equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation.depreciation. Depreciation is calculated on the straight-line basis over the estimated useful life of the assets at the following annual rates:
% | |||
Machinery and equipment | 15 - 33 | ||
Office furniture and equipment | 6 - 33 | ||
Leasehold improvements | 0* | ||
* | Over the shorter term of the lease or the useful life of the asset |
L.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 one1 operating segment and this segment comprises one1 reporting unit.
Goodwill is reviewed for impairment at least annually in accordance with ASU 2011-08, Testing ASC 350, Intangibles—Goodwill for Impairment. ASU 2011-08and Other. ASC 350 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 unit 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, 2017,2020, no impairments were found and therefore no impairment losses were recorded.
F - 13
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of significant Accounting Policies (cont’d)
L.Goodwill and other intangible assets (cont’d)
Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives of 3 years. The acquired customer relationships and current technology 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.
M.Impairment of long-lived assets
In accordance with Impairment or Disposal of Long-Lived Assetslong-lived assets Subsections of FASB ASC Subtopic 360-10, Property, Plant, and Equipment - Overall long-lived– Overall. Long-lived assets, such as property, plant, equipment and purchasepurchased intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or an asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third party independent appraisals, as considered necessary.
F - 14
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of significant Accounting Policies (cont’d)
N.Leases
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02. The guidance establishes a right-of-use model ("ROU") that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. The Company determines if an arrangement is or contains a lease at contract inception.
The Company adopted the new accounting standard ASC 842 "Leases" and all the related amendments on January 1, 2019.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.
Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
As of December 31, 2020, all of the company's leases are operating leases.
On the commencement date, the lease payments shall include variable lease payments that depend on an index (such as the Consumer Price Index), initially measured using the index at the commencement date. The Company does not remeasure the lease liability for changes in future lease payments arising from changes in an index unless the lease liability is remeasured for another reason. Therefore, after initial recognition, such variable lease payments are recognized in profit or loss as they are incurred.
Variable payments that depends on use of the underlying asset are not included in the lease payments. Such variable payments are recognized in profit or loss in the period in which the event or condition that triggers the payment occurs.
Upon initial recognition, the Company recognizes a liability at the present value of the lease payments to be made over the lease term, and concurrently recognizes a ROU asset at the same amount of the liability, adjusted for any prepaid lease payments.
The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments, the lease term and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease.
After lease commencement, the Company measures the lease liability at the present value of the remaining lease payments using the discount rate determined at lease commencement (as long as the discount rate hasn’t been updated as a result of a reassessment event). The Company subsequently measures the ROU asset at the present value of the remaining lease payments, adjusted for the remaining balance of any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term.
The Company's lease agreements have remaining lease terms up to 10 years. Some of these agreements include options to extend the leases for up to 5 years and some include options to terminate the leases immediately. Some of our vehicle lease agreements include rental payments based on the actual usage of the vehicles and other lease agreements include rental payments adjusted periodically for inflation. The agreements related to leases in Israel are in Israeli Shekel ("ILS") or in ILS, linked to the Israeli Consumer Price Index or to the US Dollars. The agreements related to leases in the USA are in US Dollars and the agreements related to leases in Denmark are in Danish Krone ("DKK"). The Company's lease agreements do not contain any residual value guarantees. See Note 10.
F - 15
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of significant Accounting Policies (cont’d)
O.Revenue recognition
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, a new accounting standard related to revenue recognition. ASC 606 supersedes nearly all U.S. GAAP on revenue recognition and eliminated industry-specific guidance. The underlying principle of ASC 606 is to recognize revenue when a customer obtains control of the promised goods at an amount that reflects the consideration that is expected to be received in exchange for those goods. It also requires increased disclosures including the nature, amount, timing, and uncertainty of revenues and cash flows related to contracts with customers. The Company adopted ASC 606 at the beginning of the first quarter of fiscal year 2018 and implemented new accounting policies and internal controls necessary to support the requirements of ASC 606.
The Company derives revenues primarily from the sale of networking and data infrastructure solutions.
The Company recognizes revenue upon transfer of control of the promised goods in a contract with a customer in an amount that reflects the consideration the Company expects to receive in exchange for those products. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment or once delivery and risk of loss has transferred to the customer. The Company accounts for a contract with customer when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. The Company identifies separated contractual performance obligations and evaluates each distinct performance obligation within a contract, whether it is satisfied at a point in time or over time. Revenue is recognized over time for sales of goods manufactured to unique customer specifications, in which the Company’s performance does not create an asset with an alternative use to the Company and the Company has an enforceable right to payment for performance completed to date if the customer were to terminate the contract. Revenue recognized over time is measured by the costs incurred to date relative to the estimated total direct costs to fulfill each contract. Incurred costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, materials and overhead.
Revenue is allocated among performance obligations in a manner that reflects the consideration that the Company expects to be entitled to for the promised goods based on standalone selling prices (SSP). SSP are estimated for each distinct performance obligation and judgment may be required in their determination. The best evidence of SSP is the observable price of the product when the Company sell the goods separately in similar circumstances and to similar customers.
F - 16
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of significant Accounting Policies (cont’d)
P.Research and development costs
Capitalization of software development costs related to programmable components incorporated into the Company's products, are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. The company has determined that technological feasibility for its software components of hardware products is reached after all high-risk development issues have been resolved through coding and testing. Amortization begins once the software is ready for its intended use, generally based on the pattern in which the economic benefits will be consumed. The amortization of these costs is included in cost of revenue over the estimated life of the products. Other costs incurred in the research and development of the Company’s products are expensed as incurred.
Q.Allowance for product warranty
The Company grants service warranties related to certain products to end-users. The Company estimates its obligation for such warranties to be immaterial on the basis of historical experience. Accordingly, these financial statements do not include an accrual for warranty obligations.
R.Treasury shares
Treasury shares are recorded at cost and presented as a reduction of shareholders' equity.
F - 17
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of significant Accounting Policies (cont’d)
S.Income taxes
Deferred taxes are accounted for under the asset and liability method based on the estimated future tax effects of temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are presented as non-current assets and liabilities and measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured atas the largest amount that is greater than 50%50 percent likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
T.Share-based compensation
The Company recognizes compensation expense based on estimated grant date fair value in accordance with ASC Topic 718, Compensation -Stock Compensation as follows:
When portions of an award vest in increments during the requisite service period (graded-vesting award), the Company’s accounting policy is to recognize compensation cost for the award over the requisite service period for each separately vesting portion of the award.
F - 18
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of significant Accounting Policies (cont’d)
U.Basic and diluted earnings per share
Basic income per ordinary share is calculated by dividing the net income attributable to ordinary shares, by the weighted average number of ordinary shares outstanding. Diluted income per ordinary share calculation is similar to basic income per ordinary share except that the weighted average of common shares outstanding is increased to include outstanding potential common shares during the period if dilutive. Potential common shares arise from stock options and RSUs, and the dilutive effect is reflected by the application of the treasury stock method.
The following table summarizes information related to the computation of basic and diluted income per ordinary share for the years indicated.
Year ended December 31 | ||||||||||||
2018 | 2019 | 2020 | ||||||||||
Net income attributable to ordinary shares (US$ thousands) | 14,637 | 10,236 | 5,725 | |||||||||
| ||||||||||||
Weighted average number of ordinary shares outstanding used in basic income per ordinary share calculation | 7,552,094 | 7,520,389 | 7,118,244 | |||||||||
| ||||||||||||
Add assumed exercise of outstanding dilutive potential ordinary shares | 105,236 | 52,228 | 38,519 | |||||||||
| ||||||||||||
Weighted average number of ordinary shares outstanding used in diluted income per ordinary share calculation | 7,657,330 | 7,572,617 | 7,156,763 | |||||||||
| ||||||||||||
Basic income per ordinary shares (US$) | 1.938 | 1.361 | 0.804 | |||||||||
| ||||||||||||
Diluted income per ordinary shares (US$) | 1.912 | 1.352 | 0.800 | |||||||||
| ||||||||||||
Weighted average number of shares related to options and RSUs excluded from the diluted earnings per share calculation because of anti-dilutive effect | 171,086 | 351,610 | 180,916 | |||||||||
F - 19
| Year ended December 31 | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Net income attributable to ordinary shares (US$ thousands) | 16,520 | 13,137 | 21,714 | |||||||||
| Weighted average number of ordinary shares outstanding used in basic income per ordinary share calculation | 7,268,536 | 7,343,696 | 7,455,528 | |||||||||
| Add assumed exercise of outstanding dilutive potential ordinary shares | 99,448 | 91,485 | 146,443 | |||||||||
| Weighted average number of ordinary shares outstanding used in diluted income per ordinary share calculation | 7,367,984 | 7,435,181 | 7,601,971 | |||||||||
| Basic income per ordinary shares (US$) | 2.273 | 1.789 | 2.912 | |||||||||
| Diluted income per ordinary shares (US$) | 2.242 | 1.767 | 2.856 | |||||||||
| The weighted average number of shares related to options and RSUs excluded from the diluted earnings per share calculation because of anti-dilutive effect | 43,181 | 9,633 | - | |||||||||
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (cont’d)
V.Comprehensive Income
For the years ended December 31, 2015, 20162018, 2019 and 2017,2020, comprehensive income equals net income.
W.Fair Value Measurements
The Company's financial instruments consist mainly of cash and cash equivalents, marketable securities, trade and other receivables and trade accounts payable. The carrying amounts of these financial instruments, except for marketable securities, approximate their fair value because of the short maturity of these investments. The fair value of marketable securities is presented in Note 5 to these consolidated financial statements. Assets held for severance benefits are recorded at their current cash redemption value.
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
F - 20
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (cont’d)
X.Concentrations of risks
(1)
Credit riskFinancial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of cash and cash equivalents, short-term bank deposits, marketable securities, trade receivables and assets held for employees’ severance benefits. Cash and cash equivalents balances of the Company, which are subject to credit risk, consist of cash accounts held with major financial institutions. Short-term bank deposits balances of the Company, which are subject to credit risk, consist of short-term bank deposits held with a major Israeli Bank. Marketable securities consist of held to maturity marketable securities issued by highly rated corporations. As of December 31, 20162019 and 2017,2020, the ratings of the securities in the Company's portfolio was at least A.A- and BBB+ respectively. Nonetheless, these investments are subject to general credit and counterparty risks (such as that the counterparty to a financial instrument fails to meet its contractual obligations). The Company closely monitors extensions of credit and has never experienced significant credit losses. See note 12.
On January 1, 2020, the Company announced thatadopted ASU 2016-13 (Topic 326) Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, as further clarified by the top-10 Cloud player that awarded its largest-ever design win has decidedFinancial Accounting Standards Board (the "FASB") through the issuance of additional related ASUs, which requires the measurement and recognition of current expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model, which requires the use of forward-looking information to abortcalculate credit loss estimates. The Company adopted the new cloud infrastructure architecture for which it had orderedstandard under the Company’s products. As of December 31, 2017,modified retrospective approach. Upon adoption, the Company had open receivables from fewstandard did not have a material impact on the Consolidated Financial Statements. We continue to monitor the financial implications of the Company’s customers that are related to this design win, out of which, an amount of approximately $10 million is still outstanding as of the date of announcement (March 13, 2018). The Company expects that these customers will fully meet their contractual obligations and that these outstanding amounts are not impaired.
(2)
Significant customersThe Company's top twothree customers accounted for approximately 34%36% of its revenues in 2017.2020. The Company expects that a small number of customers will continue to account for a significant portion of its revenues for the foreseeable future. See note 12.
Y.Liabilities for loss contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
F - 21
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies (cont’d)
Z.Recent Accounting Pronouncements
(1)In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which removes certain exceptions for: recognizing deferred taxes for investments, performing intraperiod tax allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. This ASU is effective for annual periods in fiscal years beginning after December 15, 2020. The Company does not expect the adoption of ASU 2019-12 to have a material impact on its consolidated balance sheets, results of operations, cash flows or presentation thereof.
F - 22
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 3 - Acquisitions
A.ADI Engineering, Inc.
On October 28, 2015 (hereinafter – "closing date") the Company acquired certain assets from ADI Engineering, Inc. (hereinafter – "ADI"), a privately-held, US-based provider of custom embedded communications and networking products, for an aggregate purchase price of US$ 10,000 thousand in cash and estimated contingent consideration of US$ 7,802 thousand in cash and in options to ordinary shares, payable in three yearly payments, after the closing, subject to the attainment of certain performance milestones until December 31, 2017. The fair value measurement of the contingent consideration is classified at level 2 and level 3 of the fair value hierarchy (see Note 2U). Of the total purchase price of US$ 17,802 thousand, US$ 222 thousand was attributed to tangible assets, US$ 4,261 thousand was attributed to intangible assets and US$ 13,319 thousand was attributed to goodwill. The goodwill is primarily attributable to the synergies expected to arise after the acquisition. The recognized goodwill is deductible for income tax purposes for 10 years.
B. Silicom Denmark
On December 10, 2014 (hereinafter – "closing date"), the Company completed the acquisition of all of the outstanding shares and voting interests of Silicom Denmark, a provider of high performance application acceleration solutions, for an aggregate purchase price of US$ 10,161 thousand in cash and estimated contingent consideration of US$ 4,683 thousand in cash and in options to ordinary shares, subject to the attainment of certain performance milestones until August 31, 2015. The fair value measurement of the contingent consideration is classified at level 3 of the fair value hierarchy (see Note 2U). Of the total estimated purchase price of US$ 14,844 thousand, US$ 2,022 thousand was attributed to tangible assets, US$ 1,996 thousand was attributed to intangible assets, US$ 12,242 thousand was attributed to goodwill and US$ 1,416 was attributed to liabilities assumed. The goodwill is primarily attributable to the synergies expected to arise after the acquisition. None of the recognized goodwill is expected to be deductible for income tax purposes.
In connection with the contingent consideration, during 2016 the Company paid to the Silicom Denmark sellers an amount of US$ 1,463 thousand, of which 90% was paid in cash and 10% in options to ordinary shares of the Company.
In relation to this acquisition, on April 18, 2016, the Company granted, in the aggregate, 22,795 options to the Silicom Denmark sellers and to the Silicom Denmark employees (see Note 11I)12I).
F - 23
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 4 - Cash and Cash Equivalents
December 31 | ||||||||
2019 | 2020 | |||||||
US$ thousands | ||||||||
| ||||||||
Cash | 13,382 | 19,477 | ||||||
Cash equivalents * | 3,087 | 1,199 | ||||||
16,469 | 20,676 | |||||||
* |
| December 31 | ||||||||
| 2016 | 2017 | |||||||
| US$ thousands | ||||||||
| Cash | 5,858 | 12,834 | ||||||
| Cash equivalents * | 6,059 | 4,187 | ||||||
| 11,917 | 17,021 | |||||||
Comprised mainly of deposits in banks as at December 31, |
F - 24
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 5 - Marketable Securities
The Company's investment in marketable securities as of December 31, 20162019 and 20172020 are classified as ''held-to-maturity'' and consist of the following:
Amortized cost basis** | Gross unrealized holding gains | Gross unrealized holding (losses) | Aggregate fair value* | |||||||||||||
US$ thousands | ||||||||||||||||
At December 31, 2020 | ||||||||||||||||
Held to maturity: | ||||||||||||||||
Corporate debt securities and government debt securities | ||||||||||||||||
Current | 35,445 | 265 | (102 | ) | 35,608 | |||||||||||
Non-Current | 15,365 | 339 | 0- | 15,704 | ||||||||||||
| ||||||||||||||||
50,810 | 604 | (102 | ) | 51,312 | ||||||||||||
| ||||||||||||||||
At December 31, 2019 | ||||||||||||||||
Held to maturity: | ||||||||||||||||
Corporate debt securities and government debt securities | ||||||||||||||||
Current | 14,170 | 24 | (97 | ) | 14,097 | |||||||||||
Non-Current | 46,955 | 408 | (112 | ) | 47,251 | |||||||||||
| ||||||||||||||||
61,125 | 432 | (209 | ) | 61,348 | ||||||||||||
| Gross | Gross | |||||||||||||||
| unrealized | unrealized | |||||||||||||||
| Amortized | holding | holding | Aggregate | |||||||||||||
| cost basis** | gains | (losses) | fair value* | |||||||||||||
| US$ thousands | ||||||||||||||||
| At December 31, 2017 | ||||||||||||||||
| Held to maturity: | ||||||||||||||||
| Corporate debt securities | ||||||||||||||||
| Current | 7,798 | - | (49 | ) | 7,749 | |||||||||||
| Non-Current | 5,976 | - | (95 | ) | 5,881 | |||||||||||
| 13,774 | - | (144 | ) | 13,630 | ||||||||||||
| At December 31, 2016 | ||||||||||||||||
| Held to maturity: | ||||||||||||||||
| Corporate debt securities | �� | |||||||||||||||
| Current | 16,390 | - | (97 | ) | 16,293 | |||||||||||
| Non-Current | 7,815 | - | (62 | ) | 7,753 | |||||||||||
| 24,205 | - | (159 | ) | 24,046 | ||||||||||||
* | Fair value is being determined using quoted market prices in active markets (Level |
** | Including accrued interest in the amount of US$ |
The accrued interest is presented as part of other |
Activity in marketable securities in | US$ thousands | |||
Balance at January 1, | 61,125 | |||
Purchases of marketable securities | 6,558 | |||
Discount on marketable securities, net | ( | ) | ||
Proceeds from maturity of marketable securities | ( | ) | ||
Balance at December 31, | 50,810 | |||
F - 25
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 5 - Marketable Securities (Cont’d)
The following table summarizes the gross unrealized losses on investment securities for which other-than-temporary impairments have not been recognized and the fair value of those securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2017:2020:
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Held to maturity: | Unrealized Losses | Fair value | Unrealized Losses | Fair value | Unrealized Losses | Fair value | ||||||||||||||||||
| ||||||||||||||||||||||||
Corporate debt securities and government debt securities | (2 | ) | 1,105 | (100 | ) | 6,770 | (102 | ) | 7,875 | |||||||||||||||
| ||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Unrealized Losses | Fair value | Unrealized Losses | Fair value | Unrealized Losses | Fair value | |||||||||||||||||||
| Held to maturity: | ||||||||||||||||||||||||
| Corporate debt securities | (95 | ) | 5,881 | (49 | ) | 7,749 | (144 | ) | 13,630 | |||||||||||||||
The unrealized losses on the investments were caused by changes in interest rate. The Company has the ability and intent to hold these investments until maturity and it is more likely than not that the Company will not be required to sell any of the securities before recovery; therefore these investments are not considered other than temporarily impaired.
Note 6 - Other Receivables
December 31 | ||||||||
2019 | 2020 | |||||||
US$ thousands | ||||||||
| ||||||||
Advances to suppliers | 805 | 618 | ||||||
Government authorities | 2,758 | 3,668 | ||||||
Prepaid expense | 553 | 477 | ||||||
Other receivables | 848 | 1,363 | ||||||
4,964 | 6,126 | |||||||
Note 7 - Inventories
December 31 | ||||||||
2019 | 2020 | |||||||
US$ thousands | ||||||||
| ||||||||
Raw materials and components | 20,986 | 29,362 | ||||||
Products in process | 7,137 | 10,041 | ||||||
Finished products | 8,368 | 8,247 | ||||||
36,491 | 47,650 | |||||||
F - 26
| December 31 | ||||||||
| 2016 | 2017 | |||||||
| US$ thousands | ||||||||
| Raw materials and components | 16,435 | 24,407 | ||||||
| Products in process | 19,098 | 15,079 | ||||||
| Finished products | 8,747 | 12,001 | ||||||
| 44,280 | 51,487 | |||||||
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 8 - Property, Plant and Equipment, Net
December 31 | ||||||||
2019 | 2020 | |||||||
US$ thousands | ||||||||
| ||||||||
Machinery and equipment | 13,374 | 15,494 | ||||||
Office furniture and equipment | 924 | 991 | ||||||
Leasehold improvements | 2,528 | 2,884 | ||||||
| ||||||||
Property, plant and equipment | 16,826 | 19,369 | ||||||
| ||||||||
Accumulated depreciation | (13,252 | ) | (15,259 | ) | ||||
| ||||||||
Property, Plant and equipment, net | 3,574 | 4,110 | ||||||
Depreciation expense for the years ended December 31, 2018, 2019 and 2020 were US$ 2,190 thousand, US$ 1,731 thousand and US$ 2,000 thousand, respectively.
F - 27
| December 31 | ||||||||
| 2016 | 2017 | |||||||
| US$ thousands | ||||||||
| Machinery and equipment | 8,507 | 10,531 | ||||||
| Office furniture and equipment | 634 | 665 | ||||||
| Leasehold improvements | 2,277 | 2,309 | ||||||
| Property, plant and equipment | 11,418 | 13,505 | ||||||
| Accumulated depreciation | (7,503 | ) | (9,384 | ) | ||||
| Property, Plant and equipment, net | 3,915 | 4,121 | ||||||
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 9 - |
December 31 | ||||||||||||
2019 | 2020 | |||||||||||
Useful life | US$ thousands | |||||||||||
Original cost: | ||||||||||||
Capitalization of software development costs | 3 | 1,946 | 2,983 | |||||||||
Licenses | 3 | 106 | 556 | |||||||||
2,052 | 3,539 | |||||||||||
Accumulated amortization: | ||||||||||||
Capitalization of software development costs | 274 | 2,163 | ||||||||||
Licenses | 60 | 206 | ||||||||||
334 | 2,369 | |||||||||||
| ||||||||||||
Intangible assets, net: | ||||||||||||
Capitalization of software development costs | 1,672 | 820 | ||||||||||
Licenses | 46 | 350 | ||||||||||
1,718 | 1,170 | |||||||||||
Amortization expense for the years ended December 31, 2017 are as follows:2018, 2019 and 2020 were US$ 1,103 thousand, US$ 266 thousand and US$ 378 thousand, respectively. The company recorded an impairment charge of US$ 1,657 thousand in the year ended December 31, 2020, for software that will no longer be utilized by the company and the asset value and accumulated amortization were written off. The impairment was recorded in cost of sales.
F - 28
| December 31 | ||||||||||||
| 2016 | 2017 | |||||||||||
| Useful life | US$ thousands | |||||||||||
| Original cost: | ||||||||||||
| Current technology | 3 | 3,833 | 3,844 | |||||||||
| Customer relationships | 3 | 1,937 | 1,937 | |||||||||
| 5,770 | 5,781 | |||||||||||
| Accumulated amortization: | ||||||||||||
| Current technology | 1,930 | 3,181 | ||||||||||
| Customer relationships | 916 | 1,553 | ||||||||||
| 2,846 | 4,734 | |||||||||||
| Intangible assets, Net: | ||||||||||||
| Current technology | 1,903 | 663 | ||||||||||
| Customer relationships | 1,021 | 384 | ||||||||||
| 2,924 | 1,047 | |||||||||||
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 10 - Leases
A.The components of operating lease cost for the year ended December 31, 2020 and 2019 were as follows:
Year ended December 31 | ||||||||
2019 | 2020 | |||||||
US$ thousands | ||||||||
| ||||||||
Operating lease costs | 1,494 | 1,623 | ||||||
Variable lease payments not included in the lease liability | 2 | 3 | ||||||
Short-term lease cost | 287 | 285 | ||||||
Total operating lease cost | 1,783 | 1,911 | ||||||
B.Supplemental cash flow information related to operating leases was as follows:
Year ended December 31 | ||||||||
2019 | 2020 | |||||||
US$ thousands | ||||||||
| ||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases | 1,541 | 1,601 | ||||||
Right-of-use assets obtained in exchange for lease obligations (non-cash): | ||||||||
Operating leases | 1,524 | 7,201 | ||||||
C.Supplemental balance sheet information related to operating leases was as follows:
December 31 | ||||||||
2019 | 2020 | |||||||
US$ thousands | ||||||||
| ||||||||
Operating leases: | ||||||||
Operating leases right-of-use | 3,783 | 9,913 | ||||||
| ||||||||
Current operating lease liabilities | 1,090 | 1,813 | ||||||
Non-current operating lease liabilities | 2,693 | 8,282 | ||||||
Total operating lease liabilities | 3,783 | 10,095 | ||||||
F - 29
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 10 - Leases (cont’d)
C.Supplemental balance sheet information related to operating leases was as follows (cont’d):
December 31 | ||||||||
2019 | 2020 | |||||||
US$ thousands | ||||||||
| ||||||||
Weighted average remaining lease term (years) | 4.8 | 8.2 | ||||||
| ||||||||
Weighted average discount rate | 3.3 | % | 2.4 | % | ||||
D.Future minimum lease payments under non-cancellable leases as of December 31, 2020 were as follows:
December 31, 2020 | ||||
US$ thousands | ||||
| ||||
2021 | 1,743 | |||
2022 | 1,575 | |||
2023 | 1,426 | |||
2024 | 1,161 | |||
After 2025 | 4,934 | |||
Total operating lease payments | 10,839 | |||
Less: imputed interest | (744 | ) | ||
Present value of lease liabilities | 10,095 | |||
F - 30
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 911 - Assets Held and Liability for Employees' Severance Benefits
A.Under Israeli law and labor agreements, Silicom is required to make severance payments to retired or dismissed employees and to employees leaving employment in certain other circumstances.
In respect of the liability to the employees, individual insurance policies are purchased and deposits are made with recognized severance pay funds.
The liability for severance pay is calculated on the basis of the latest salary paid to each employee multiplied by the number of years of employment. The liability is covered by the amounts deposited including accumulated income thereon as well as by the unfunded provision.
B.According to Section 14 to the Severance Pay Law ("Section 14") the payment of monthly deposits by a company into recognized severance and pension funds or insurance policies releases it from any additional severance obligation to the employees that have entered into agreements with the company pursuant to such Section 14. Commencing July 1, 2008, the Company has entered into agreements with a majority of its employees in order to implement Section 14. Therefore, as of that date, the payment of monthly deposits by the Company into recognized severance and pension funds or insurance policies releases it from any additional severance obligation to those employees that have entered into such agreements and therefore the Company incurs no additional liability since that date with respect to such employees. Amounts accumulated in the pension funds or insurance policies pursuant to Section 14 are not supervised or administrated by the Company and therefore neither such amounts nor the corresponding accrual are reflected in the balance sheet.
C.Consequently, the assets held for employees' severance benefits reported on the balance sheet, in respect of deposits for those employees who have signed agreements pursuant to Section 14, represent the redemption value of deposits made through June 30, 2008. The liability for employee severance benefits, with respect to those employees, represents the liability of the Company for employees' severance benefits as of June 30, 2008.
As a result of the implementation of Section 14, as described above, the liability with respect to those employees is calculated on the basis of number of years of employment as of June 30, 2008, multiplied by the latest salary paid. The liability is covered by the amounts deposited, including accumulated income thereon, as well as by the unfunded provision. Such liability will be removed, either upon termination of employment or retirement.
D.Expenses recorded with respect to employees' severance payments |
| Year ended December 31 | US$ thousands | |||
| 2018 | 1,665 | |||
| 2019 | 1,211 | |||
| 2020 and on | 226 | |||
F - 31
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 1112 - Shareholders' Equity
Capital and subsequent to an amendment byreserves
On May 2, 2019, the board in 2007 it covered up to 582,750 options. In August 2012, theCompany's Board of Directors increasedauthorized and began implementation of a one-year share repurchase plan to repurchase up to $15 million of the Company's ordinary shares. On April 30, 2020 the Company's Board of Directors authorized another one-year share repurchase plan allowing the Company to invest up to $15 million to repurchase its ordinary shares. This plan has began as the previously announced $15 million one-year share repurchase plan was completed. Repurchases may be made in the open market and will be in accordance with applicable securities laws and regulations. The timing and amount of each repurchase transaction may depend on a variety of factors. The share repurchase plan does not obligate the Company to acquire any specific number of the ordinary shares available for issuance under the 2004 Plan by an additional 500,000. All options areand may be suspended or terminated at a conversion rate of 1:1.
Share based compensation
A.On October 21, 2013 the Board resolved to adopt the Global Share Incentive Plan (2013) (the "2013 Plan") and to reserve up to 500,000 ordinary shares for issuance under the 2013 Plan to employees, directors, officers and consultants of the Company or of any subsidiary or affiliate of the Company. In January 2018, our Board approved the increase of the number of ordinary shares reserved for issuance under the 2013 Plan by 600,000 additional ordinary shares. Grants under the 2013 Plan, whether as options, restricted stock units, restricted stock or other equity based awards, including their terms, are subject to the Board of Directors' approval. Grants to directors and certain other officers are generally subject to the approvals of the Compensation Committee as well as Board of Directors, and grants to directors or a CEO (and under certain circumstances certain other officers) will also have to be approved by the Shareholders.
B.Options or RSUs granted to Israeli residents may be granted under Section 102 of the Israeli Income Tax Ordinance pursuant to which the awards of options, or the ordinary shares issued upon their exercise, must be deposited with a trustee for at least two years following the date of grant. Under Section 102, any tax payable by an employee from the grant or exercise of the awards is deferred until the transfer of the awards or ordinary shares by the trustee to the employee or upon the sale of the awards or ordinary shares.
Capital gains on awards granted under the plans are subjected to tax of 25% to be paid by the employee, and the Company is not entitled to a tax deduction.
Gains which are not capital gains on awards under the plans are subjected to regular tax rates on individuals, and the Company is entitled to a tax deduction for such gains.
F - 32
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 1112 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
C.During 2017 and 2020, the Company granted 78,000 and 86,000 RSUs respectively to certain of its directors, employees and consultants under the 2013 Plan. In relation to those grants:
1.The vesting period of the RSUs ranges between 2 to 3 years from the date of grant.
2.The fair value of RSUs is estimated based on the market value of the Company’s stock on the date of grant, less an estimate of dividends that will not accrue to RSUs holders prior to vesting.
3.The Company recognizes compensation expenses on these RSUs based on estimated grant date fair value, with the following assumptions:
2017 | 2020 | |||||||
Expected dividend yield | 2.68 | % | 0 | % | ||||
Termination rate | 1.74 | % | 1.58 | % | ||||
| 2014 | 2015 | |||||||
| Expected dividend yield | 2.06 | % | 3.22 | % | ||||
| Termination rate | 4.35 | % | 0 | % | ||||
F - 33
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 1112 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
D.On June 8, 2016, the Company granted, in the aggregate, 93,660 options to certain of its directors and employees under the 2013 Plan. In relation to this grant:
1.The exercise price for the options (per ordinary share) was US$ 28.38 and the Option expiration date was the earlier to occur of: (a) June 8, 2024; and (b) the closing price of the shares falling below US$ 14.19 at any time after the date of grant. The options vest and become exercisable on the second anniversary of the date of grant.
2.The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:
Average Risk-free interest rate (a) | 1.58 | % | ||
Expected dividend yield | 2.42 | % | ||
Average expected volatility (b) | 47.90 | % | ||
Termination rate | 9 | % | ||
Suboptimal factor(c) | 3.32 |
(a) | Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant. | |
(b) | Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market. | |
(c) | Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies. |
F - 34
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 1112 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
E.On January 30, 2017, the Company granted, in the aggregate, 119,925 options to certain of its directors and employees under the 2013 Plan. In relation to this grant:
1.The exercise price for the options (per ordinary share) was US$ 39.62 and the Option expiration date was the earlier to occur of: (a) January 30, 2025; and (b) the closing price of the shares falling below US$ 19.81 at any time after the date of grant. The options vest and become exercisable on the second anniversary of the date of grant.
2.The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:
Average Risk-free interest rate (a) | 2.35 | % | ||
Expected dividend yield | 2.42 | % | ||
Average expected volatility (b) | 43.71 | % | ||
Termination rate | 9 | % | ||
Suboptimal factor(c) | 3.28 |
(a) | Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant. | |
(b) | Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market. | |
(c) | Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies. |
F - 35
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 1112 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
F.On April 30, 2018, the Company granted, in the aggregate, 137,010 options to certain of its directors and employees under the 2013 Plan. In relation to this grant:
1.The exercise price for the options (per ordinary share) was US$ 36.11 and the Option expiration date was the earlier to occur of: (a) April 30, 2026; and (b) the closing price of the shares falling below US$ 18.06 at any time after the date of grant. The options vest and become exercisable on the second anniversary of the date of grant.
2.The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:
Average Risk-free interest rate (a) | 2.92 | % | ||
Expected dividend yield | 0.0 | % | ||
Average expected volatility (b) | 45.13 | % | ||
Termination rate | 9 | % | ||
Suboptimal factor (c) | 3.2 |
(a) | Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant. | |
(b) | Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market. | |
(c) | Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies. |
F - 36
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 1112 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
G.On January 31, 2019, the Company granted, in the aggregate, 141,928 options to certain of its directors and employees under the 2013 Plan. In relation to this grant:
1.The exercise price for the options (per ordinary share) was US$ 33.83 and the Option expiration date was the earlier to occur of: (a) January 31, 2027; and (b) the closing price of the shares falling below US$ 16.92 at any time after the date of grant. The options vest and become exercisable on the second anniversary of the date of grant.
2.The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:
Average Risk-free interest rate (a) | 2.55 | % | ||
Expected dividend yield | 0.0 | % | ||
Average expected volatility (b) | 44.62 | % | ||
Termination rate | 9 | % | ||
Suboptimal factor (c) | 3.18 |
(a) | Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant. |
(b) | Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market. |
(c) | Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company |
F - 37
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
| Options outstanding | Options exercisable | ||||||||||||||||
| Weighted average | Weighted average | ||||||||||||||||
| remaining | remaining | ||||||||||||||||
| Exercise price | Number | contractual life | Number | contractual life | |||||||||||||
| US$ | of options | (in years) | of options | (in years) | |||||||||||||
| 15.28 | 7,825 | 2.7 | 7,825 | 2.7 | |||||||||||||
| 26.91 | 19,582 | 5.6 | 19,582 | 5.6 | |||||||||||||
| 33.27 | 19,706 | 8.3 | 13,137 | 8.3 | |||||||||||||
| 28.38 | 88,124 | 6.4 | - | - | |||||||||||||
| 39.62 | 114,674 | 7.1 | - | - | |||||||||||||
| 249,911 | 40,544 | ||||||||||||||||
Note 12 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
H.On June 8, 2020, the Company granted, in the aggregate, 148,426 options to certain of its directors and employees under the 2013 Plan. In relation to this grant:
3.The aggregate intrinsic value ofexercise price for the options outstanding as of December 31, 2016(per ordinary share) was US$ 32.54 and 2017 is US$ 4,283 thousandthe Option expiration date was the earlier to occur of: (a) June 8, 2028; and US$ 9,175 thousand, respectively.
4.The Company recognizes compensation expenses on these options based on estimated grant is zero.date fair value using the Binomial option-pricing model with the following assumptions:
Average Risk-free interest rate (a) | 0.75 | % | ||
Expected dividend yield | 0.0 | % | ||
Average expected volatility (b) | 45.29 | % | ||
Termination rate | 9 | % | ||
Suboptimal factor (c) | 3.16 |
(a) | Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant. |
(b) | Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market. |
(c) | Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies. |
F - 38
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 12 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
I.The following table summarizes information regarding stock options as at December 31, 2020:
Options outstanding | Options exercisable | ||||||||||||||||
Weighted average | Weighted average | ||||||||||||||||
remaining | remaining | ||||||||||||||||
Exercise price | Number | contractual life | Number | contractual life | |||||||||||||
US$ | of options | (in years) | of options | (in years) | |||||||||||||
| |||||||||||||||||
26.91 | 19,332 | 2.6 | 19,332 | 2.6 | |||||||||||||
| |||||||||||||||||
33.27 | 19,706 | 5.3 | 19,706 | 5.3 | |||||||||||||
| |||||||||||||||||
28.38 | 68,649 | 3.4 | 68,649 | 3.4 | |||||||||||||
| |||||||||||||||||
39.62 | 101,004 | 4.1 | 101,004 | 4.1 | |||||||||||||
| |||||||||||||||||
36.11 | 114,090 | 5.3 | 114,090 | 5.3 | |||||||||||||
| |||||||||||||||||
33.83 | 125,674 | 6.1 | 0- | - | |||||||||||||
| |||||||||||||||||
32.54 | 141,592 | 7.4 | 0- | - | |||||||||||||
| |||||||||||||||||
590,047 | 322,781 | ||||||||||||||||
The aggregate intrinsic value of options outstanding as of December 31, 2019 and 2020 is US$ 593 thousand and US$ 4,589 thousand, respectively. | |||||||||||
The aggregate intrinsic value of options exercisable as of December 31, 2019 and 2020 is US$ 593 thousand and US$ 2,263 thousand, respectively. | |||||||||||
The |
| Weighted | ||||||||||||
| Weighted | average | |||||||||||
| Number | average | grant date | ||||||||||
| of options | exercise price | fair value | ||||||||||
| US$ | US$ | |||||||||||
| Balance at January 1, 2015 | 192,130 | |||||||||||
| Granted | 89,907 | 26.91 | 10.04 | |||||||||
| Exercised | (61,711 | ) | 15.28 | 6.54 | ||||||||
| Forfeited | (5,625 | ) | 24.07 | 9.19 | ||||||||
| Balance at December 31, 2015 | 214,701 | |||||||||||
| Granted* | 116,455 | 29.34 | 10.96 | |||||||||
| Exercised | (62,269 | ) | 15.28 | 6.54 | ||||||||
| Forfeited | (2,882 | ) | 29.71 | 11.79 | ||||||||
| Balance at December 31, 2016 | 266,005 | |||||||||||
| Granted | 119,925 | 39.62 | 11.89 | |||||||||
| Exercised | (124,918 | ) | 21.46 | 8.46 | ||||||||
| Forfeited | (11,101 | ) | 33.18 | 10.87 | ||||||||
| Balance at December 31, 2017 | 249,911 | |||||||||||
| Exercisable at December 31, 2017 | 40,544 | |||||||||||
| US$ 28 thousand and US$ 240 thousand, respectively. | ||||||||||||
F���- 39
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 12 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
J.The stock option activity under the abovementioned plans is as follows:
Number of options | Weighted average exercise price | Weighted average grant date fair value | ||||||||||
US$ | US$ |
| ||||||||||
| ||||||||||||
Balance at January 1, 2018 | 249,911 | |||||||||||
| ||||||||||||
Granted | 137,010 | 36.11 | 14.71 | |||||||||
Exercised | (9,674 | ) | 28.02 | 9.94 | ||||||||
Forfeited | (11,752 | ) | 36.73 | 13.05 | ||||||||
| ||||||||||||
Balance at December 31, 2018 | 365,495 | |||||||||||
| ||||||||||||
Granted | 141,928 | 33.83 | 13.35 | |||||||||
Exercised | (5,500 | ) | 28.09 | 10.03 | ||||||||
Forfeited | (36,676 | ) | 35.88 | 13.50 | ||||||||
| ||||||||||||
Balance at December 31, 2019 | 465,247 | |||||||||||
| ||||||||||||
Granted | 148,426 | 32.54 | 14.82 | |||||||||
Exercised | (12,357 | ) | 22.38 | 8.63 | ||||||||
Forfeited | (11,269 | ) | 33.93 | 14.56 | ||||||||
| ||||||||||||
Balance at December 31, 2020 | 590,047 | |||||||||||
Exercisable at December 31, 2020 | 322,781 | |||||||||||
F - 40
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 12 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
K.The Restricted Share Units activity under the abovementioned plans is as follows:
Number of Restricted Share Units | Weighted average grant date fair value | |||||||
US$ | ||||||||
| ||||||||
Balance at January 1, 2018 and December 31, 2018 | 78,000 | |||||||
| ||||||||
Vested | (39,000 | ) | 35.36 | |||||
| ||||||||
Balance at December 31, 2019 | 39,000 | |||||||
| ||||||||
Granted | 86,000 | 35.33 | ||||||
Vested | (39,000 | ) | 34.43 | |||||
| ||||||||
Balance at December 31, 2020 | 86,000 | |||||||
| Weighted | ||||||||
| Number of | average | |||||||
| Restricted | grant date | |||||||
| Share Units | fair value | |||||||
| US$ | US$ | |||||||
| Balance at January 1, 2015 | 74,000 | |||||||
| Granted | 8,000 | 29.09 | ||||||
| Vested | (4,000 | ) | 46.07 | |||||
| Balance at December 31, 2015 | 78,000 | |||||||
| Vested | (35,000 | ) | 46.54 | |||||
| Balance at December 31, 2016 | 43,000 | |||||||
| Granted | 78,000 | 34.90 | ||||||
| Vested | (43,000 | ) | 42.52 | |||||
| Balance at December 31, 2017 | 78,000 | |||||||
The aggregate intrinsic value of RSUs outstanding as of December 31, 20162019 and December 31, 20172020 is US$ 1,7671,297 thousand and US$ 5,4693,599 thousand, respectively.
F - 41
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 12 - Shareholders' Equity (cont'd)
Share based compensation (cont'd)
L.During 2018, 2019 and 2020, the Company recorded share-based compensation expenses. The following summarizes the allocation of the stock-based compensation expenses:
Year ended December 31 | ||||||||||||
2018 | 2019 | 2020 | ||||||||||
US$ thousands | ||||||||||||
| ||||||||||||
Cost of sales | 372 | 437 | 535 | |||||||||
Research and development costs | 953 | 900 | 959 | |||||||||
Selling and marketing expenses | 569 | 493 | 602 | |||||||||
General and administrative expenses | 530 | 525 | 615 | |||||||||
| ||||||||||||
2,424 | 2,355 | 2,711 | ||||||||||
| Year ended December 31 | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| US$ thousands | US$ thousands | US$ thousands | ||||||||||
| Cost of sales | 150 | 180 | 320 | |||||||||
| Research and development costs | 455 | 504 | 832 | |||||||||
| Selling and marketing expenses | 502 | 366 | 537 | |||||||||
| General and administrative expenses | 806 | 500 | 736 | |||||||||
| 1,913 | 1,550 | 2,425 | ||||||||||
As of December 31, 2017,2020, there were US$ 2,4203,616 thousand of unrecognized compensation costs related to outstanding stock options and RSUs to be recognized over a weighted average period of 1.361.73 years.
The total tax benefit recognized in the consolidated statements of operations related to share based compensation expenses amounted to US$ 21667 thousand for the year ended December 31, 2017.
F - 42
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 13 - Geographic areas and major customers
A.Information on sales by geographic distribution:
The Company has one operating segment.
Sales are attributed to geographic distribution based on the location of the customer.
Year ended December 31 | ||||||||||||
2018 | 2019 | 2020 | ||||||||||
US$ thousands | ||||||||||||
| ||||||||||||
North America | 108,024 | 77,161 | 65,142 | |||||||||
Europe | 21,038 | 20,956 | 35,570 | |||||||||
Asia-Pacific | 4,691 | 7,123 | 6,686 | |||||||||
| ||||||||||||
133,753 | 105,240 | 107,398 | ||||||||||
B.Sales to single customers exceeding 10% of sales (US$ thousands):
Year ended December 31 | ||||||||||||
2018 | 2019 | 2020 | ||||||||||
US$ thousands | ||||||||||||
| ||||||||||||
Customer "A" | 305 | 2,428 | 13,468 | |||||||||
Customer "B" | 0- | 0- | 13,328 | |||||||||
Customer "C" | 18,855 | 17,107 | 12,278 | |||||||||
Customer "D" | 14,506 | 11,030 | 4,225 | |||||||||
Customer "E" | 14,220 | 121 | 44 | |||||||||
F - 43
| Year ended December 31 | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| US$ thousands | ||||||||||||
| North America | 54,537 | 65,590 | 100,434 | |||||||||
| Europe | 16,331 | 24,208 | 20,156 | |||||||||
| Asia-Pacific | 11,870 | 10,549 | 5,100 | |||||||||
| 82,738 | 100,347 | 125,690 | ||||||||||
| Year ended December 31 | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| US$ thousands | ||||||||||||
| Customer "A" | * | * | 25,888 | |||||||||
| Customer "B" | 16,320 | 17,366 | 16,915 | |||||||||
| Customer "C" | * | 11,628 | * | |||||||||
| Year ended December 31 | ||||||||
| 2016 | 2017 | |||||||
| Percentage | ||||||||
| Customer 1 | * | 30 | % | |||||
| Customer 2 | * | 22 | % | |||||
| Customer 3 | 11 | % | 10 | % | ||||
| Customer 4 | 11 | % | * | |||||
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 13 - Geographic areas and major customers (cont'd)
C.Information on Long-Lived Assets - Property, Plant and Equipment and ROU assets by geographic areas:
The following table presents the locations of the Company’s long-lived assets as of December 31, 2019 and 2020:
Year ended December 31 |
| |||||||
2019 | 2020 | |||||||
US$ thousands | ||||||||
| ||||||||
North America | 1,189 | 1,081 | ||||||
Europe | 198 | 189 | ||||||
Israel | 5,970 | 12,753 | ||||||
| ||||||||
7,357 | 14,023 | |||||||
F - 44
| Year ended December 31 | ||||||||
| 2016 | 2017 | |||||||
| US$ thousands | ||||||||
| North America | 16 | 20 | ||||||
| Europe | 76 | 225 | ||||||
| Israel | 3,823 | 3,876 | ||||||
| 3,915 | 4,121 | |||||||
| Year ended December 31 | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| US$ thousands | ||||||||||||
| Interest income | 1,026 | 751 | 527 | |||||||||
| Discount on marketable securities, net | (561 | ) | (358 | ) | (217 | ) | ||||||
| Exchange rate differences, net | (148 | ) | (236 | ) | (45 | ) | ||||||
| Bank charges | (97 | ) | (122 | ) | (109 | ) | ||||||
| 220 | 35 | 156 | ||||||||||
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 14 - Financial Income (Expenses), Net
Year ended December 31 | ||||||||||||
2018 | 2019 | 2020 | ||||||||||
US$ thousands | ||||||||||||
| ||||||||||||
Interest income | 840 | 2,295 | 2,197 | |||||||||
Discount on marketable securities, net | (32 | ) | (144 | ) | (244 | ) | ||||||
Exchange rate differences, net | 208 | (357 | ) | (748 | ) | |||||||
Bank charges | (93 | ) | (148 | ) | (171 | ) | ||||||
| ||||||||||||
923 | 1,646 | 1,034 | ||||||||||
F - 45
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 15 - Taxes on Income
A.Measurement of results for tax purposes under the Israeli Income Tax Regulations (Rules for Maintaining Accounting Records of Foreign Invested Companies and Certain Partnerships and Determining Their Taxable Income) - 1986
As a "foreign invested company" (as defined in the Israeli Law for the Encouragement of Capital Investments-1959), the Company's taxable income or loss is calculatedand the tax basis of assets and liabilities of the Company’s Israeli operations are denominated in US Dollars.
B.Corporate tax rate in Israel
The regular corporate tax rate applied to taxable income of Israeli companies is subject to tax at the rate of 26.5% in 2014 and 2015, and in January 2016, the regular tax rate in Israel was reduced to 25% as from 2016 and thereafter.
C.Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter - the "Law")
1.On December 29, 2010 the Knesset approved the Economic Policy Law for 2011-2012, which includes an amendment to the Law for the Encouragement of Capital Investments – 1959 (hereinafter – "the Amendment to the Law"). The Amendment to the Law is effective from January 1, 2011 and thereafter.
Companies can choose to not be included in the scope of the Amendment to the Law and to stay in the scope of the law before its amendment until the end of the benefits period.
Under the Amendment to the Law, which the Company started applying in 2014, upon an irrevocable election made by a company, a uniform corporate tax rate will apply to all preferred income of such company. UnderThe Company elected to apply the law, when the election is made,uniform corporate tax rate as of 2014. From 2017 onwards, the uniform tax rate (for 2014 and on) willis to be 9%7.5% in areas in Israel designated as Development Zone A and 16% elsewhere in Israel. The company has two facilities in Israel of which one of them is located in Development Zone A. The profits of these Preferred Companies will be freely distributable as dividends, subject to a withholding tax of 20%.
Should the Company derive income from sources other than the "Preferred Enterprise" during the relevant period of benefits,Preferred Company, such income will be taxable at the regular corporate tax rates for the applicable year.
F - 46
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 15 - Taxes on Income (cont’d)
C.Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter - the "Law") (cont'd)
On December 29, 2016 the Israeli Parliament (the "Knesset") enacted the "Economic Efficiency Law (Legislative Amendments for Achieving Budget Objectives in the Years 2017 and 2018) – 2016" in which the Law was also amended (hereinafter: “the Amendment”). The Amendment added new tax benefit tracks for a “preferred technological enterprise” and a “special preferred technological enterprise” which award reduced tax rates to a technological industrial enterprise for the purpose of encouraging activity relating to the development of qualifying intangible assets.
The benefits will be awarded to a “preferred company” that has a “preferred technological enterprise” or a “special preferred technological enterprise” with respect to taxable “preferred technological income” per its definition in the Law.
Preferred technological income that meets the conditions required in the law, will be subject to a reduced corporate tax rate of 12%, and if the preferred technological enterprise is located in "Development Area A" in Israel - to a reduced tax rate of 7.5%. A company that owns a special preferred technological enterprise will be subject to a reduced corporate tax rate of 6% regardless of the development area in which the enterprise is located. The Amendment is effective as from January 1, 2017.
On June 14, 2017 the Knesset Finance Committee approved "Encouragement of Capital Investment Regulations (Preferred Technological Income and Capital Gain of Technological Enterprise) – 2017" (hereinafter: “the Regulations”), which provides rules for applying the “preferred technological enterprise” and “special preferred technological enterprise” tax benefit tracks, including the Nexus formula that provides the mechanism for allocating the technological income eligible for the benefits.
Should the Company derive income from sources other than the “preferred technological enterprise”, such income will be taxable at the "Preferred Company" tax rate (for manufacturing activity in Israel) or regular corporate tax rates for the applicable year.
As a result of the aforesaid legislation, starting 2021 the Company is expected to implement the “preferred technological enterprise” tax benefit track; however, the transition to this tax benefit track is not expected to significantly change the Company's effective tax rate and the deferred tax liabilities and deferred tax assets that were recognized.
F - 47
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 15 - Taxes on Income (cont’d)
C.Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter - the "Law") (cont'd)
2.In the event of distribution by the Company of dividends out of its retained earnings that were generated prior to the 2014 tax year and were tax exempt under the "Approved Enterprise" or "Benefited Enterprise" status, the Company would be subjected to a maximum of 25% corporate tax on the amount distributed, and a further 15% withholding tax would be deducted from the amounts distributed to the shareholders.
Out of the Company’s retained earnings as of December 31, 2016 and 2017,2020, approximately US$ 45,40554,303 thousand and US$ 50,356 thousand respectively are tax-exempt, due tounder our previous "Approved Enterprise" and "Benefited Enterprise" status. If such tax-exempt income is distributed by cashas a dividend (including a liquidation dividend), it would be taxed at the reducedregular corporate tax rate applicable to such profits (up(subject to a maximum rate of 25%) and an income tax liability of up to approximately US$ 11,351 thousand and US$ 12,58913,576 thousand would be incurred as of December 31, 2016 and 2017, respectively.2020. The Company anticipates that any future dividends distributed pursuant to its dividend policy, will be distributed from income sources which will not impose additional tax liabilities on the Company. The Company intends to reinvest the amount of its tax-exempt income. Accordingly, no deferred income taxes havetax liability has been provided onrecognized for income attributable to the Company’s previous "Approved Enterprise" or "Benefited Enterprise". status. If the Company was to declare a dividend from its tax-exempt income, an income tax expense would be recognized in the period a dividend is declared.
F - 48
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 1415 - Taxes on Income (cont’d)
D.Taxation of the subsidiaries
1.The subsidiary Silicom Inc. files tax returns with US federal tax authorities and with state tax authorities in the states of New Jersey, California, Virginia, New York, New Mexico, Tennessee, Texas and Illinois. The |
2.The subsidiary Silicom Denmark is taxed according to 21% effective January 1, 2018.
3.The Company has not provided for Israeli income and foreign withholding taxes on US$ 8,702 thousand of its non-Israeli subsidiaries' undistributed earnings as of December 31, 2020. The earnings could become subject to tax if earnings are remitted or deemed remitted as dividends or upon sale of a subsidiary.
The Company currently has no plans to repatriate those funds and intends to indefinitely reinvest them in its non-Israeli operations. The unrecognized deferred tax liability associated with these temporary differences was approximately US$ 4451,188 thousand at December 31, 2017.
4.As of December 31, 2020, the net operating loss carry-forwards of the Companys’ subsidiaries for tax purposes amounted to approximately US$ 300 thousand. These losses are available to offset any future taxable income.
E.Tax assessments
1.For the Israeli jurisdiction the Company has final tax assessments for all years up to and including the tax year ended December 31, 2012.
2.For the US Federal jurisdictions,federal jurisdiction, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2013.2016. For the New Jersey and California state jurisdictions, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2012.2015. For the Virginia, Tennessee, New York and New Mexico state jurisdictions, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2017. For the Texas state jurisdiction, Silicom Inc. has open tax assessments for the years 20152018 through 2017.2020. For the TennesseeIllinois state jurisdiction, Silicom Inc. has open tax assessments for the years 2016 through 2017. For the New Mexico, New York and Texas state jurisdictions, Silicom Inc. has open tax assessmentsassessment for the year 2017.
3.For the Danish jurisdiction, Silicom Denmark has final tax assessments for all years up to and including the tax year ended AugustDecember 31, 2013.
F - 49
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 15 - Taxes on Income (cont’d)
F.Income before income taxes and income taxes expense (benefit) included in the consolidated statements of operations
Year ended December 31 | ||||||||||||
2018 | 2019 | 2020 | ||||||||||
US$ thousands | ||||||||||||
| ||||||||||||
Income before income taxes: | ||||||||||||
Israel | 14,703 | 9,339 | 5,565 | |||||||||
Foreign jurisdictions | 2,871 | 2,520 | 1,717 | |||||||||
17,574 | 11,859 | 7,282 | ||||||||||
| ||||||||||||
Current taxes: | ||||||||||||
Israel | 2,400 | 1,732 | 1,260 | |||||||||
Foreign jurisdictions | 831 | 611 | 506 | |||||||||
3,231 | 2,343 | 1,766 | ||||||||||
| ||||||||||||
Current tax (benefits) expenses relating to prior years: | ||||||||||||
Israel | (73 | ) | (17 | ) | 50 | |||||||
Foreign jurisdictions | (226 | ) | (4 | ) | (198 | ) | ||||||
(299 | ) | (21 | ) | (148 | ) | |||||||
| ||||||||||||
Deferred taxes: | ||||||||||||
Israel | (106 | ) | (904 | ) | 8 | |||||||
Foreign jurisdictions | 111 | 205 | (69 | ) | ||||||||
5 | (699 | ) | (61 | ) | ||||||||
| ||||||||||||
Income tax expense | 2,937 | 1,623 | 1,557 | |||||||||
F - 50
| Year ended December 31 | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| US$ thousands | ||||||||||||
Income (loss) before income taxes: | ||||||||||||
| Israel | 19,486 | 15,541 | 23,226 | |||||||||
| Foreign jurisdiction | (1,061 | ) | 324 | 2,356 | ||||||||
| 18,425 | 15,865 | 25,582 | ||||||||||
Current taxes: | ||||||||||||
| Israel | 2,383 | 2,242 | 2,379 | |||||||||
| Foreign jurisdiction | 465 | 720 | 1,095 | |||||||||
| 2,848 | 2,962 | 3,474 | ||||||||||
Current tax (benefits) expenses relating to prior years: | ||||||||||||
| Israel | - | 26 | 12 | |||||||||
| Foreign jurisdiction | (36 | ) | - | (71 | ) | |||||||
| (36 | ) | 26 | (59 | ) | ||||||||
Deferred taxes: | ||||||||||||
| Israel | (437 | ) | 10 | 549 | ||||||||
| Foreign jurisdiction | (470 | ) | (270 | ) | (96 | ) | ||||||
| (907 | ) | (260 | ) | 453 | ||||||||
| Income tax expense | 1,905 | 2,728 | 3,868 | |||||||||
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 1415 - Taxes on Income (cont’d)
G.Deferred income taxes
The tax effects of significant items comprising the Company’s deferred tax assets and liabilities are as follows:
December 31 | December 31 | |||||||
2019 | 2020 | |||||||
US$ thousands | US$ thousands | |||||||
| ||||||||
Deferred tax assets: | ||||||||
Accrued employee benefits | 327 | 368 | ||||||
Research and development costs | 1,597 | 1,859 | ||||||
Operating loss carryforwards | 196 | 66 | ||||||
Property, plant and equipment | 31 | 0- | ||||||
Share based compensation | 374 | 365 | ||||||
Intangible assets | 347 | 287 | ||||||
Operating lease liabilities | 0- | 1,121 | ||||||
Other | 0- | 1 | ||||||
Total deferred tax assets | 2,872 | 4,067 | ||||||
| ||||||||
Deferred tax liabilities: | ||||||||
Intangible assets | (397 | ) | (203 | ) | ||||
Goodwill | (879 | ) | (1,089 | ) | ||||
Operating leases right-of-use, net | 0- | (1,100 | ) | |||||
Other | (3 | ) | (21 | ) | ||||
Total deferred tax liabilities | (1,279 | ) | (2,413 | ) | ||||
| ||||||||
Net deferred tax assets | 1,593 | 1,654 | ||||||
| ||||||||
In Israel | 1,798 | 1,790 | ||||||
Foreign jurisdictions | (205 | ) | (136 | ) | ||||
Net deferred tax assets | 1,593 | 1,654 | ||||||
| ||||||||
Non-current deferred tax assets | 1,798 | 1,790 | ||||||
Non-current deferred tax liabilities | (205 | ) | (136 | ) | ||||
F - 51
| December 31 | December 31 | |||||||
| 2016 | 2017 | |||||||
| US$ thousands | US$ thousands | |||||||
| Deferred tax assets: | ||||||||
| Accrued employee benefits | 261 | 282 | ||||||
| Research and development costs | 921 | 846 | ||||||
| Tax loss carryforwards | 338 | 111 | ||||||
| PPE | 15 | 15 | ||||||
| Share based compensation | 246 | 213 | ||||||
| Intangible assets | 107 | 110 | ||||||
| Other | 2 | 2 | ||||||
| Total gross deferred tax assets | 1,890 | 1,579 | ||||||
| Deferred tax liabilities: | ||||||||
| Intangible assets | (138 | ) | - | |||||
| Goodwill | (215 | ) | (680 | ) | ||||
| Total gross deferred tax liabilities | (353 | ) | (680 | ) | ||||
| Net deferred tax assets | 1,537 | 899 | ||||||
| In Israel | 1,338 | 788 | ||||||
| Foreign jurisdictions | 199 | 111 | ||||||
| Net deferred tax assets | 1,537 | 899 | ||||||
| Non-current deferred tax assets | 1,537 | 899 | ||||||
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 15 - Taxes on Income (cont’d)
H.Reconciliation of the statutory tax expense to actual tax expense
Year ended December 31 | ||||||||||||
2018 | 2019 | 2020 | ||||||||||
US$ thousands | ||||||||||||
| ||||||||||||
Income before income taxes | 17,574 | 11,859 | 7,282 | |||||||||
Statutory tax rate in Israel | 23.0 | % | 23.0 | % | 23.0 | % | ||||||
4,042 | 2,728 | 1,675 | ||||||||||
| ||||||||||||
Increase (decrease) in taxes resulting from: | ||||||||||||
Non-deductible operating expenses | 295 | 417 | 508 | |||||||||
Prior years adjustments | (299 | ) | (21 | ) | (148 | ) | ||||||
Tax effect due to | ||||||||||||
"Preferred Enterprise" status* | (1,398 | ) | (1,099 | ) | (714 | ) | ||||||
Statutory rate differential | 176 | 18 | 105 | |||||||||
Changes in tax rate | 0- | 7 | 181 | |||||||||
Creation of deferred taxes for tax losses and benefits from previous years for which deferred taxes were not created in the past | 0- | (476 | ) | 0- | ||||||||
Other | 121 | 49 | (50 | ) | ||||||||
| ||||||||||||
Income tax expense | 2,937 | 1,623 | 1,557 | |||||||||
* | The effect of the |
Year ended December 31 | ||||||||||||
2018 | 2019 | 2020 | ||||||||||
| ||||||||||||
Basic | 0.19 | 0.15 | 0.10 | |||||||||
| ||||||||||||
Diluted | 0.18 | 0.15 | 0.10 | |||||||||
| Year ended December 31 | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| US$ thousands | ||||||||||||
| Income before income taxes | 18,425 | 15,865 | 25,582 | |||||||||
| Statutory tax rate in Israel | 26.5 | % | 25.0 | % | 24.0 | % | ||||||
| 4,883 | 3,966 | 6,140 | ||||||||||
| Increase (decrease) in taxes resulting from: | ||||||||||||
| Non-deductible operating expenses, net | 209 | 228 | 364 | |||||||||
| Non-taxable income | (819 | ) | (84 | ) | (1,114 | ) | ||||||
| Prior year adjustments | (36 | ) | 26 | (59 | ) | |||||||
| Tax effect due to | ||||||||||||
| "Preferred Enterprise" status* | (2,368 | ) | (1,924 | ) | (2,361 | ) | ||||||
| Taxes related to foreign jurisdictions | 250 | 324 | 632 | |||||||||
| Changes in tax rate | 35 | 94 | 162 | |||||||||
| Creation of deferred taxes for tax losses and benefits from previous years for which deferred taxes were not created in the past | (252 | ) | - | - | ||||||||
| Other | 3 | 98 | 104 | |||||||||
| Income tax expense | 1,905 | 2,728 | 3,868 | |||||||||
| * The effect of the benefit resulting from the "Preferred Enterprise" status on net earnings per ordinary share is as follows: | ||||||||||||
| Year ended December 31 | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Basic | 0.33 | 0.26 | 0.32 | |||||||||
| Diluted | 0.32 | 0.26 | 0.31 | |||||||||
F - 52
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 1415 - Taxes on Income (cont’d)
I.Accounting for uncertainty in income taxes
The accounting literature clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This standard prescribesThe standards prescribe a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position.
During 2015, 20162018, 2019 and 20172020 the Company and its subsidiaries did not have any significant unrecognized tax benefits and thus, no related interest and penalties were accrued.
In addition, the Company and its subsidiaries do not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months.
F - 53
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
Note 16 - Subsequent Events
(1)In January 2021, the Company’s compensation committee and board of directors, respectively, have approved the grant of a total of 137,759 options under the Global Share Incentive Plan (2013), of which options granted to directors and office holders are subject to the approval of the Annual General Meeting, which is currently scheduled to convene no later than June 2021, as prescribed under the Israeli Companies Law, 1999 and the Company's Amended and Restated Articles of Association.
(2)Pursuant to the share repurchase plan approved on April 30, 2020, the Company has purchased 49,555 shares of the Company's ordinary shares subsequent to December 31, 2020 and through March 5, 2021 for a total cost of US$ 2,257 thousand inclusive of transaction costs.
F - 54