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, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-30668
NOVA MEASURING INSTRUMENTS LTD.
(Exact name of Registrant as specified in its charter)
Nova | Israel |
(Translation of Registrant’s name into English) | (Jurisdiction of incorporation or organization) |
(Address of principal executive offices)
Dror David, +972-73-2295833, +972-8-9407776, P.O.B 266, Rehovot 7610201,7632805, Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of the Registrant’s Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Ordinary Shares | NVMI | The Nasdaq Global Select Market |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 27,917,50528,579,044 ordinary shares, NIS 0.01 nominal (par) value per share, as of December 31, 2018.2021.
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 ☒
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,, or an emerging growth company. See definition of “accelerated filer and large accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ ☒ Accelerated filer ☒☐ Non-accelerated filer ☐
Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant has filed a report on the 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 ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒
International Financing 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 ☒
TABLE OF CONTENTS
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- i -
In this annual report (this “Annual Report the “Company””), references to “we,” “us,” “our,” “our business,” “the Company,” “Nova”, “we” or “our” refers and similar references refer to Nova Measuring Instruments Ltd. and, where appropriate, its consolidated subsidiaries, when the context requires.subsidiaries.
This annual report contains estimates, projections and other information concerning our industry and our business, as well as data regarding market research, estimates and forecasts prepared by our management. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those discussed under the headings “Special Note Regarding Forward-Looking Statements” and Item 3.D. “Risk Factors” in this Annual Report.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains estimates and forward-looking statements, principally in the sections entitled Item 3.D. “Key Information—Risk Factors,” Item 4. “Information on the Company,” and Item 5. “Operating and Financial Review and Prospects.” In some cases, these forward-looking statements can be identified by words or phrases such as “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “seek,” “believe,” “estimate,” “predict,” “potential,” “continue,” “contemplate,” “possible” or similar words. Statements regarding our future results of operations and financial position, growth strategy and plans and objectives of management for future operations, including, among others, expansion in new and existing markets, are forward-looking statements.
Our Functional Currencyestimates and forward-looking statements are mainly based on our current expectations and estimates of future events and trends which affect or may affect our business, operations and industry. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to numerous risks and uncertainties.
These forward-looking statements are subject to a number of known and unknown risks, uncertainties, other factors and assumptions, including the risks described in Item 3.D “Key Information—Risk Factors” and elsewhere in this Annual Report, regarding, among other things:
Our estimates and forward-looking statements may be influenced by factors including:
Our business could be disrupted by catastrophic events, such as the outbreak of COVID-19.
Increased information technology security threats and more sophisticated computer crime could disrupt our business.
We are dependent on international sales, which expose us to foreign political and economic risks that could impede our plans for expansion and growth.
Changes in Global trade policies and other factors beyond our control may adversely impact our business, financial condition and results of operations.
- ii -
Because of the technical nature of our business, our intellectual property is extremely important to our business, and our inability to protect our intellectual property or our involvement in related litigation could harm our competitive position.
We may incorporate open source technology in some of our software and products, which may expose us to liability and have a material impact on our product development and sales.
We operate in an extremely competitive market, and if we fail to compete effectively or to respond to the rapid technological changes, our revenues and market share will decline.
The ongoing consolidation in our industry may harm us if our competitors are able to offer a broader range of products and greater customer support than we can offer.
The markets we target are cyclical and it is difficult to predict the length and strength of any downturn or expansion period.
Our operations may be delayed or interrupted, and our business could suffer if we violate environmental, safety and health, or ESH, regulations
Because most of our current sales are dependent on few specific product lines, factors that adversely affect the pricing and demand for these product lines could reduce our sales.
We depend on a small number of large customers, and the loss of one or more of them could significantly lower our revenues.
There can be no assurance that revenues from future products or product enhancements will be sufficient to recover the development costs or to ensure the sale of related inventory.
New product lines that we may introduce in the future may contain defects, which will require us to allocate time and financial resources to correct.
Our dependence on a single manufacturing facility per product line magnifies the risk of an interruption in our production capabilities.
We may not be successful in our efforts to complete and integrate current and/or future acquisitions, which could disrupt our current business activities and adversely affect our results of operations or future growth.
We depend on a limited number of suppliers, and in some cases a sole supplier. Any disruption, delay or termination of these supply channels may adversely affect our ability to manufacture our products and to deliver them to our customers.
Our operations may be disrupted by loss of key personnel or failure to attract, recruit, retain and develop qualified employees due to intense competition for highly skilled personnel.
Our lengthy sales cycle increases our exposure to customer delays in orders, which may result in obsolete inventory and volatile quarterly revenues.
Political, economic, and military instability in Israel may impede our ability to operate and harm our financial results.
Our convertible senior notes may impact our financial results, result in the dilution of existing shareholders, create downward pressure on the price of our ordinary shares, and restrict our ability to take advantage of future opportunities. We may not have the ability to raise the funds necessary to settle conversions, and the accounting method for the Convertible Notes could adversely affect our reported financial condition and results
Our profit margin may be seriously harmed by currency fluctuations.
We participate in government programs under which we receive research and development grants. Some of these programs impose restrictions on our ability to use the technologies developed under these programs. The reduction or termination of these programs would increase our costs.
We experience quarterly fluctuations in our operating results, which may adversely impact our share price.
Our investment portfolio may be adversely affected by market conditions and interest rates.
- iii -
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk factors” and elsewhere in this Annual Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Annual Report. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements made in this Annual Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Annual Report to reflect events or circumstances after the date of this Annual Report or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.
OUR FUNCTIONAL CURRENCY
Unless otherwise indicated, all amounts herein are expressed in United States dollars (“U.S. dollars”, “dollars”, “USD”, “US$” or “$”).
The currency of the primary economic environment in which we operate is the U.S. dollar, since substantially all our revenues to date have been denominated in U.S. dollars and over 50% of our expenses are in U.S. dollars or in New Israeli Shekels linked to the dollar. Transactions and balances denominated in dollars are presented at their original amounts. Non-dollar transactions and balances have been re-measured into dollars as required by the principles in ASC 830 Foreign Currency Matters. All exchange gains and losses from such re-measurement are included in the net financial income when they arise.
- iiiv -
Item 1. Identity of Directors, Senior Management and Advisors
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
3A.Selected Financial Data
[Reserved]
3B.Capitalization and Indebtedness
| Year ended December 31, | ||||||||||||||||||||
| 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||
| Consolidated Statement of Operations Data: | ||||||||||||||||||||
| Revenues | $ | 120,618 | $ | 148,514 | $ | 163,903 | $ | 221,992 | $ | 251,134 | ||||||||||
| Cost of revenues | 57,005 | 71,434 | 88,623 | 90,805 | 105,900 | |||||||||||||||
| Gross profit | 63,613 | 77,080 | 75,280 | 131,187 | 145,234 | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Research and development expenses, net | 29,498 | 39,703 | 34,998 | 38,956 | 45,451 | |||||||||||||||
| Sales and marketing expenses | 12,747 | 15,967 | 21,523 | 24,554 | 28,847 | |||||||||||||||
| General and administrative expenses | 4,457 | 8,511 | 6,835 | 8,100 | 8,735 | |||||||||||||||
| Amortization of intangible assets | 1,318 | 1,758 | 1,758 | 1,759 | ||||||||||||||||
| Total operating expenses | 46,702 | 65,499 | 65,114 | 73,368 | 84,792 | |||||||||||||||
| Operating profit | 16,911 | 11,581 | 10,166 | 57,819 | 60,442 | |||||||||||||||
| Financing income, net | 563 | 643 | 1,216 | 2,276 | 2,984 | |||||||||||||||
| Income before income taxes | 17,474 | 12,224 | 11,382 | 60,095 | 63,426 | |||||||||||||||
| Income taxes expenses (benefit) | (1,178 | ) | (3,501 | ) | 1,738 | 13,636 | 9,051 | |||||||||||||
| Net income for the year | $ | 18,652 | $ | 15,725 | $ | 9,644 | $ | 46,459 | $ | 54,375 | ||||||||||
| Earnings per share: | ||||||||||||||||||||
| Basic | $ | 0.68 | $ | 0.58 | $ | 0.35 | $ | 1.68 | $ | 1.94 | ||||||||||
| Diluted | $ | 0.67 | $ | 0.57 | $ | 0.35 | $ | 1.63 | $ | 1.89 | ||||||||||
| Shares used in calculation of net earnings per share: | ||||||||||||||||||||
| Basic | 27,447 | 27,185 | 27,175 | 27,696 | 28,022 | |||||||||||||||
| Diluted | 27,807 | 27,510 | 27,503 | 28,524 | 28,765 | |||||||||||||||
| December 31, | ||||||||||||||||||||
| 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Consolidated Balance Sheet Data: | ||||||||||||||||||||
| Working capital | $ | 130,480 | $ | 112,819 | $ | 128,872 | $ | 179,782 | $ | 233,499 | ||||||||||
| Total assets | 173,279 | 207,269 | 218,593 | 283,285 | 333,430 | |||||||||||||||
| Capital stock (including additional paid-in capital) | 119,058 | 113,022 | 117,102 | 122,500 | 122,386 | |||||||||||||||
| Shareholders’ equity | 143,582 | 161,060 | 174,717 | 226,736 | 280,740 | |||||||||||||||
Not applicable.
3C.Reasons for the Offer and Use of Proceeds
Not applicable.
3D.Risk Factors
Our business could be disrupted by catastrophic events, such as the outbreak of COVID-19.
The COVID-19 pandemic has caused substantial global disruptions, including in the jurisdictions where we develop our products and conduct business and may cause additional disruptions in the future. Local, regional and national authorities in numerous jurisdictions, including the United States and Israel, have implemented a variety of measures designed to slow the spread of the virus, including social distancing guidelines, quarantines, banning of non-essential travel and requiring the cessation of non-essential activities on the premises of businesses and various other measures and restriction. Such measures and restrictions are subject to occasional updates by the authorities, hard to predict and depend on the spread of the virus and its variants.
1
Some of the risks associated with the pandemic or a worsening of the pandemic in the future include:
cancellation or reduction of routes available from common carriers, which may cause delays in our ability to deliver or service our products or receive components from suppliers necessary to manufacture or service our products;
•travel bans or the requirement to quarantine for a lengthy period after entering a jurisdiction, which may delay our ability to install the products we sell or service those products following installation;
•governmental orders or employee exposure requiring us, our customers or our suppliers to discontinue manufacturing products at our respective facilities for a period of time;
•increased costs or inability to acquire components necessary for the manufacture of our current sales are dependent on three specific product lines, factors that adversely affect the pricing and demand for these product lines could substantially reduce our sales.products due to lower availability;
•absence of liquidity at customers and suppliers caused by disruptions from these product linesthe pandemic, which may hamper the ability of customers to pay for the products they purchase on time or at all, or hamper the ability of our suppliers to continue to account forsupply components to us in a substantial portion of our revenues in the coming years. As a result, factors adversely affecting the pricing of,timely manner or demand for, these product lines, such as competitionat all; and technological change, could significantly reduce our sales.
As a result, wethe COVID-19 pandemic may adversely affect our business and financial results, and may also have difficulty achieving continued profitability during a protracted slowdown.the effect of heightening many of the other factors described in this section and in the “Risk Factors’” section in this Annual Report.
Increased information technology security threats and more sophisticated computer crime, and changes in privacy laws could disrupt our business.
Our global operations are linked by information systems, including telecommunications, the internet, our corporate intranet, network communications, email and various computer hardware and software applications. In light of information technology security threats, we have implemented network security measures and engaged the services of a cybersecurity consulting firm to conduct an information security risk assessment review which was reviewed and discussed by our audit committee and board of directors. In the current environment, there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error. High-profile security breaches at other companies and in government agencies have increased in recent years, and security industry experts and government officials have warned about the risks of hackers and cyberattacks targeting businesses such as ours. Computer hackers and others routinely attempt to breach the security of technology products, services and systems, and to fraudulently induce employees, customers, sub-contractors, agents, distributors or others to disclose information or unwittingly provide access to systems or data. In addition, some of our software and products utilize open-source technologies, which may also be used by computer hackers for purpose of cyber-attacks.
2
Although we have invested in measures to reduce these risks, we can provide no assurance that our current IT systems are fully protected against third-party intrusions, viruses, hacker attacks, information or data theft or other similar threats. WeThe cost and operational consequences of implementing, maintaining and enhancing further data or system protection measures could increase significantly to overcome increasingly intense, complex, and sophisticated global cyber threats. Despite our best efforts, we are not fully insulated from data breaches and system disruptions and, accordingly, we have experienced and expect to continue to experience actual or attempted cyberattacks of our IT networks. Although none of these actual or attempted cyberattacks has had a material adverse effect on our operations or financial condition thus far, we cannot guarantee that any such incidents will not have a material adverse effect on our operations or financial condition in the future. For instance, during 2020 and 2021, we experienced a few fraud attempts involving instructions given by a fraudster to third parties working with the Company, and in one of these attempts a financial institution used by the Company for certain financial transactions, wired out Company funds without Company's authorization. Although almost all of such funds have been retrieved in full by the Company, there is no assurance that such events, at a larger scale, will not happen in the future. Any material breaches of cybersecurity or media reports of perceived security vulnerabilities to our systems or those of the Company’s third parties, even if no breach has been attempted or occurred, could cause us to experience reputational harm, loss of customers and revenue, regulatory actions and scrutiny, sanctions or other statutory penalties, litigation, liability for failure to safeguard our customers’ information, or financial losses that are either not insured against or not fully covered through any insurance maintained by us. Any of the foregoing may have a material adverse effect on our business, operating results and financial condition.
As such, our tools and servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems and tools located at our facility or at customer sites, or could be subject to system failures or malfunctions for other reasons. Increased information technology security threats and more sophisticated computer crime pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data or customer data. Cybersecurity attacks could also include attacks targeting the security, integrity and/or reliability of the hardware and software installed in our products. System failures or malfunctioning could disrupt our operations and our ability to timely and accurately process and report key components of our financial results.
Further, the regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. In May 2016,particular, in the European Union, adopted the General Data Protection Regulation (“GDPR”), fully enforceable as of May 25, 2018, that impose(GDPR) imposes more stringent data protection requirements and provides for greater penalties for noncompliance. We may be required to incur significant costs to comply with privacy and data security laws, rules and regulations, including the GDPR. Any inability to adequately address privacy and security concerns or comply with applicable privacy and data security laws, rules and regulations could have an adverse effect on our business prospects, results of operations and/or financial position.
We are dependent on international sales, which expose us to foreign political and economic risks that could impede our plans for expansion and growth.
Our principal customers are located in Taiwan, South Korea, China, Japan and the United States, and we produce our products in Israel and the United States. International operations expose us to a variety of risks that could seriously impact our financial condition and impede our growth including:
instability in political or economic conditions, including but not limited to inflation, recession, foreign currency exchange restrictions and devaluations, restrictive governmental controls on the movement and repatriation of earnings and capital, and actual or anticipated military or political conflicts, particularly in emerging markets; Rising inflation and elevated U.S. budget deficits and overall debt levels, including as a result of federal pandemic relief and stimulus legislation and/or economic or market and supply chain conditions, can put upward pressure on interest rates and could be among the factors that could lead to higher interest rates in the future. Higher interest rates could adversely affect our overall business or reduce our liquidity.
intergovernmental conflicts or actions, including but not limited to armed conflict, trade wars and acts of terrorism or war, including current war between Russia and the Ukraine; and
interruptions to the Company’s business with its largest customers, distributors and suppliers resulting from but not limited to, strikes, and financial instabilities. For instance, trade restrictions, changes in tariffs and import and export license requirements could adversely affect our ability to sell our products in the countries adopting or changing those restrictions, tariffs or requirements. This could reduce our sales by a material amount.
Specifically, starting 2018 and to date, the U.S. Department of Commerce has taken actions to restrict exports to several Chinese based semiconductor manufacturers, such as Fujian Jinhua Integrated Circuit Company, Ltd. (“JHICC”) and Semiconductor Manufacturing International Corporation (“SMIC”). These customers have acquired several of our metrology solutions in the past. Due to the abovementioned export restrictions, our U.S. subsidiary is currently restricted from shipping tools or parts or provide any form of service to JHICC and tools to some specific sites of SMIC, until it is cleared to resume by the appropriate authorities.
In addition, in 2020 the US Department of State introduced restrictions on exporting to customers who are suppliers to Huawei, which is a Chinese based electronics supplier. Since the introduction of these restrictions, our US subsidiary has put in place a procedure to ensure compliance with these restrictions.
In some cases, the abovementioned export restrictions might also be applicable to the products which we export from other countries.
Additionally, the uncertainty of the economic, financial, regulatory, trade, tax and legal implications of the withdrawal of the U.K. from the E.U. (“Brexit”) and other significant political developments could also have a materially adverse effect on our business.
All of these risks could result in increased costs or decreased revenues, either of which could have a materially adverse effect on our profitability.
4
Changes in global trade policies and other factors beyond our control may adversely impact our business, financial condition and results of operations.
The international environment in which we operate is affected from inter-country trade agreements and tariffs. As a result of recent revisions in the U.S. administrative policy there are, and may be additional, changes to existing trade agreements, greater restrictions on free trade and significant increases in tariffs on goods imported into the United States, particularly those manufactured in China, Mexico and Canada. Future actions of the U.S. administration and that of foreign governments, including China, with respect to tariffs or international trade agreements and policies remains currently unclear.
The escalation of a trade war, tariffs, retaliatory tariffs or other trade restrictions on products and materials either exported by us to China or raw materials imported by us from China may significantly impede our ability to provide our solutions and service our customers in China or other effected locations. Such developments may result in a decrease in demand for our products and technologies as well as delays in payments from our customers. Furthermore, other governmental action related to tariffs or international trade agreements, changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries, where our customers are located, could adversely affect our business, financial condition, operating results and cash flows.
We may be affected by instability in the global economy and by financial turmoil.
There is an inherent risk, based on the complex relationships among China, Japan, Korea, Taiwan, and the United States, that political, diplomatic and national security influences might lead to trade disputes, impacts and/or disruptions, in particular those affecting the semiconductor industry. This would adversely affect our business with China, Japan, Korea, and/or Taiwan and perhaps the entire Asia Pacific region or global economy. A significant trade dispute, impact and/or disruption in any area where we do business could have a materially adverse impact on our future revenue and profits. Instability in the global markets and in the geopolitical environment in many parts of the world, including current war between Russia and the Ukraine, as well as other disruptions may continue to put pressure on global economic conditions. In the event global economic and market conditions, or economic conditions in key markets, remain uncertain or deteriorate further, we may experience material impacts on our business, operating results, and financial condition.
Because we derive a significant portion of our revenues from sales in Asia, our sales could be hurt by instability of Asian economies.
A number of Asian countries have experienced political and economic instability. For instance, Taiwan and China have had a number of disputes, as have North and South Korea, and Japan has for a number of years experienced significant economic instability. Additionally, the Asia-Pacific region is susceptible to the occurrence of natural disasters, such as earthquakes, cyclones, tsunamis and flooding. We have subsidiaries in Taiwan, South Korea, China and Japan and we have significant customers in Taiwan, South Korea and China. An outbreak of hostilities or other political upheaval, economic downturns or the occurrence of a natural disaster in these or other Asian countries would likely harm the operations of our customers in these countries, causing our sales to suffer.
5
Risks related to technology and Intellectual Property
Because of the technical nature of our business, our intellectual property is extremely important to our business, and our inability to protect our intellectual property could harm our competitive position.
Our continued success depends upon our ability to protect our core technology and intellectual property. We therefore have an extensive program devoting resources to seeking patent protection for our inventions and discoveries that we believe will provide us with competitive advantages. Our patents and applications principally cover various aspects of optical measurement systems and methods, integrated process control implementation concepts, and optical, opto-mechanical and mechanical design. In addition, our patents and applications cover various aspects of X-ray based measurement systems and methods, including process control implementation concepts, X-ray energy sources, electron optics and detection, vacuum systems and equipment integration.
We cannot assure that:
pending patent applications will be approved; or
any patents will be broad enough to protect our technology, will provide us with competitive advantages or will not be challenged or invalidated by third parties. We also cannot assure that others will not independently develop similar products, duplicate our products or, if patents are issued to us, design around these patents. Furthermore, because patents may afford less protection under foreign law than is available under U.S. law, we cannot assure that any foreign patents issued to us will adequately protect our proprietary rights.
In addition, number of the patents which relating to our main-stream products have already expired or are expected to be expired in the coming years. Such expiration may add significant competition to our tools in this area, which may lead to a decrease in our incomes. In addition, not all of our patents are covering all territories we operate in, and thus in some territories there is less coverage to some product lines.
In addition to patent protection, we also rely upon trade secret protection, employee and third-party nondisclosure agreements and other intellectual property protection methods to protect our confidential and proprietary information. Despite these efforts, we cannot be certain that others will not otherwise gain access to our trade secrets or disclose our technology.
Additionally, as part of our long-term technological collaboration, we are engaged with joint development activities with some of our strategic customers and vendors as well as with research institutes. These activities impose some limitations on the joint intellectual property developed as part of these programs.
Furthermore, we may be required to institute legal proceedings to protect our intellectual property. If such legal proceedings are resolved adversely to us, our competitive position and/or results of operations could be harmed. For additional information on our intellectual property, see “Item 4B. Business Overview — Intellectual Property” in this Annual Report.
There has been significant litigation involving intellectual property rights in the semiconductor and related industries, and similar litigation involving Nova could force us to divert resources to defend against such litigation or deter our customers from purchasing our systems.
6
We have been, and may in the future be, notified of allegations that we may be infringing intellectual property rights possessed by others. In addition, we may be required to commence legal proceedings against third parties, which may be infringing our intellectual property, in order to defend our intellectual property. In the future, protracted litigation and expense may be incurred to defend ourselves against alleged infringement of third-party rights or to defend our intellectual property against infringement by third parties. Adverse determinations in that type of litigation could:
result in our loss of proprietary rights;
subject us to significant liabilities, including triple damages in some instances;
require us to seek licenses from third parties, which licenses may not be available on reasonable terms or at all; or
prevent us from selling our products.
Any litigation of this type, even if we are ultimately successful, could result in substantial cost and diversion of time and effort by our management, which by itself could have a negative impact on our profit margin, available funds, competitive position and ability to develop and market new and existing products. For additional information on our intellectual property, see “Item 4B. Business Overview — Intellectual Property” in this Annual Report.
We may incorporate open source technology in some of our software and products, which may expose us to liability and have a material impact on our product development and sales.
7
Risks related to our industry
We operate in an extremely competitive market, and if we fail to compete effectively, our revenues and market share will decline.
Although the market for process control systems used in semiconductor manufacturing is currently concentrated and characterized by relatively few participants, the semiconductor capital equipment industry is intensely competitive. We compete mainly with Onto Innovation Inc. (formerly Nanometrics Inc. and Rudolph Technologies Inc., who have merged during the second half of 2019), and KLA Corp., which manufacture and sell integrated and/or stand-alone process control systems. In addition, we compete with process equipment manufacturers (“PEMs”), such as ASML Holdings N.V., and Applied Materials Inc., which develop (or might as well acquire companies which develop) in-situ sensors and metrology products. Established companies, both domestic and foreign, compete with our product lines, and new competitors enter our market from time to time. Some of our competitors have greater financial, engineering, manufacturing and marketing resources than we do. If a particular customer selects a competitor’s capital equipment, we expect to experience difficulty in selling our solution to that customer for a significant period of time. A substantial investment is required by the customers to evaluate, test, select and integrate capital equipment into a production line. As a result, once a manufacturer has selected a particular vendor’s capital equipment, we believe that the manufacturer generally relies upon that equipment for the specific production line application and frequently will attempt to consolidate its other capital equipment requirements with the same vendor. Accordingly, unless our systems offer performance or cost advantages that outweigh a customer’s expense of switching to our systems, it will be difficult for us to achieve significant sales from that customer once it has selected another vendor’s system for an application. We believe that our ability to compete successfully depends on a number of factors both within and outside of our control, including:
the contribution and value our solutions bring to our customers;
our product innovation, quality and performance;
our global technical service and support;
the return on investment (ROI) of our equipment and its cost of ownership;
the breadth of our product line;
our success in developing and marketing new products; and
the extendibility of our products.
If we fail to compete in a timely and cost-effective manner against current or future competitors, our revenues and market share will decline.
If we do not respond effectively and on a timely basis to rapid technological changes, our ability to attract and retain customers could be diminished, which would have an adverse effect on our sales and ability to remain competitive.
The semiconductor manufacturing industry is characterized by rapid technological changes, new product introductions and enhancements and evolving industry standards. Our ability to remain competitive and generate revenue will depend in part upon our ability to develop new and enhanced systems at competitive prices in a timely and cost-effective manner and to accurately predict technology transitions. Because new product development commitments must be made well in advance of sales, new product decisions must anticipate the future demand for products. If we fail to correctly anticipate future demand for products, our sales and competitive position will deteriorate. In addition, the development of new measurement technologies, new product introductions or enhancements by our competitors could cause a decline in our sales or loss of market acceptance of our existing products.
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The ongoing consolidation in our industry may harm us if our competitors are able to offer a broader range of products and greater customer support than we can offer.
We believe that the semiconductor capital equipment market has undergone consolidation over the last few years. For example, Lam Research Corporation acquired Novellus Systems Inc. in 2016 and Coventor in 2017; Thermo Fisher Scientific Inc. acquired FEI Company, Inc. in 2016; ASML Holdings N.V. acquired Hermes Microvision Inc. in 2016; KLA Corporation acquired Orbotech Ltd. in 2019; and Nanometrics Inc. and Rudolph Technologies, Inc. merged in 2019. We believe that similar acquisitions and business combinations involving our competitors, our customers and the PEMs may occur in the future. These acquisitions could adversely impact our competitive position by enabling our competitors and potential competitors to expand their product offerings and customer services, which could provide them an advantage in meeting customers’ needs, particularly with those customers that seek to consolidate their capital equipment requirements with a smaller number of vendors. The greater resources, including financial, marketing, intellectual property and support resources, of competitors involved in these acquisitions could allow them to accelerate the development and commercialization of new competitive products and the marketing of existing competitive products to their larger installed bases. Accordingly, such business combinations and acquisitions by competitors and/or customers could jeopardize our competitive position.
The markets we target are cyclical and it is difficult to predict the length and strength of any downturn or expansion period.
The semiconductor capital equipment market and industries, which are cyclical, experienced steep downturns and upturns in the last two decades. In recent years, we have seen a more stable overall capital investment patterns, yet we cannot predict the length and strength of potential future downturns or expansions and the impact on our business.
Our operations may be delayed or interrupted and our business could suffer if we violate environmental, safety and health, or ESH, regulations.
Some of our activities require the use of various gases, chemicals, hazardous materials and other substances such as solvents and sulfuric acid which may have an impact on the environment. We are subject to ESH regulations, and a failure to manage the use, storage, transportation, emission, discharge, recycling or disposal of raw materials or to comply with these ESH regulations could result in (i) regulatory penalties, fines and other legal liabilities, (ii) suspension of production or delays in operation and capacity expansion, (iii) a decrease in our sales, (iv) an increase in pollution cleaning fees and other operation costs, or (v) damage to our public image, any of which could harm our business. In addition, as ESH regulations are becoming more comprehensive and stringent, we may incur a greater amount of capital expenditures in technology innovation and materials substitution in order to comply with such regulations, which may adversely affect our results of operations.
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Operational risks
Because substantially most of our current sales are dependent on few specific product lines, factors that adversely affect the pricing and demand for these product lines could substantially reduce our sales.
We are currently dependent on few process control product lines. We expect these product lines to continue to account for a substantial portion of our revenues in the coming years. As a result, factors adversely affecting the pricing of, or demand for, these product lines, such as competition and technological change, could significantly reduce our sales.
We depend on a small number of large customers, and the loss of one or more of them could significantly lower our revenues.
Like our peers serving the semiconductor front end market, our customer base is highly concentrated among a limited number of large customers. We anticipate that our revenues will continue to depend on a limited number of major customers, although the companies considered to be our major customers and the percentage of our revenue represented by each major customer may vary from period to period. As a result of our customer concentration, our financial performance may fluctuate significantly from period to period based, among others, on exogenous circumstances related to our clients. For example, it is possible that any of our major customers could terminate its purchasing relationship with us or significantly reduce or delay the amount of orders for our products, purchase products from our competitors, or develop its own alternative solutions internally. The loss of any one of our major customers would adversely affect our revenues. Furthermore, if any of our customers become insolvent or have difficulties meeting their financial obligations to us for any reason, we may suffer losses. For more information regarding our sales by major customers as percentage of our total sales, see Note 15 to our consolidated financial statements contained elsewhere in this Annual Report.
Our inability to significantly reduce spending during a protracted slowdown in the semiconductor industry could reduce our prospects of achieving continued profitability.
Historically, we have derived all our revenues, and we expect to continue to derive practically all of our revenues, from sales of our products and related services to the semiconductor industry. Our business depends in large part upon capital expenditures by semiconductor manufacturers, which in turn depend upon the current and anticipated demand for semiconductors. The semiconductor industry has experienced severe and protracted cyclical downturns and upturns. Cyclical downturns, as those we have experienced in the past, may cause material reductions in the demand for the products and services that we offer, and may result in a decline in our sales. In addition, our ability to significantly reduce expenses during such cyclical downturn may be limited because of:
our continuing need to invest in research and development;
our continuing need to market our new products; and
our extensive ongoing customer service and support requirements worldwide.
Furthermore, during 2021, we increased our leased facilities and related investments and our operating expenses. In the event of a global recession or certain other economic conditions forcing the Company to materially reduce its expenses, portions of such facilities may be rendered obsolete. As a result, we may have difficulty achieving continued profitability during a protracted slowdown.
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There can be no assurance that revenues from future products or product enhancements will be sufficient to recover the development costs or to ensure the sale of inventory related to these productsproducts.
We must continue to make significant investments in research and development in order to introduce new products and technologies, or to enhance the performance, features and functionality of our existing products, to keep pace with the competitive landscape and to satisfy customer demands. Substantial research and development costs are typically incurred before we confirm the technical feasibility and commercial viability of a new product, and not all development activities result in commercially viable products. There can be no assurance that revenues from future products or product enhancements will be sufficient to recover the development costs associated with such products or enhancements. In addition, we cannot be sure that these products or enhancements will receive market acceptance or that we will be able to sell these products at prices that are favorable to us. Our business will be seriously harmed if we are unable to sell our products at favorable prices or if the market in which we operate does not accept our products. In addition, in some cases, we accumulate inventories based on sales forecasts. If such sales forecasts are not materialized, we might need to write-off the related inventory, which will increase our losses.
New product lines that we may introduce in the future may contain defects, which will require us to allocate time and financial resources to correct.
Our new product lines may contain defects when first introduced. If there are defects, we will need to divert the attention of our personnel from our ongoing product development efforts to address the detection and correction of the defects. We cannot provide assurances that we will not incur any costs or liabilities or experience any lags or delays in the future. Moreover, the occurrence of such defects, whether caused by our products or the products of another vendor, may result in significant customer relations problems and adversely affect our reputation and may impair the market acceptance of our products.
Our products are complex and require technical expertise to design and manufacture. Various problems occasionally arise during the manufacturing process that may cause delays and/or impair product quality. We have historically generated lossesactively monitor our manufacturing processes to ensure that our products meet our internal quality specifications. Any significant delays stemming from the failure of our products to meet or exceed our internal quality specifications, or for any other reasons, would delay our shipments. Shipment delays could be harmful to our business, revenues and may incur future losses.
Our dependence on a single manufacturing facility per product line magnifies the risk of an interruption in our production capabilities.
We have one manufacturing facility for our Optical CD and Raman technology related product lines, which is located in WeizmanWeizmann Science Park, Ness-Ziona-Rehovot,Nes Ziona, Israel, and one manufacturing facility for our XPS and secondary ion mass spectrometry (“SIMS”) technology related product line,lines, which is located in Santa Clara,Fremont, CA, US (the "Manufacturing Facilities"). These Manufacturing Facilities include special clean room environments and manufacturing jigs, which are customized to our needs. In addition, most of our on-goingongoing inventories, including our main warehouse and work in process, are located in these Manufacturing Facilities. Although we adopted measures to protect these manufacturing facilities and inventories, and a disaster recovery plan, any event affecting any of our Manufacturing Facilities, including natural disaster, labor stoppages or armed conflict, may disrupt or indefinitely discontinue our manufacturing capabilities and could significantly impair our ability to fulfill orders and generate revenues, thus negatively impacting our business.
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Our lease agreements for our Manufacturing Facilities include provisions that exempt the landlord and others from liability for damages to our Manufacturing Facilities.
Pursuant to ourthe lease agreements for our Manufacturing Facilities, (one of which is also our headquarters), the landlord and anyone on its behalf, and additional tenants are exempt from any liability for direct or consequential damages to our Manufacturing Facilities, except in the event of willful misconduct. While we have obtained insurance policies against certain damages, the aforementioned exemption of liability could compromise our ability to recover the full amount of such damages, and consequently we may incur substantial costs upon the occurrence of such damages.
Because shipment dates may be changed and some of our customers may cancel or delay orders with little or no penalty, and since we encounter difficulties in collecting cancellation fees from our customers, our backlog may not be a reliable indicator of actual sales and financial results.
We schedule production of our systems based upon order backlog and customer forecasts. We include in backlog only those orders toreceived from the customers in which the customer has assigned a purchase order number and for which delivery date has been specified. In general, our ability to rely on our backlog for future forecasting and planning is limited because shipment dates may be changed, some customers may cancel or delay orders with little or no penalty, and our ability to collect cancelationcancellation fees from customers is not assured. Thus, our backlog may not be a reliable indicator of actual sales and financial results.
We may not be successful in our efforts to complete and integrate current and/or future acquisitions, which could disrupt our current business activities and adversely affect our results of operations or future growth.
| Any acquisition may involve many risks, including the risks of: |
diverting management’s attention and other resources from our ongoing business concerns; |
entering markets in which we have no direct prior experience;
improperly evaluating new services, products and markets; |
being unable to maintain uniform standards, controls, procedures and policies;
failing to comply with governmental requirements pertaining to acquisitions of local companies or assets by foreign entities;
being unable to |
incurring the expenses of any undisclosed or potential liabilities; and
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If we are unable to successfully complete our future acquisitions or to effectively complete the integrationintegrate our current acquisition of ourancosys GmbH (hereinafter: “ancosys”) or future acquisitions, our ability to grow our business or to operate our business effectively could be reduced, and our business, financial condition and operating results could suffer. Even if we are successful in completing acquisitions, we cannot assure that we will be able to integrate the operations of the acquired business without encountering difficulty regarding different business strategies with respect to marketing and integration of personnel with disparate business backgrounds and corporate cultures. The integration of ancosys acquisition, which closed in January 2022, is in its early stages and, as of the date of this Annual Report, we cannot assure that such process will be completed without encountering difficulties. Further, in certain cases, mergers and acquisitions require special approvals, or are subject to scrutiny by the local authorities, and failing to comply with such requirements or to receive such approvals, may prevent or limit our ability to complete the acquisitions as well as expose us to legal proceedings prior or following the consummation of such acquisitions. In some cases, such proceedings, if initiated, may conclude in a requirement to divest portions of the acquired business. As of the date of this Annual Report, we are not aware of any pending proceedings as such in connection with the acquisition of ancosys.
We believe that sales of systems which are integrated with the process equipment will continue to be an important source of our products revenues. Sales of such systems depend upon the ability of PEMs to sell semiconductor equipment products that are able to integrate with these metrology systems. If our PEMs are unable to sell such products, if they choose to focus their attention on products that do not integrate our systems, or if they choose to develop their own metrology solutions, our business could suffer. If we were to lose our PEMs as business partners for any reason, our inability to realize sales from such systems could significantly harm our business. In addition, we may not be able to develop or market such new systems, which could slow or prevent our growth.
Some of our contractscommercial agreements with PEMs and arrangements potentially subject us to the risk of significant or non-limited liability.
We depend on a limited number of suppliers, and in some cases a sole supplier. Any disruption, delay or termination of these supply channels may adversely affect our ability to manufacture our products and to deliver them to our customers.
We purchase components, subassemblies and services from a limited number of suppliers and occasionally from a single or a sole source. Disruption or termination of these sources could occur (due to several factors, including, but not limited to, supplier capacity limitations, low availability of raw materials, bankruptcy, work stoppages due to COVID-19 or other reasons, acts of war, terrorism, fire, earthquake, energy shortages, flooding or other natural disasters), and these disruptions could have at least a temporary adverse effect on our operations. Although we generally maintain an inventory of critical components used in the manufacture and assembly of our systems, such supplies may not be sufficient to avoid potential delays that could have an adverse effect on our business.
To date, we have not experienced any material disruption or termination of our supply sources.
A prolonged inability on our part to obtain components included in our systems on a cost-effective basis could adversely impact our ability to deliver products on a timely basis, which could harm our sales and customer relationships.
The application of tax laws is subject to interpretation and if tax authorities challenge our methodologies or our analysis of our tax rates it could result in an increase to our worldwide effective tax rate and cause us to change the way we operate our business.
The Securities and Exchange Commission, or SEC, requires certain disclosure by companies that use conflict minerals in their products, with substantial supply chain verification requirements in the event that the materials come from, or could have come from, the Democratic Republic of the Congo or adjoining countries. These rules and verification requirements may impose additional costs on us and on our suppliers, and limit the sources or increase the prices of materials used in our products. Among other things, this rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of components that are incorporated into our products. In addition, the number of suppliers who provide conflict-free minerals may be limited, and there may be material costs associated with complying with the disclosure requirements, such as costs related to the process of determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. We may not be able to sufficiently verify the origins of the relevant minerals used in components manufactured by third parties through the procedures that we implement, and we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so. While we have created processes and procedures designed to enable compliance to these rules, if in the future we are unable to certify that our products are conflict free, we may face challenges with our customers, which could place us at a competitive disadvantage and harm our reputation.
Our lengthy sales cycle increases our exposure to customer delays in orders, which may result in obsolete inventory and volatile quarterly revenues.
Sales of our systems depend, in significant part, upon our customers adding new manufacturing capacity or expanding existing manufacturing capacity, both of which involve a significant capital commitment. We may experience delays in finalizing sales while a customer evaluates and approves an initial purchase of our systems. Our sales cycle for new customers, products or applications, may take longer than twelve (12) months to complete. During this time, we may expend substantial funds and management effort, but fail to make any sales. Lengthy sales cycles subject us to a number of significant risks, including inventory obsolescence and fluctuations in operating results, over which we have limited control.
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We compete in a market that involves rapidly changing technological and regulatory developments that require a wide-ranging set of expertise and intellectual capital. In order for us to successfully compete and grow, we must attract, recruit, retain and develop the necessary personnel who can provide the needed expertise across the entire spectrum of our intellectual capital needs. While we have a number of our key personnel who have substantial experience with our operations, we must also develop and exercise our personnel to provide succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital. Our principal research and development activities are conducted from our headquarters in Israel and our subsidiary in the US. and we face significant competition for suitably skilled developers in this region. The international environmenthigh-tech industry in Israel, the US and other territories we operate in has experienced significant levels of employee attrition and is currently facing a severe shortage of skilled human capital. We may encounter higher attrition rates in the future, particularly if Israel continues to experience strong economic growth. We may not succeed in recruiting additional experienced or professional personnel, retaining current personnel or effectively replacing current personnel who depart with qualified or effective successors. Many of the companies with which we compete for experienced personnel have greater resources than us.
Our effort to retain and develop personnel may also result in significant additional expenses, which could adversely affect our profitability. There can be no assurance that qualified employees will continue to be employed or that we will be able to attract and retain qualified personnel in the future. Failure to retain or attract qualified personnel could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Incorporation and Location in Israel
Political, economic and military instability in Israel may impede our ability to operate is affected from inter-countryand harm our financial results.
Our principal executive offices and research and development facilities are located in Israel and therefore may be influenced by regional instability and extreme military tension. Accordingly, political, economic and military conditions in Israel and the surrounding region could directly affect our business. Any armed conflicts, political instability, terrorism, cyberattacks or any other hostilities involving Israel or the interruption or curtailment of trade agreementsbetween Israel and tariffs. Asits present trading partners could affect adversely our operations. Ongoing and revived hostilities or other Israeli political or economic factors, could prevent or delay shipments of our products, harm our operations and product development and cause any future sales to decrease. In the event that hostilities disrupt the ongoing operation of our facilities or the airports and seaports on which we depend to import and export our supplies and products, our operations may be materially adverse affected.
Our operations may be disrupted by the obligation of key personnel to perform military service.
Some of our executive officers and employees in Israel are obligated to perform significant periods of military reserve service until the age of 40 for soldiers and until the age of 45 for officers. This time-period may also be extended by the Military Chief of the General Staff and the approval of the Minister of Defense or by a directive of the Minister of Defense in the event of a declared national emergency. Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees due to military service. To date, our operations have not been materially disrupted as a result of recent revisionsthese military service obligations. Any disruption in the U.S. administrative policy there are,our operations due to such obligations would adversely affect our ability to produce and may be additional, changesmarket our existing products and to existing trade agreements, greater restrictions on free tradedevelop and significant increases in tariffs on goods imported into the United States, particularly those manufactured in China, Mexico and Canada. Future actions of the U.S. administration and that of foreign governments, including China, with respect to tariffs or international trade agreements and policies remains currently unclear.market future products.
Our convertible senior notes due 2025 (“Convertible Senior Notes”) may impact our financial results, result in the dilution of a trade war, tariffs, retaliatory tariffs or other trade restrictionsexisting shareholders, create downward pressure on productsthe price of our ordinary shares, and materials either exported by us to China or raw materials imported by us from China may significantly impededrestrict our ability to provide our solutions and service our customers in China or other effected locations. Such developments may resulttake advantage of future opportunities.
In October 2020, we closed an offering of $200 million aggregate principal amount of 0% Convertible Senior Notes due 2025 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Convertible Senior Notes may affect our earnings per share figures, as accounting procedures may require that we include in our calculation of earnings per share the number of ordinary shares into which the Convertible Senior Notes are convertible. The Convertible Senior Notes may be converted, under the conditions and at the premium specified in the Convertible Senior Notes, into cash and our ordinary shares, if any (subject to our right to pay cash in lieu of all or a portion of such shares). Given the prevailing market price of our ordinary shares during the relevant periods in 2021, the Convertible Senior Notes were convertible at the election of the holders thereof in the fourth quarter of 2021 and in the first quarter of 2022 and are expected to be convertible also looking forward. If our ordinary shares are issued to the holders of the Convertible Senior Notes upon conversion, there will be dilution to our shareholders’ equity and the market price of our ordinary shares may decrease due to the additional selling pressure in demandthe market. Any downward pressure on the price of our ordinary shares caused by the sale or potential sale of ordinary shares issuable upon conversion of the Convertible Senior Notes could also encourage short sales by third parties, creating additional downward pressure on our share price.
Furthermore, the indenture for the Convertible Senior Notes will prohibit us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our productsobligations under the Convertible Senior Notes. These and technologiesother provisions in the indenture could deter or prevent a third party from acquiring us even when the acquisition may be favorable.
We currently anticipate that we will be able to rely on and to implement certain clarifications from the applicable Tax Authorities, with respect to the administration of our Israeli withholding tax obligations in relation to considerations to be paid to the holders of the Convertible Senior Notes upon their future conversion and settlement as well as delaysother related tax aspects. Unexpected failure to ultimately obtain such anticipated clarifications from the Israeli Tax Authorities could potentially result in payments from our customers. Furthermore, other governmental action relatedincreased Israeli withholding tax gross-up costs.
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We may not have the ability to tariffs or international trade agreements, changesraise the funds necessary to settle conversions of the Convertible Senior Notes, if we are obligated to settle such conversions, in U.S. social, political, regulatory and economic conditionswhole or in lawspart, in cash, repurchase the Convertible Senior Notes upon a fundamental change or repay the Convertible Senior Notes in cash at their maturity, and policies governing foreign trade, manufacturing, developmentour future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the Convertible Senior Notes.
As per the date of these financial statements, holders of the Convertible Senior Notes have the right, and investmentcould have it again in the territoriesfuture, under the indenture governing the Convertible Senior Notes to require us to repurchase all or a portion of their Convertible Senior Notes upon the occurrence of a fundamental change before the applicable maturity date, at a repurchase price equal to 100% of the principal amount of such Convertible Notes to be repurchased, plus accrued and countries, whereunpaid interest, if any. Moreover, we will be required to repay the Convertible Notes in cash at their maturity, unless earlier converted, repurchased or redeemed. We may not have enough available cash or be able to obtain financing at the time we are required to make such repurchases of the Convertible Senior Notes and/or repay the Convertible Senior Notes upon maturity. In addition, we have the right to elect to settle conversions of the Convertible Senior Notes in cash.
Our ability to repurchase or to pay cash upon conversion of Convertible Senior Notes may be limited by law, regulatory authority or agreements governing our customers are located,future indebtedness. Our failure to repurchase the Convertible Senior Notes at a time when the repurchase is required by the indenture or to pay cash upon conversion of the Convertible Senior Notes when required or at maturity as required by the indenture would constitute a default under the indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Convertible Senior Notes or to pay cash upon conversion of the Convertible Senior Notes or at maturity.
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The accounting method for the Convertible Notes could adversely affect our business,reported financial condition operating results and results.
Under applicable accounting standards we separately account for debt and equity components of convertible notes that may be settled in cash. The carrying amount of the debt component was based on the fair value of a similar hypothetical debt instrument excluding the conversion feature, valued using an effective borrowing rate which was based on our synthetic credit risk. Issuance costs were allocated to the debt and equity components in proportion to the allocation of proceeds to those components. The difference between the principal amount of the Convertible notes and the amount allocated to the debt component was considered to be debt discount, which is subsequently amortized through non cash flows.interest expenses over the expected life of the Convertible Notes.
Because we derivemost of our revenues are generated in U.S. dollars, but a significant portion of our expenses is incurred in currencies other than U.S. dollars, and mainly New Israeli Shekels, our profit margin may be seriously harmed by currency fluctuations.
We generate most of our revenues from sales in Asia,U.S. dollars, but incur a significant portion of our salesexpenses in currencies other than U.S. dollar, and mainly New Israeli Shekel, commonly referred to as NIS. In addition, starting January 1, 2019, in accordance with ASC 842 of lease accounting standard, we are required to present a significant NIS linked liability related to our operational leases in Israel. As a result, we are exposed to risk of devaluation of the U.S. dollar in relation to the NIS and other currencies. In such event, the dollar cost of our operations in countries other than the U.S. will increase and our dollar measured results of operations will be adversely affected. During 2021, the U.S. dollar devaluated against the NIS by 3.3%, after being devaluated by approximately 7.3% in the previous three years. We cannot predict the future trends in the rate of devaluation or revaluation of the U.S. dollar against the NIS, and our cost of operations also could be hurt by instabilityadversely affected.
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We participate in government programs under which we receive research and development grants. Some of Asian economies.these programs impose restrictions on our ability to use the technologies developed under these programs. The reduction or termination of these programs would increase our costs.
Until the end of 2016, we received royalty-bearing grants from the Israel Innovation Authority, or IIA (formerly known as the Office of the Chief Scientist of the Ministry of Economy and Industry, or the OCS), for the financing of certain of our research and development programs that meet specified criteria. Starting 2018, we have participated only in IIA royalty free grant programs.
In addition, through the years, we participated in consortiums which are either solely managed by the IIA, or are joint consortia of the IIA and the European Research Area, or only European managed consortia. To maintain our eligibility for these programs, we must continue to meet certain conditions.
All these programs also restrict our ability to manufacture particular products and transfer particular technology, which were developed as part of the IIA’s programs, outside of Israel. The restrictions associated with these IIA’s programs may require us to obtain approval of the research and development committee nominated by the IIA for certain actions and transactions and pay additional payments to the IIA. Approval to manufacture products, which their development was partially funded by IIA grants, outside of Israel or consent to the transfer of technology, if requested, might not be granted and if granted, may increase our financial liabilities to the IIA. In addition, if we fail to comply with certain restrictions associated with formerly received IIA's funding, we may be subject to criminal charges.
We are further exposed to risks related to the receipt of funding from other governments or governmental agencies in connection with strategic development programs, under which we receive funding. Under such strategic development programs, governments and governmental agencies typically have the right to terminate the program’s funding at any time. In addition, a project may be terminated by a mutual agreement, if the parties determine that the project's goals or milestones are not being achieved. As a result, there is no assurance that these sources of external funding will continue to be available to us in the future, and we currently expect such external funding to significantly reduce in 2022 and future years. Moreover, under the terms of certain governmental funding programs in which we receive funding, the applicable granting agency has the right to audit the costs that we incur, directly and indirectly, in connection with such programs. Any such audit could result in modifications to, or even termination of, the applicable governmental funding program. Any adverse finding resulting from any such audit could lead to penalties (financial or otherwise), termination of funding programs, suspension of payments or other adverse consequences to our ability to receive governmental funding. In addition, obligations related to grants received from the IIA grants bear an annual interest rate based on the 12-month LIBOR. Currently, there is considerable uncertainty regarding the publication of LIBOR beyond 2021, and it is not possible to determine precisely whether, or to what extent, the replacement of LIBOR would affect companies' existing or future liabilities to the IIA.
The application of tax laws is subject to interpretation and if tax authorities challenge our methodologies or our analysis of our tax rates it could result in an increase to our worldwide effective tax rate and cause us to change the way we operate our business.
The application of the tax laws of various jurisdictions to our international business activities is subject to interpretation and also depends on our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The tax authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing, or determine that the manner in which we operate our business does not achieve the expected tax consequences, which could result in tax and penalty payments and in an increase of our worldwide effective tax rate, and could adversely affect our financial position and results of operations.
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A numbercertain degree of Asianjudgment is required in evaluating our tax positions and determining our provision for income taxes. In the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have experienced politicallower statutory rates and economic instability. higher than anticipated in countries where we have higher statutory rates, by changes in foreign currency exchange rates or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. As we operate in numerous taxing jurisdictions, the application of tax laws can be subject to diverging and sometimes conflicting interpretations by tax authorities of these jurisdictions. It is not uncommon for tax authorities in different countries to have conflicting views. In addition, tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. For example, the work being carried out by the OECD on base erosion and profit shifting as a response to increasing globalization of trade could result in changes in tax treaties or the introduction of new legislation that could impose an additional tax on businesses. As a result of changes to laws or interpretations, our tax positions could be challenged, and our income tax expenses could increase in the future.
For instance, Taiwanif tax authorities in any of the countries in which we operate were to successfully challenge our transfer prices, they could require us to reallocate our income to reflect transfer pricing adjustments, which could result in an increased tax liability to us. In addition, if the country from which the income was reallocated did not agree with the reallocation asserted by the first country, we could become subject to tax on the same income in both countries, resulting in double taxation. If tax authorities were to allocate income to a higher tax jurisdiction, subject our income to double taxation or assess interest and Chinapenalties, it could increase our tax liability, which could adversely affect our financial position and results of operations.
The enactment of legislation implementing changes in taxation of international business activities, the adoption of other corporate tax reform policies, or changes in tax legislation or policies could impact our future financial position and results of operations.
There can be no assurance that our effective tax rate for the year ended December 31, 2021 will not change over time as a result of changes in corporate income tax rates or other changes in the tax laws the jurisdictions in which we operate. Any changes in tax laws could have hadan adverse impact on our financial results. Corporate tax reform, base-erosion efforts and tax transparency continue to be high priorities in many tax jurisdictions where we have business operations. As a result, policies regarding corporate income and other taxes in numerous jurisdictions are under heightened scrutiny and tax reform legislation is being proposed or enacted in a number of disputes,jurisdictions.
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For example, there is growing pressure in many jurisdictions and from multinational organizations such as the Organization for Economic Cooperation and Development (OECD) and the EU to amend existing international taxation rules in order to align the tax regimes with current global business practices. Specifically, in October 2015, the OECD published its final package of measures for reform of the international tax rules as a product of its Base Erosion and Profit Shifting (BEPS) initiative, which was endorsed by the G20 finance ministers. Many of the initiatives in the BEPS package required and resulted in specific amendments to the domestic tax legislation of various jurisdictions and to existing tax treaties. We continuously monitor these developments. Although many of the BEPS measures have Northalready been implemented or are currently being implemented globally (including, in certain cases, through adoption of the OECD’s “multilateral convention” (to which Israel is also a party) to effect changes to tax treaties which entered into force on July 1, 2018 and South Korea,through the European Union’s “Anti Tax Avoidance” Directives), it is still difficult in some cases to assess to what extent these changes our tax liabilities in the jurisdictions in which we conduct our business or to what extent they may impact the way in which we conduct our business or our effective tax rate due to the unpredictability and Japaninterdependency of these potential changes. In January 2019 the OECD announced further work in continuation of the BEPS project, focusing on two “pillars.” On October 8, 2021, 136 countries approved a statement known as the OECD BEPS Inclusive Framework, which builds upon the OECD’s continuation of the BEPS project. The first pillar is focused on the allocation of taxing rights between countries for in-scope large multinational enterprises (with revenue in excess of Euro 20 Billion and profitability of at least 10%) that sell goods and services into countries with little or no local physical presence. The second pillar is focused on developing a global minimum tax rate of at least 15 percent applicable to in-scope multinational enterprises (with revenue in excess of Euro 750 million). Israel is one of the 136 jurisdictions that has agreed in principle to the adoption of the global minimum tax rate. Given these developments, it is generally expected that tax authorities in various jurisdictions in which we operate may increase their audit activity and may seek to challenge some of the tax positions we have adopted. It is difficult to assess if and to what extent such challenges, if raised, might impact our effective tax rate.
In addition, the U.S. government may enact significant changes to the taxation of business entities including, among others, an increase in the corporate income tax rate. While different versions of United States tax legislation have been discussed and considered by Congress, the likelihood of these changes being enacted or implemented is unclear. We are currently unable to predict whether such changes will occur and, if so, the ultimate impact on our business or results of our operations.
Our entitlement to certain tax benefits under the Israeli Capital Investment Encouragement Law may increase our ETR.
Starting 2017, we made an election to receive Tax benefits under Israeli “Economic Efficiency Law” as a “Preferred Technological Enterprise”. While we believe that we meet the statutory conditions to entitle us to such benefits there can be no assurance that the tax authorities in Israel will concur to our position in general and for each specific year separately. Should it be determined that we have not, or do not meet such conditions, the benefits received would be cancelled. We would also be required to pay increased taxes or refund any benefits previously received, adjusted to the Israeli consumer price index and interest, or other monetary penalty.
For additional information regarding Approved and Benefited Enterprise, Preferred Enterprise and Preferred Technological Enterprise see, “Item 10E. Taxation – Israeli Taxation” in this Annual Report.
It should be noted that the Israeli government may reduce or eliminate the above-mentioned benefits in the future. The termination or reduction of these grants or tax benefits could harm our financial condition and results of operations, and result in significantly higher tax payment. In addition, if we increase our activities outside Israel due to, for example, future acquisitions or outsourcing of manufacturing or development activities, these activities generally will not be eligible for inclusion in Israeli grants or tax benefit programs. Accordingly, our effective corporate tax rate could increase significantly in the future.
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We experience quarterly fluctuations in our operating results, which may adversely impact our share price.
Our quarterly operating results within a specific year can fluctuate significantly. A principal reason is that we derive a substantial portion of our revenue from the sale of a relatively small number of years experiencedsystems to a relatively small number of customers. As a result, our revenues and results of operations for any given quarter may decrease due to factors relating to the timing of orders, the timing of shipments of systems, and the timing of recognizing these revenues. Furthermore, our quarterly results are affected by the cyclical nature of the semiconductor capital equipment market and industries.
We also have a limited ability to predict revenues for future quarterly periods and, as a result, face risks of revenue shortfalls. If the number of systems we actually ship, and thus the amount of revenues we are able to record in any particular quarter, is below our expectations, the adverse effect may be magnified by our inability to adjust spending quickly enough to compensate for the revenue shortfall.
Some of our contracts and arrangements potentially subject us to the risk of significant economic instability. Additionally, the Asia-Pacific regionor non-limited liability.
We produce highly complex optical and electronic components and, accordingly, there is susceptiblea risk that defects may occur in any of our products. Such defects can give rise to significant costs, including expenses relating to recalling products, replacing defective items, writing down defective inventory and loss of potential sales. In addition, the occurrence of natural disasters, such as earthquakes, cyclones, tsunamisdefects may give rise to product liability and flooding. We have subsidiarieswarranty claims, including liability for damages caused by such defects.
In our commercial relationship with customers, we attempt to negotiate waivers of consequential and indirect damages arising from damages for loss of use, loss of product, loss of revenue and loss of profit caused by our products. Similarly, with respect to our commercial relationship with subcontractors and suppliers, we attempt to negotiate arrangements which do not include a limitation of liabilities and limitation of consequential and indirect damages. However, some contracts and arrangements we are bound by, expose us to product liability claims resulting in Taiwan, Japanpersonal injury or death, up to an unlimited amount, and South Koreathe incurrence of the risk of material penalties for consequential or liquidated damages. Additionally, under such contracts and arrangements, we may be named in product liability claims even if there is no evidence that our products caused the damage in question, and such claims could result in significant costs and expenses relating to attorneys’ fees and damages.
In addition, such contracts and arrangements may include non-limited liability provisions for infringement of a third party’s intellectual property rights in connection with our products.
Although we have not incurred in the past any material penalties for consequential or liquidated damages, we may incur such penalties in the future. Such penalties for consequential or liquidated damages may be significant customers(and so is the legal process conducted in Taiwanconnection with such penalties) and South Korea as well as in China. An outbreakcould negatively affect our financial condition or results of hostilities or other political upheaval, economic downturns or the occurrence of a natural disaster in these or other Asian countries would likely harm the operations of our customers in these countries, causing our sales to suffer.operations.
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A large number of our ordinary shares continue to be owned by a relatively small number of shareholders, whose future sales of our shares, if substantial, may depress our share price.
If our principal shareholders sell substantial amounts of our ordinary shares, including shares issued upon the exercise of outstanding options or warrants, the market price of our ordinary shares may fall. For additional information on our major shareholders, see “Item 7A – Major Shareholders” in this annual report on Form 20-F.Annual Report.
Certain shareholders may control the outcome of matters submitted to a vote of our shareholders, including the election of directors.
To the best of our knowledge, approximately 41%30% of our outstanding ordinary shares are cumulatively held by sevenfour of our shareholders. As a result, and although we are currently not aware of any voting agreement between such shareholders, if these shareholders voted together or in the same manner, they would have the ability to control the outcome of corporate actions requiring an ordinary majority vote of shareholders as set in the Company’s Amended and Restated Articles of Association. Even if these shareholders do not vote together, each one of them may have the ability to influence the outcome of corporate actions requiring the vote of shareholders as set in the Company’s Amended and Restated Articles of Association. For additional information on our major shareholders, see “Item 7A – Major Shareholders” in this annual report on Form 20-F.
The market price of our ordinary shares may be affected by a limited trading volume and may fluctuate significantly.
In the past, there has been a limited public market for our ordinary shares and there can be no assurance that an active trading market for our ordinary shares will continue. An absence of an active trading market could adversely affect our shareholders’ ability to sell our ordinary shares in short time periods. Our ordinary shares have experienced, and are likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our ordinary shares without regard to our operating performance.
In addition, the price of our ordinary shares could also be affected by possible sales of our ordinary shares by investors who view our convertible senior notes as a more attractive means of equity participation in our company, and by hedging and arbitrage trading activity that such investors may engage in.
We manage our available cash through various bank institutions and invest large portions of our cash reserves in bank deposits. A bankruptcy of one of the banks in which or through which we hold or invest our cash reserves, might prevent us to access that cash for an uncertain period of time.
We manage our available cash through various bank institutions and invest large portions of our cash reserves in bank deposits. As of December 31, 2018, substantially all2021, a large portion of our cash reserves were invested in bank institutions, of which approximately 50%22% was invested in one institution. A bankruptcy of one of the banks in which we hold our cash reserves or through which we invest our cash reserves, might prevent us to access that cash for an uncertain period of time.
Our investment portfolio may be adversely affected by market conditions and interest rates.
We maintain substantial balances of liquid investments, for purposes of financing our operations and acquisitions. Our marketable securities totaled $199 million as of December 31, 2021. The performance of the capital markets affects the values of funds that are held in marketable securities. These assets are subject to market fluctuations and various developments, including, without limitation, rating agency downgrades that may impair their value. We generally buy and hold our portfolio positions, while minimizing credit risk by setting limits for minimum credit rating and maximum concentration per issuer. Our investments consist primarily of government and corporate debentures, which are primarily fixed-income securities.
Although we believe that we generally adhere to conservative investment guidelines, the continuing turmoil in the financial markets may result in impairments of the carrying value of our investment assets. In addition, as our investment portfolio is invested primarily in fixed-income securities it is affected by changes in interest rates. Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Any significant decline in our financial income or the value of our investments as a result of the changes in interest rates and interest rate expectations of the financial markets, deterioration in the credit rating of the securities in which we have invested, or general market conditions, could have an adverse effect on our results of operations and financial condition. We classify our investments as available-for-sale. Changes in the fair value of investments classified as available-for-sale are not recognized as income during the period, but rather are recognized as other comprehensive income, or OCI, which is a separate component of equity until realized. Realized losses in our investments portfolio may adversely affect our financial position and results.
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We may fail to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.
The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors. Our efforts to comply with the requirements of Section 404 (Assessment of Internal Control), which started in connection with our Annual Report on Form 20-F for the fiscal year ended December 31, 2007, have resulted in increased general and administrative expense and a diversion of management time and attention, and we expect these efforts to require the continued commitment of resources. Section 404 of the Sarbanes-Oxley Act of 2002 requires (i) management’s annual review and evaluation of our internal control over financial reporting and (ii) an attestation report issued by an independent registered public accounting firm on our internal control over financial reporting, in connection with the filing of our Annual Report on Form 20-F for each fiscal year. We have documented and tested our internal control systems and procedures in order for us to comply with the requirements of Section 404. While our assessment of our internal control over financial reporting resulted in our conclusion that as of December 31, 2018,2021, our internal control over financial reporting was effective, we cannot predict the outcome of our testing in future periods. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting. Failure to maintain effective internal control over financial reporting could result in investigation or sanctions by regulatory authorities, and could have a material adverse effect on our operating results, investor confidence in our reported financial information, and the market price of our ordinary shares.
Provisions of our Amended and Restated Articles of Association and Israeli law may delay, prevent or make difficult an acquisition of Nova, which could prevent a change of control and negatively affect the price of our ordinary shares.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, for special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. See Item 10.B, “Additional Information – Memorandum and ArticlesExhibit 2.1 to this Annual Report, “Description of Association”the Securities”. For a more detailed discussion regarding some anti-takeover effects of Israeli law.
These provisions of Israeli law may delay, prevent or make difficult an acquisition of Nova, which could prevent a change of control and therefore depress the price of our shares.
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The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.
We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our Amended and Restated Articles of Association and by the Israeli Companies Law, 1999 (the “Companies Law”). These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, pursuant to the Companies Law each shareholder of an Israeli company has to act in good faith in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his power in the company, including, among other things, in voting at the general meeting of shareholders and class meetings, on amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers, and transactions requiring shareholders’ approval under the Companies Law. In addition, a controlling shareholder of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or who has the power to appoint or prevent the appointment of a director or officer in the company, or has other powers toward the company has a duty of fairness toward the company. However, Israeli law does not define the substance of this duty of fairness. Because Israeli corporate law has undergone extensive revision in recent years, there is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.
Any shareholder with a cause of action against us as a result of buying, selling or holding our ordinary shares may have difficulty asserting a claim under U.S. securities laws or enforcing a U.S. judgment against us or our officers, directors or Israeli auditors.
We are organized under the laws of the State of Israel, and we maintain most of our operations in Israel. Most of our officers and directors as well as our Israeli auditors reside outside of the United States and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, if you wish to enforce a judgment obtained in the United States against us, or our officers, directors and auditors, you will probably have to file a claim in an Israeli court. Additionally, you might not be able to bring civil actions under U.S. securities laws if you file a lawsuit in Israel. We have been advised by our Israeli counsel that Israeli courts generally enforce a final executory judgment of a U.S. court for liquidated amounts in civil matters after a hearing in Israel. If a foreign judgment is enforced by an Israeli court, it will be payable in Israeli currency. However, payment in the local currency of the country where the foreign judgment was given will be acceptable, subject to applicable foreign currency restrictions.
Our shares are listed for trade on more than one stock exchange, and this may result in price variations.
Our ordinary shares are listed for trading on the Nasdaq Global Select Market and on the Tel Aviv Stock Exchange Ltd., or TASE. This may result in price variations. Our ordinary shares are traded on these markets in different currencies, U.S. dollars on the Nasdaq Global Select Market and New Israeli Shekels on the TASE. These markets have different opening times and close on different days. Different trading times and differences in exchange rates, among other factors, may result in our shares being traded at a price differential on these two markets. In addition, market influences in one market may influence the price at which our shares are traded on the other.
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Our business could be negatively affected as a result of actions of activist shareholders, and such activism could impact the trading value of our securities.
In recent years, certain Israeli issuers listed on United States exchanges have been faced with governance-related demands from activist shareholders, as well as unsolicited tender offers and proxy contests. Although as a foreign private issuer we are not subject to U.S. proxy rules, responding to these types of actions by activist shareholders could be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. Such activities could interfere with our ability to execute our strategic plan. In addition, a proxy contest for the election of directors at our annual meeting would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and our board of directors. The perceived uncertainties due to these potential actions of activist shareholders also could affect the market price and volatility of our securities.
We may be classified as a “passive foreign investment company” for U.S. income tax purposes, which could have significant and adverse tax consequences to U.S. shareholders.
Generally, if for any taxable year 75% or more of our gross income consists of specified types of passive income, or, on average, at least 50% of our assets are held for the production of, or produce, passive income, we may be characterized as a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes. Classification of Nova as a PFIC could result in adverse U.S. tax consequences to our U.S. shareholders, such as ineligibility for any preferredpreferential tax rates on capital gains or on dividends, interest charges on certain taxes treated as deferred, and additional reporting requirements under U.S. federal income tax laws and regulations. ItIf we are a PFIC, it may be possible for U.S. holders of our ordinary shares to mitigate certain of these consequences by making an election to treat us as a “qualified electing fund” under Section 1295 of the Internal Revenue Code of 1986, as amended (the “Code”) or a “mark-to-market election” under Section 1296 of the Code. U.S. shareholders should consult with their own U.S. tax advisors with respect to the U.S. tax consequences of investing in our ordinary shares.
We believe that for our 20182021 taxable year we were not a PFIC. Nonetheless, because the determination of whether we are, or will be, a PFIC for a taxable year depends on our assets, income and activities in each year and the application of complex U.S. federal income tax rules, which are subject to various interpretations, there is a risk that we were a PFIC in 2018.2021. Absent one of the elections referenced above, and described in greater detail below, if we are a PFIC for any taxable year during which a U.S. holder holds our ordinary shares, we generally will continue to be treated as a PFIC with respect to such U.S. holder in all succeeding years regardless of whether we cease to meet the PFIC tests in one or more subsequent years. Currently we expect that we will not be a PFIC in 2019.2022 or subsequent years. However, PFIC status is determined based on our assets and income over the course of each taxable year, and is dependent on a number of factors, including the value of our assets, the trading price of our ordinary shares and the amount and type of our gross income. Therefore, there can be no assurances that we will not become a PFIC for the 20192022 taxable year, or any future year, or that the Internal Revenue Service will not challenge any determination made by us concerning our PFIC status. For a discussion on how we might be characterized as a PFIC and related tax consequences, please see the section of this annual reportAnnual Report entitled “Taxation - U.S. Taxation – Passive Foreign Investment Companies.” Investors should consult their own tax advisors regarding all aspects of the application of the PFIC rules to our ordinary shares.
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If a United States person is treated as owning at least 10% of our shares, such holder may be subject to adverse U.S. federal income tax consequences.
If a United States person is treated as owning (directly, indirectly or constructively) at least 10% of the value or voting power of our shares, such person may be treated as a “United States shareholder” with respect to each “controlled foreign corporation” in our group (if any).group. Because our group includes one or more U.S. subsidiaries, certain of our future non-U.S. subsidiaries couldwill be treated as controlled foreign corporations (regardless of whether we are or are not treated as a controlled foreign corporation). A United States shareholder of a controlled foreign corporation may be required to annually report and include in its U.S. taxable income its pro rata share of the controlled foreign corporation’s “Subpart F income”, “global intangible low-taxed income” and investments in U.S. property, whether or not such controlled foreign corporation makes any distributions. An individual that is a United States shareholder with respect to a controlled foreign corporation generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a United States shareholder that is a U.S. corporation. A failure to comply with these reporting obligations may subject you to significant monetary penalties and may prevent the statute of limitations with respect to your U.S. federal income tax return for the year for which reporting was due from starting. We cannot provide any assurances that we will assist investors in determining whether any of our current or future non-U.S. subsidiaries are treated as a controlled foreign corporation or whether such investor is treated as a United States shareholder with respect to any of such controlled foreign corporations or furnish to any United States shareholders information that may be necessary to comply with the aforementioned reporting and tax paying obligations. The Internal Revenue Service provided limited guidance on situations in which U.S. shareholders may rely on publicly available information to comply with their reporting and tax paying obligations with respect to foreign-controlled CFCs. A United States investor should consult their own advisors regarding the potential application of these rules to its investment in the shares.
The U.S. Tax Cuts and Jobs Act of 2017 was approved by Congress on December 20, 2017, and signed into law by President Donald J. Trump on December 22, 2017. This legislation makesgovernment may enact significant changes to the U.S. Internal Revenue Code. Such changes include a reductiontaxation of business entities including, among others, an increase in the corporate income tax rate and limitationsthe imposition of minimum taxes, the capitalization of certain costs related to research and development or surtaxes on certain corporate deductions and credits, among other changes.
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4.AHistory and Development of the Company
Nova Measuring Instruments Ltd. was incorporated in May 1993 under the laws of the State of Israel. We commenced operations in October 1993 to design, develop and produce integrated process control systems for use in the manufacture of semiconductors, also known as integrated circuits or chips.
In April 2000, we conducted an initial public offering and our shares were listed for trading on the Nasdaq stock exchange.
In June 2002, we listed our shares on the TASE, pursuant to legislation which enables Israeli companies whose shares are traded on certain stock exchanges outside of Israel to be registered on the TASE, while reporting, in substance, in accordance with the provision of the relevant foreign securities law applicable to the Company.
Until 2008, most of our products were sold to process equipment manufacturers such as Applied Materials, Inc. and Ebara Corp., which later sold these products to semiconductor manufacturers. Since then, we have completely changed our business model, selling mostsubstantially all of our products directly to semiconductor manufacturers. Through this process, which has also enabled us to introduce to these customers additional products and features, we have improved our products gross margins and net profitability. In parallel, we continue to work with the process equipment manufacturers as business partners for future products and process control solutions.
In April 2015, we acquired ReVera Inc., a privately held company headquartered in Santa Clara, California, which develops, manufactures and sells stand-alone metrology tools for measurements of thin-films and composition applications in the semiconductor industry. Following its acquisition, ReVera became a wholly owned subsidiary of our U.S. subsidiary, Nova Measuring Instruments, Inc. Effectiveindustry, and on December 31, 2017, we merged ReVera into its parent company, Nova Measuring Instruments, Inc.
In November 2021, we signed a definitive agreement to acquire ancosys, a privately held company Headquartered in Pliezhausen Germany which is a leading provider of chemical analysis and metrology solutions for advanced semiconductor manufacturing, supporting both frontend and backend semiconductor manufacturing. The transaction’s closing was completed in January 2022.
Our headquarter office is located in Israel at the Weizmann Science Park, Building 22, 25 David Fikes St., 10ndth Floor, Ness-Ziona. Our telephone number at our main office is +972-73-229-5600. In 2018, we entered into a new lease agreement for the lease a total of approximately 12,000 square meters at a new building being built at the Science Park in Rehovot, with the intention to move our Israel headquarters into this building during 2019. For more information about our new lease see “Item 4D. Property, Plant and Equipment.”Rehovot.
4.A.8.
The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov). The information is also available on our website (http://www.novami.com).
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4.BBusiness Overview
Nova is a leading innovator and key provider of metrology solutions for advanced process control used in semiconductor manufacturing. Nova delivers continuous innovation by providing advancedhigh-performance metrology solutions for effective process control throughout the semiconductor manufacturing industry. Deployed by the world’s largest integrated-circuit manufacturers, Nova’s novel technologies provide semiconductor manufacturers with process insight and clarity required to boost process performance, product yields and time to market.fabrication process. We bring pioneering metrology solutions to the world ofsemiconductors process control, by industrializing lab and research-grade technologies and developing emerging metrology solutions. Nova’s product portfolio, deployed at the world’s largest integrated-circuit manufacturers, combines high-precision hardware and cutting-edge software, and provides its customers with deep insight into the development and production of the most advanced semiconductor devices. Nova’s capability to deliver innovative Optical, X-ray and SIMS technology solutions enables its customers to improve performance, enhance product yields and accelerate time to market.
Nova’s market offering is driven by product divisions: The Dimensional Metrology Division (DMD) which is responsible for optical technology-based metrology solutions (integrated and standalone), and the Materials Metrology Division (MMD) which is responsible for x-ray based solutions. The corporate units, such as marketing, next generation technology, human resources, finance and global business group, support both divisions. This structure allows the company to focus management attention on each product line separately, as well as to facilitate the integration of additional businesses or technologies in the future.
In January 2022, through the acquisition of ancosys, we expanded our technology base. ancosys is a leading provider of chemical analysis metrology solutions for advanced semiconductor manufacturing. ancosys’ automated analytical systems combine flexible architecture with industry-grade capabilities and support both frontend and backend semiconductor manufacturing. We believe that the combined advanced portfolio will deliver cutting edge solutions for advanced semiconductor process control and facilitate our customers’ challenging technical transitions. We offer a combination of materialswill expand Nova’s total available market beyond frontend semiconductor manufacturing into the backend and dimensional metrology, advanced modeling algorithms that combine machine learningpackaging markets.
Our Market
Semiconductor Industry and big data within both integrated and standalone configurations, thereby enabling our customers to gain deeper insight throughout the entire development and manufacturing processes. We supply our metrology solutions to major semiconductor manufacturers worldwide, and are recognized for excellence since our first system was installed in 1995.Metrology Market
The semiconductor manufacturing process starts with a flat silicon disc known as a silicon wafer upon which integrated circuits are constructed. To construct the integrated circuits, a series of layers of thin films that act as conductors, semiconductors or insulators are applied to the polished side of the wafer.applied. During the manufacturing process, these film layers are subjected to processes which remove portions of the film, create circuit patterns and perform other functions. The semiconductor manufacturing process requires numerous precise steps and strict control of equipment performance and process sequences. Tight process control can be achieved through monitoring silicon wafers and measuring relevant parameters beforebefore’ during or after each process step, with metrology tools such as those we produce.tools.
The growing investment in advanced technology nodes and device structures introduces growing complexity and new challenges. Scaling limits and technology progresschallenges into the semiconductor manufacturing process, as manufacturers are continuously pushed in order to improve performance and cost andto gain competitive advantage. These fundamental elements create favorable market conditions for metrologyIn a climate of constant growth, where more process steps are needed, new novel materials are introduced and innovative structures and packaging solutions are incorporated. We believe that all the above market conditions set favorable business environment for growth.
The Semiconductor Manufacturing Process
Semiconductors devices typically consist of transistors, memory cells or other components connected by an intricate system of circuitry on silicon wafers. Integrated circuit manufacturing involves thousands ofmany individual steps, some of which are repeated several times, through which numerous copies of an integrated circuit are formed on a single silicon wafer. Typically, more than 30 very thin patterned layers are created on each wafer during the manufacturing process. At the end of the manufacturing process, the wafer is cut into individual chips or dies. Because semiconductor specifications are extremely tight, and integrated circuits are becoming more complex, requiring ever more sophisticated manufacturing processes, the process steps are constantly monitored, and critical parameters are measured at each step using metrology equipment.
The processes described above are repeated in sequence until the last layer of structures on the wafer has been completed. Each integrated circuit on the wafer is then inspected and its functionality tested before shipment. Measurementsmeasurements taken by metrology systems during the manufacturing process help ensure process uniformity and help semiconductor manufacturers avoid costly rework and misprocessing, therebytherefore increasing efficiency, yield and profitability.
The Need for Effective Process Control and Metrology Tools
Several technical and operational trends within the semiconductor manufacturing industry are strengthening the need for more effective process control and metrology solutions. These trends include:
•Materials Engineering. In order to overcome limitations in the continued shrink of transistor dimensions, which is used to improve performance, leading manufacturers are introducing new novel materials to IC production. New materials introduction requires new processing and metrology solutions in the atom level and thus represent a challenging development for the semiconductor manufacturing industry. It also representing a growing demand for more tighter materials control and therefore increasing demand for Materials Metrology solutions to control parameters such as composition, stress, ultra-thickness, crystallization and more.
In order to address the continuous increasing costs and challenges associated with these trends, we believe semiconductor manufacturers must enhanceimprove manufacturing productivity. One wayprocedures, production yields and time to enhance productivity is through improvements in process control, with a greater emphasis on metrology as part of process control. As part of this emphasis on metrology, manufacturers are taking more measurements to characterize each step ofmarket. Beyond improving the semiconductor manufacturing process,technology, introducing new and enhanced measurement techniques are being used to provide meaningful data and the data provided is being used in new ways to enhance the manufacturing process. We believe that the demand for advanced process control systems that address the evolving needs of semiconductor manufacturers will continue to drive the growth in the market for process control systems and that the demand for metrology will be even higher as a result of the short time cycle of each technology and the need to fast ramp from R&D to production.
The Semiconductor Market – Update
According to Gartner, Inc., forecasts the world GDPsemiconductor revenues are expected to grow by 2.9%25.1% in 20192022, compared to an estimated increasegrowth of 3.1%10.4% in 2018.
According to research reports, future demand drivers for semiconductors include 5G mobile devices, data centerscenter and cloud infrastructure, Artificial Intelligence, Augmented and Virtual Reality, Smart Sensors, internet-of-things and other electronic equipment.
Products & Technologies
Our product portfolio includes a complete set of metrology platforms suited for dimensional, films ,materials and chemical metrology measurements for process control across multiple semiconductor manufacturing process steps including lithography, Etch, CMP, deposition, electrochemical plating and advanced packaging. Our offering is comprised of several key product lines, spanning multiple technologies and addressing key challenges in semiconductor process control, from R&D to High-Volume-Manufacturing.
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| Technology | Product Line | Key applications | Product families | |
• • • • | Broadband Spectrophotometry Scatterometry Spectral Reflectometry Imaging and Image Processing | Dimensional Optical CD Integrated Metrology | Critical Dimensions Thin films | Nova i Platform Nova 3090 Nova 2040 Nova ASTERA |
| Dimensional Optical CD Stand-Alone Metrology | Nova T-platform Nova MMSR | |||
| • | Spectral Interferometry | Nova PRISM | ||
• • | X-Ray Photoelectron Spectroscopy X-Ray Fluorescence | X-Ray Materials Metrology | Thin film Composition | Nova VERAFLEX |
| • | Secondary Ion Mass Spectrometry | SIMS Materials Metrology | Composition depth-profiling | Nova METRION |
| • | Raman Spectroscopy | Optical Materials Metrology | Strain Crystallinity | Nova ELIPSON |
| • | Computational Modeling for | Physical modeling (Modeling Software Solutions) | Nova Mars | |
| Metrology Platforms | ||||
• • | Machine Learning Advanced Algorithms | Mathematical modeling algorithms (Software solutions) | Nova FIT | |
• • | Big Data Analytics High Power Computing | Fleet Management (Software solutions) | Nova FM Nova HPC QED | |
Following the acquisition of ancosys in January 2022, we have expanded our technology offering by adding Chemical Analytical methods (such as CVS, HPLC, Titration, Spectroscopy) with applications of Chemical metrology in various steps.
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About the product lines
| 1. | Dimensional Metrology |
Nova’s integrated metrology (IM) - Integrated platforms that enable advanced process control schemes that(APC) required for the most advanced logic and memory technology nodes. Nova’ IM solutions offer fast metrology with high productivity, targeting manufacturing of advanced logic and memory device technologies. Integrated metrology systems are closer to the actualdirectly integrated with manufacturing process stepequipment and produce wafer to wafer variation control. Nova’s approach is to lead the industry with solutions that can enable effective and accurate measurements in non-ideal process conditions. Our integrated metrology systems provide semiconductor manufacturers with effective and efficient process control by measuring wafers and their properties immediately afterwithin the process without removing the wafer from the process equipment. All ourenvironment. This family of products use our patented measuring methods that enable usallows within-wafer and within-die variation control. Enriched with Nova’s advanced modeling and algorithmic solutions, Nova’s integrated metrology provides enhancements in metrology accuracy, precision, and tool matching.
Nova’s stand-alone metrology platforms are utilized to produce optical measuring systems thatcharacterize critical dimensions such as width, shape and profile with high precision and accuracy and are small enough to be incorporated directly inside many types of equipment used in semiconductor processing. Integrated systems measuremultiple areas of the wafer within the actualfabrication process environment, reducing labor and wafer handling as well as the risk of contamination of or damage to the wafer. In addition, we believe that our systems deliver significant increases in overall equipment efficiency through advanced process control, along with improving wafer-to‑wafer uniformity, all with minimal operator intervention.
| 2. | Modeling and Software |
Nova MARS - Nova MARS software package is a multi-channel metrology modeling engine designed for the most advanced 3D structures in advanced process nodes of semiconductor manufacturing. It’s a complete modeling solution for scatterometry and interferometry models’ development, material characterization and recipe optimization which is crucial for facing increasing challenges in semiconductor metrology. The Nova MARS also injects physical and process related knowledge to solve complex structures.
Nova FIT - Nova FIT modeling suite compliments traditional modeling of Optical Critical Dimensions by machine learning and data driven algorithmic solutions. The algorithmic suite works in conjunction with NovaMARS®Nova MARS physical modeling engine and Nova’s fleet management solution to improve metrology performance, speed up time to solution and expendexpand metrology envelope for enriched process control. NovaFitNova FIT embeds the most advanced machine learning and big data architecture into optical modeling, revolutionizesenhancing the way customers utilize metrology measurement data and expands the metrology performance envelope to tighten process windows, avoid process excursions and improve yield. In addition to our modeling software solutions, we have provided the Nova
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Nova’s Centralized Fleet Management platform which is Nova solution for managing large fleets of metrology tools to deliver high productivity, operational efficiency and advanced analytics in high volume production environment of foundryControl - Nova’s Fleet Management and memory customers. The fleetPerformance Monitoring Center simplify the management solution offers an easy and intuitive platform for managing and improvingenhance the overall productivity of Nova’sNova tools in the fabrication site. The platform’s ability to process and analyze large amounts of fleet of systems and metrology data using advanced data analytic tools provides our customers with intelligent and predictive insights on tool performance and process trends.
Nova HPC - The Nova HPC is a High-Performance Computing solution, which is designed to addressaccelerate Nova MARS and Nova FIT work processes. Nova HPC significantly expedites application development by accelerating library-building, real time regression and recipe-setting processes. Its advanced computing hardware design enables optimization of Nova’s proprietary algorithm performance, thus enabling the needs and working methodologies of metrology and process engineers in the fab.most calculation-demanding application development.
| 3. | Materials Metrology |
architectural scaling. The growing usage of complex and novel materials in advanced FinFET logic, DRAM and 3D NAND memory technology nodes has increased the demand for metrology solutions that can measure compositionmaterials properties, In Line and film thicknessIn Die, with high precision and accuracy in recent years. Ouraccuracy. Nova’s materials metrology division, has pioneered the materials metrology segment with productsoffering utilizes powerful X-Ray, Raman and SIMS technologies that utilize X-ray photoelectron spectroscopy (XPS), a powerful technology that hashave been optimized to provide the automation, speed and reliability required in today’s advanced semiconductor production environment. As part of Nova’s strategic plan, Nova intends to increase its focus on the evolving materials engineering market. The demand to precisely characterize and control materials composition, thickness, stress and more, is growing in advanced Memory and Logic nodes and requires innovative metrology solutions. Our Nova ELIPSON, METRION and VERAFLEX platforms aim to provide such capabilities.
VERAFLEX - Nova’s VERAFLEX combines enhanced XPS is uniquely suited for the move(X-Ray photoelectron spectroscopy) capability with a unique low energy XRF (X-Ray fluorescence) channel to thinner films and smaller features, while improving the performance at each new technology node. Our XPS products are used byaddress logic and memory device manufacturers worldwidefabrication challenges. This innovative inline technology is a surface-sensitive quantitative spectroscopic technique that is used to measure, monitor and control critical device layers in high-volume production and to enable rapid development and controldetermine the elemental composition of complex, new processes. Nova products set the standard for High K – Metal Gate, tunnel oxide and capacitor film metrology.thin films.
| • | Nova METRION- Nova METRION- targets process control of 3D logic and memory semiconductor devices. The technology enables advanced materials profile measurements by bringing secondary ion mass spectrometry (SIMS) into semiconductor production lines on both monitor and product wafer. The Nova METRION provides quantitative and actionable results on depth profiling of compositional information with high-depth resolution and precision. |
Nova ELIPSON - Nova ELIPSON utilizes Raman spectroscopy, a vibrational spectroscopy technique, to detect multiple material properties such as strain, crystallinity, phases, grain size and Technology Synergiescomposition. The combination of a small spot and high speed of this non-destructive, optical method makes it a metrology of choice for both memory and logic segments.
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Our Customers, Sales and channels of information to optimize the metrology performance, we have introduced hybrid metrology. Hybrid metrology combines measurements from multiple metrology toolset types in order to enable or improve the measurement of one or more critical parameters required for process control of advanced devices, materials and architectures. In the hybrid ecosystem, two or more toolsets measure the same or similar targets. The data from one toolset helps reducing the model degrees of freedom of the other toolset (typically Optical metrology) resulting in improved performance of the combined measurement in compare of that of any of the individual toolsets. Nova’s hybrid metrology solution is implemented in production in advanced technology nodes and is available with multiple metrology toolsets including CD SEM and X-ray Photoelectron Spectroscopy (XPS) technologies.Marketing
Our Technologysales and marketing strategy is based mostly on direct sales channels where we engage with our customers from the early stages of process development, to address their challenges in the development phase, and later on support their technology transition to high volume production. We seek to establish and maintain tight cooperative relationships with our customers by consistently providing them with a high level of service, support and new capabilities. We have a global network of sales and marketing, customer service and applications support offices worldwide. Our teams are empowered by frequent trainings, remote support options, online resources and rich marketing collateral.
We believe thatserve all leading manufacturers in the logic, foundry and memory sectors of the integrated circuit manufacturing industry. Our customers are located across Asia, Europe and North America.
For the distribution of our total revenues, from products and services, by geographic areas, see Note 12A to our consolidated financial statements.
The semiconductor industry is dominated by a small number of large companies. As a result, our sales are highly concentrated among a relatively small number of customers. The following table indicates the percentage of our total revenues derived from sales to our five largest customers and the range of these revenues from these customers for the periods indicated.
| 2019 | 2020 | 2021 | ||||||||||
| Total revenues from five largest customers | 67 | % | 69 | % | 70 | % | ||||||
| Range of revenues from five largest customers | 3%-27 | % | 5%-26 | % | 4%-31 | % | ||||||
Competition
The industries in which Nova operates are highly competitive and characterized by rapid technological and engineering expertise and research and development capabilities allow uschange. Nova’s ability to compete generally depends on its ability to develop and offerintroduce competitive solutions, commercialize its technology in a timely manner, continuously improve its products, and develop new products and technologies tothat meet the ever-changing demandsevolving customer requirements. Significant competitive factors include technical capability and differentiation, productivity, cost-effectiveness and the ability to support a global customer base. The importance of these factors varies according to customers’ needs, including product mix and respective product requirements, applications, and the semiconductor industry. We have applied our technologicaltiming and engineering expertise to develop a wide rangecircumstances of integrated and stand-alone products for the dielectric CMP, copper CMP, Tungsten CMP, Etch and lithography processes as well as high end CVD deposited layers, Cu electroplating and sputteringpurchasing decisions. Substantial competition exists in all areas of Cu barrier and seed materials. Because of our open architecture policy, our integrated metrology solutions can work with most models of CMP and Etch tools made by the major process equipment manufacturers, for both 200 mm and 300 mm applications.Nova’s business.
Research and Development
We have assembled a core team of experienced scientists and engineers who are highly skilled in their particular field or discipline. Our research and development core competencies, technologies and disciplines are in scatterometry, thin film metrology, XPS, and materialinterferometry, Raman Spectroscopy metrology and semiconductor process control, and include multidisciplinary measurement instruments, complex system engineering, algorithms, physical modeling, optical modeling,design, interpretation software, machine learning, image acquisition, pattern recognition, X-ray energy sources, electron optics and detection, vacuum systems and equipment integration. Our research and development staff consistsconsist of about 275330 highly skilled members, approximately 8380 of whichwhom hold Ph.D.’s.’s (not including skilled members of ancosys, which we acquired in January 2022). In addition, we rely on independent subcontractors and consultants in various fields. Since June 2003, our research and development operations in Israel are certified as 9001/2000for ISO 9001 quality standard.standard (Current ISO 9001:2015 version).
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The metrology and process control market is characterized by continuous technological development and product innovations. We believe that the rapid and ongoing development of new products and enhancements to our existing product lines is critical to our success. Accordingly, we devote a significant portion of our technical, management and financial resources to developing innovative products, new applications and emerging innovative technologies.
Our vision is to continue to be a marketan innovative leader in the semiconductor process control market, increasethrough increasing our leadership in integratedthe Dimensional and Materials metrology solutions, increase our leadership in in-line composition and thickness of ultra-thin layers and become the leader in the stand-alone Optical CD metrology market, and
our research and development efforts and activities are designed to support this vision. Our research and development policy is based on aefforts are structured process of initiating newthrough different and separate development projects, and on-going review of existing development projects. Project initiation is based onwhich are initiated following a detailed project plan, technical feasibility, and risk and market analysis. Each project isThe main projects are monitored throughout itstheir life cycle in a structured process, including design reviews and project management reviews.
In the frame of our research and development activities we enter intoparticipate from time to time in development consortium arrangements, which also help us to support our customers in the transition to advance technology nodes in the coming years.nodes. These consortiumsconsortia are joint collaboration programs with other semiconductors companies and are supported and funded by the IIA and\or European Joint Research. It should be noted, that in order to maintain our eligibility for these programs, we must continue to meet certain conditions. These programs might also restrict our ability to manufacture particular products and transfer particular technology, which were funded by the IIA. For additional information, see “Item 5C - Grants from the Israel Innovation Authority”Authority & European programs” in this annual report on Form 20-F.Annual Report.
As part of our long-term technological collaboration, we are also engaged with joint development activities with some of our strategic customers, as well as with research institutes and other semiconductor companies. These activities sometimes impose some limitations on the joint intellectual property developed as part of these programs.
Our continued success depends in part upon our ability to protect our core technology and intellectual property. We therefore have an extensive program devoteddevoting resources to seeking patent protection for our inventions and discoveries that we believe will provide us with competitive advantages. As of December 31, 2018, our portfolio includes more than 150 U.S. patents and about 90 non-U.S. patents. The U.S. patents we hold have expiration dates ranging from 2019 to 2034. We also have about 40 U.S. patent applications pending and more than 105 applications pending in other countries including 7 PCT applications. Our patents and applications principally cover various aspects of optical measurement systems and methods, integrated process control implementation concepts, and optical, opto-mechanical and mechanical design. In addition, our patents and applications principally cover various aspects of X-ray based measurement systems and methods, including process control implementation concepts, X-ray energy sources, electron optics and detection, vacuum systems and equipment integration. We haveWith the acquisition of ancosys in January 2022, our patents and applications portfolio also registered 7 trademarks in the U.S. and have more than 30 registered trademarks and 16 applications for trademarks’ registration in countries other than the U.S.
include aspects of Chemical metrology. To protect our proprietary rights, we also rely on a combination of copyrights, trademarks, trade secret laws, contractual provisions (e.g. confidentiality agreements) and licenses. Our copyrights include software copyrights. We constantly seek to control access to, and distribution of our proprietary information, such as our proprietary algorithms. We enter into confidentiality and proprietary rights agreements with our employees, consultants and business partners, and we control access to and distribution of our proprietary information.
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Our in-house know-how is an important element of our intellectual property. The development and management of our products requires sophisticated coordination among many specialized employees. We believe that duplication of this coordination by competitors or individuals seeking to copy our products would be difficult. The risk of a competitor effectively replicating the functionality of our products is further mitigated by the fact that most of the core technology operating on our systems is not exposed to a user or to our competitors. To protect our technology, we implement multiple layers of security.
From time to time, we receive communications from others asserting that our products infringe or may infringe their intellectual property rights. Typically, our in-house patent counsel investigates these matters and, where appropriate, retains outside counsel to provide assistance. We are not presently involved in any material legal proceedings in which a third party has asserted that we have violated their intellectual property rights.If, however, we become involved in any such litigation and its outcome is adverse to us, it may result in a loss of proprietary rights, subject us to significant liabilities, including trebletriple damages in some instances, require us to seek licenses from third parties which may not be available on reasonable terms or at all, or prevent us from selling our products. Furthermore, any litigation relating to intellectual property, even if we are ultimately successful, could result in substantial costs and diversion of time and effort by our management. This in and of itself could have a negative impact on us.
While we believe that we would be successful in any litigation seeking to enforce our patent rights, the ultimate outcome of any litigation or other legal proceedings cannot be predicted.
| 2016 | 2017 | 2018 | ||||||||||
| (US Dollars, in thousands) | ||||||||||||
| Taiwan, R.O.C. | $ | 74,567 | $ | 68,041 | $ | 62,460 | ||||||
| Korea | 26,871 | 61,664 | 79,290 | |||||||||
| USA | 15,269 | 38,254 | 20,082 | |||||||||
| China | 31,269 | 36,715 | 58,982 | |||||||||
| Other | 15,927 | 17,319 | 30,320 | |||||||||
| Total | 163,903 | 221,992 | 251,134 | |||||||||
| 2016 | 2017 | 2018 | ||||||||||
| Total revenues from five largest customers | 76 | % | 75 | % | 66 | % | ||||||
| Range of revenues from five largest customers | 10%-34 | % | 8%-23 | % | 5%-20 | % | ||||||
Manufacturing
We have one manufacturing facility for our Optical CDbased product lines (including the Raman technology), which is located in Ness-Ziona, Israel, divided into two buildings, and one manufacturing facility for our X-ray and SIMS based product line,lines, which is located in Santa Clara,Fremont, CA, US.
In addition, we are expecting to expand our production and development capabilities with a new state-of-the-art clean room in Rehovot Israel that will support the Company’s newly introduced technologies and continuous growth. This new clean room is expected to become operational by the end of 2022. In addition to the expansion of our Israel cleanroom footprint, we are also in the process of establishing a cleanroom in a new facility to our Fremont site. This cleanroom is expected to become operational in the first half of 2022. As part of Nova’s corporate social responsibility, the construction is also expected to support high sustainability standards.
Our principal manufacturing activities include assembly, integration, final testing and calibration. Our production activities are conducted in our manufacturing and repair center facility in Israel and in Santa Clara.Fremont. We rely and expect to continue to rely on subcontractors and turnkey suppliers to fabricate components, build subassemblies and perform other non-core activities in a cost-effective manner. While we use standard components and subassemblies wherever possible, most mechanical parts, metal fabrications, optical components and other critical components used in our products are engineered and manufactured to our specifications. A small portion of these components and subassemblies are obtained from a limited group of suppliers, and occasionally from a single source supplier.
In order to leverage the relatively high volume of the systems we manufacture, and in order to decrease production costs, we continue to focus our internal manufacturing activities on processes that add significant value or require unique technology or specialized knowledge and outsource others. Our manufacturing operationssite in Israel received the ISO 9001 quality mark by an international certification institute in October 1999. Since then, we have upgraded our quality systems to conform to ISO 9001:9001:2015 requirements. Our site in Fremont received the ISO 9001:2015 quality mark in November 2021. We received the formal certification of ISO 14001 in 2010 which was upgraded to ISO:ISO 14001:2015 in 2016 and in 2014 we received the formal certification of OHSAS 18001:2007 for our manufacturing operations in Israel which was upgraded to ISO 45001 in 2019. We are being annually recertified for these standards.
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Environmental, Social and Governance (ESG)
Nova ESG 2021 Status
Based on our ESG plan that was launched in 2020 we aim at creating an advancedethical, inclusive, and sustainable ecosystem that improves the lives of the communities and the environment we are a part of. Recognizing the far-reaching implications that corporate behavior has over the socio-economic environment, we have been working towards full integration of ESG principles into our everyday operations and decision-making processes.
In 2020 we forged ahead on our environmental, social and governance (ESG) journey, and focused on developing a broader perspective and meaningful examination of the ESG aspects we affect. When COVID-19 disrupted everyday operations and lives of every person on the planet, our top priority was keeping our employees and their families safe, secure, and cared for. Hence, we quickly adapted our operations and health and safety measures to support our global teams.
In addition to the emphasis on the safety and wellbeing of our employees, Nova recognized the growing need to streamline the ESG management within the company. As such, Nova launched its ESG strategy in 2020, with the review and guidance of the company’s board of directors and with the cooperation with a global steering committee comprised of several Officers and Employees.
Following the adoption of this strategy, we instituted initiatives and working programs across the organization to provide clarity and coherence on Nova's ESG positions and activities.
We are proud of our ESG achievements throughout 2020 and 2021, and we plan to continue and develop our corporate ESG strategy. Our existing and planned ESG activities which are described below, indicate our growing commitment and engagement in this matter.
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In order to highlight the different directions we are taking in our ESG plans we describe it in the following chart:
| Environment | Building a Sustainable Future We strive to play our part in building a better future by protecting our environment and making a positive impact on the planet for the next generations to inherit. |
| Community Relations | Lifting our Communities We welcome members of the community into our family and provide them with the resources required to promote equality, belonging and self-worth |
| Diversity | Expanding Cultural Diversity We’re committed to building a diverse organization with a unique sense of belonging. We strive to expand our multidisciplinary platform with diverse talents and inspire the various segments of society. |
| Inclusion | Empowering Every Voice Our organization fosters an inclusive, open-minded and accepting environment. We respect all individuals and ensure everyone is seen, heard, feel valued and respected. |
| Ethics & Governance | Championing our Employees People at Nova always come first. We strive to create an ethical, safe and motivational workplace for our employees, one in which they belong, while their privacy, interests and well-being are protected. |
General:
ESG Steering Committee
Composed of several executive officers and company employees and under the guidance of our board of directors and management, we have established an ESG steering committee. The committee, led by the Chief Human Resources Officer is responsible to set the annual targets, evaluate the ESG implementation progress as a whole, review counsels’ recommendations, and lead internal work plans and their alignment with our ESG strategy and commitments, with special emphasis on Nova’s annual ESG report.
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Global ESG Lead
Nova’s main internal focal point to run all programs is the Global ESG Lead. The incumbent is working as an integral part of Nova’s HR division, as well as aligned with, and under the guidance of the aforementioned head of ESG steering committee. The incumbent is responsible for:
Communicating with business leaders across all Nova departments and sites on ESG
Developing and coordinating the strategies which underpin the company's ESG objectives
Conducting research into best practices to further ensure Nova’s positive impact on local communities and the environment, and
Representing and raising public awareness regarding our ESG commitment
Nova’s ESG Current Analysis:
In 2021, we contracted Ernst & Young (Israel) Ltd. to conduct a full initial analysis of ESG maturity throughout identified material topics, across all Nova global locations. The analysis was based on global ESG standards, such as GRI and SASB, and leading ESG raters’ expectations, including MSCI and Sustainalitycs. Key findings of the review indicated the following:
The company is at an ESG medium-high maturity level with Business Continuity Plan indicating high level understanding of risk management and preparedness
The Company demonstrates wide range of Social and Governance activities, including employees’ trainings on code of ethics, promoting gender equality, supporting of employees and suppliers during COVID19, putting emphasis on product quality, and more.
Nova is planning to release public disclosure of these activities in its planned ESG report 2022.
| 1. | Environment: |
Nova is a global organization, with operations and supply chains which span over multiple countries and cultures. It is for this reason that the nature of our work and the countries we source from and operate in, mean that despite our best intentions and efforts, there is always a risk that various forms of environment hazards and risks may exist. Yet, we believe sustainability is an indisputable force of change in our current environment, transforming how we live and work, and impacting our understanding of social and economic value and growth. This defines Nova’s environment standards and dictates our approach to our operations, supply chain and partners management, as well as our approach to promoting long-standing solutions and alternatives to improving our environmental impact.
Nova’s responsibility to advance sustainability and environmental responsibility, lies first and foremost with entering building our new headquarters in 2019 with sustainability of a “Leed Gold” certificate - LEED (Leadership in Energy and Environmental Design), which is a widely used green building rating system and provides a framework for healthy, safe, highly efficient, and cost-saving green buildings. The building includes installed control management systems with sensors for light and air conditioning, and with anti-sun layered curtains on all windows, which allow efficient energy consumption. Furthermore in all of Nova’s new buildings and facilities across the globe - U.S., Taiwan, and China - we strive to follow the sustainability standards.
We also implemented recycling measures in our facilities, which allow proper gathering and recycling.
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In general, our production lines don’t not involve industrial waste, and any waste that is created from used metal and electronics components is being processed through authorized companies which manage the disposal of toxic substances (IPA - "Tabib”). We also implemented recycling measures of production line related waste, such as packing materials, including crates and wooden pallets. In 2022, we will be focusing on the creation of Climate Change / EHS policy that discusses the commitment of Nova to the various activities that are in place; create standardization and unification of data collection in all sites; and finally, set KPI’s and Goals for the following years based on data collected and benchmarks.
| 2. | Social: |
Nova’s unique DNA and operating culture, along with its position as a leader in the semiconductor process control market, with approximately 1,000 employees and almost a dozen worldwide sites, position us with an extraordinary opportunity and responsibility to have a meaningful impact on the community surrounding us. We believe that by welcoming diverse cultures, experiences and opinions, we can develop technologies and ideas that transform lives and shape and impact the population around us.
Our strategy, shaped in 2020, is focused on the Human Capital. A top priority for us is ensuring all our employees and their families are safe, secure, and cared for. Along with the Access to Health Care we provide globally, this concern has increased with the disruption of COVID-19 to everyday lives and our daily operations have changed accordingly. Furthermore, in 2021, we decided to deepen our human capital focus on the Diversity, Equity and Inclusion (DE&I) pillars, and to frame our various operation programs accordingly:
We set a goal to increase the number of our female recruits by 10 percent during the year, a goal we have successfully achieved worldwide. As a result, the absolute number of female recruits in 2021 was doubled from 2020 and tripled from 2019.
We implemented inclusive language across several companywide documents and procedures
We conducted training to our leadership and HR teams on DE&I challenges and opportunities
We established employee resource groups devoted to the issue of DE&I
We nominated a Disability Services and Compliance Officer to provide care and support for individuals with disabilities and assist them to integrate into the organization, and
We adjusted Nova’s website to the latest accessibility requirements and standards.
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In 2021 we have deepened our relationships with our surrounding communities and strengthened our Community Relations. Nova has been striving for years to provide members of our local and global communities with resources to generate true social change by making a difference in people’s lives. With the help of our most valuable assets, our employees, we have chosen to focus on four critical areas: empowering women, people with disabilities, youth at risk, and national emergencies. In 2021, we established a donation committee led by our executive leadership and adopted a Donation and Charitable Contribution Policy which was approved by our board of directors. We are committed to make a significant impact on our community by mentoring and nurturing related projects and activities together with numerous non-profit organizations worldwide. As such, in 2021 we have dedicated our resources to the following activities:
Supporting youth at risk - through working with our partners, we have reached approximately 500 youths around Israel, supporting them with a unique program that runs “Night Vans" equipped with professional counsels who meet youths and provides support to the youths on their “own territory", helping them integrate into society.
Keeping our communities physically safe from harm - we have supported the addition of a new mobile bomb shelter in the heavily bombarded City of Ashkelon in Israel.
We offered Nova employees opportunities to volunteer and contribute to supporting youth via private tutoring in English and STEM (science, technology, engineering and mathematics) professions or other endeavors and topics which are close to their hearts and can help and inspire the youth.
We have strategically partnered with organizations in Taiwan and the U.S., that are best connected to the local communities and can help us promote aspects of STEM education among children and youth and empowering women.
Moving forward into 2022, investing in our Human Capital, and developing the diversity and inclusion pillars will continue to be a central focus. In addition to preserving human rights and social justice, we believe that increasing diversity, inclusion, and gender equality at the company will deliver a range of potential business benefits, including a more talented and satisfied team of employees.
| 3. | Governance: |
As part of our sustainable operations policies, we aim that our corporate governance and corporate behavior mechanisms align the interest of all our stakeholders. To do so, we developed a strong set of corporate values that inspire ethical behavior across all decision-making processes, and a management and control system to ensure that ethics and security issues are given their due weight, as following:
| • | Board Practices: |
Our board of directors consists of seven (7) members, of whom six (6) are independent and three (3) are women. In 2021, 26 meetings of our board of directors and its committees were held, with the directors’ attendance rate being higher than 90%.
| • | The Audit Committee of our board of directors currently consists of four (4) members, all independent directors, three (3) of whom are women and two (2) of whom hold deep financial expertise. The primary function of the committee is to assist the board of directors in fulfilling its oversight responsibilities by reviewing financial information, internal controls and the audit process. In addition, the committee is responsible for oversight of the work of our independent auditors, as well as the implementation of our internal enforcement plan and governance policies. The committee meets at regularly scheduled quarterly meetings. |
| • | The function of our Nominating Committee of the board of directors’ includes responsibility for identifying individuals qualified to become board members and recommending that the board of directors consider the director nominees for election at the general meeting of shareholders. The Committee currently consists of three (3) members, two (2) of whom are independent directors. |
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| • | The committee overseeing our pay practices is the Compensation Committee of our board of directors, whose function includes assisting the board of directors in discharging its responsibilities relating to compensation of the Company’s officers, directors and executives and the overall compensation programs and reviewing and approving, or if required by law, approving, and recommending for approval by the board of directors, grants and awards under the Company’s equity incentive plans. The primary objective of the committee is to oversee the development and implementation of the compensation policies and plans that are appropriate for the Company in light of all relevant circumstances, and which provide incentives that fit the Company’s long-term strategic plans and are consistent with the culture of the Company and the overall goal of enhancing shareholder’s value. The Committee currently consists of four (4) members, all independent directors and two (2) of whom are women. |
For further details on our board of directors and its Committees’ practices, refer to Item 6.C in this Annual Report.
Compensation Policy:
Our Compensation committee and board of directors have adopted a policy regarding the compensation and terms of employment of their directors and officers (“Compensation Policy”), which pursuant to the Companies Law is presented for re-approval of the Company’s shareholders at least once in every three years. Our shareholders voted on June 17, 2019 for the Compensation Policy recommended by our board of directors. Our Compensation Policy is designed to promote our objectives, business plan and long-term strategy, to create appropriate incentives to our office holders while taking into consideration the size and nature of operations of our Company as well as the competitive environment in which we operate. As such, our Compensation Policy is intended to incentivize superior individual excellence and to align the interests of our office holders with our long-term performance, and as a result, with those of our shareholders. To that end, a portion of an office holder compensation package is targeted to reflect both our short- and long-term goals, the office holder’s individual performance, as well as measures designed to reduce office holder’s incentive to take excessive risks that may harm us in the long-term. For example, the Policy limits office holders’ value of cash bonuses and equity-based compensation and sets a minimum vesting period for equity-based compensation. Our Compensation Policy also addresses each office holder’s individual characteristics (such as position, education, scope of responsibilities, seniority and contribution to the attainment of our goals) as the basis for compensation variation among our office holders, and considers the internal ratios between compensation of our office holders and directors to those of other employees. For further details on our pay practices, refer to Item 6.B in this Annual Report.
Shareholder Control & Ownership:
Nova is publicly traded whose securities are listed on the Nasdaq and TASE, and over 99% of our shares are held in free float. To our best knowledge, none of our shareholders is a controlling shareholder which can direct the Company’s activities. In addition, each share is entitled to one vote on each matter to be voted on at any Company’s shareholders meeting. Based on information provided to us, as of February 14, 2022 our 15 directors and officers, have had, as a group, sole voting and investment power of less than 2% of the issued and outstanding ordinary shares of our Company as of such date. For further details on our Pay practices, refer to Item 6.E and Item 7 in this Annual Report.
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Ethical Business Conduct:
Nova depends on its reputation for innovation, quality, service, and integrity. We are committed to upholding the highest professional standards of business conduct and maintaining confidence and trust in our relationships with each other, with our employees, customers, investors, suppliers, business partners, regulators, and others. We are committed to ethical business practices and compliance with all applicable standards, laws and regulations, and we believe that maintaining high standards of Corporate Governance is important for our success. We have hundreds of employees working worldwide, and each facility upholds its individual organizational culture while committed to the global Nova Code of Conduct and other Corporate Governance Policies. Our Executive and Financial Officers have leadership responsibilities that include nurturing this culture of commitment to ensure standards and compliance. In order to anchor this strategy in our day to day activities, we have adopted the following policies and practices:
| • | Code of Conduct. All of our directors, officers, service providers and employees must conduct themselves in accordance with our Code and seek to avoid even the appearance of improper behavior. The code is intended to promote the following:Compliance with Laws, Regulations and Company Policies; Avoiding conflict of interests and personal exploitation of corporate opportunities; Competition and Fair Dealing, handling of business inducements, and preventing anti-trust violations; Prevention of Discrimination and Harassment and promoting healthy and safe work environment; Preserving complete and accurate business information and records and engaging in an accurate accounting practices, and confidentiality of the company’s information; handling of public fillings and Protection and Proper Use of Company Assets; The Code sets principals and standards for: Insider trading policies, Anti-fraud, Anti-corruption policies, Whistleblower Policy. The Code is available on our employees portal, and each employee must familiarize with upon joining the company, and on an annual basis. The code is also posted on Nova’s website. Employees are clearly encouraged to report violations to the compliance team, senior management, or other officers as deemed appropriate. If matters concern accounting or auditing issues, employees can directly report to the Audit committee of the board of directors. Whistleblowers who make reports in good faith of suspected violations are protected from retaliation such as demotion or termination of employment because of reporting. Any Employee who wants to bring an ethical issue to light, can also write an anonymous complaint to the Corporate Secretary. |
| • | Insider Trading Policy. Nova has adopted an Insider Trading Policy that all employees must be familiar with and adhere to. Officers and employees may not trade in Nova’s securities while in the possession of “material non-public information” concerning Nova, its customers and suppliers, or during any quarterly or special blackout periods. Officers, Employees, and their immediate family members may trade in Nova’s securities only outside of the clearly defined blackout periods. A failure to comply with the Policy could result in a serious violation of the securities laws and may involve both civil and criminal penalties. |
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| • | Anti-Fraud and Anti Bribery Policies. We are committed to ethical behavior and values. It is amongst our first priorities to establish a corporate and working culture that enhances the value of ethics and promote the individual responsibility as well. To this effect, the Company has established an Anti-Fraud and Anti-Bribery Policies and Guidelines and a Complaint Procedure, which set the highest standards for personnel conduct related to ethical behavior and alertness. The cornerstone in preventing fraud is the creation of an environment that fosters morality, integrity and business conduct. Our Anti-Fraud policy outlines the responsibilities of all the involved parties with respect to fraud prevention, the actions to be taken if fraud is suspected and the mechanism of verifying suspicion of fraud, the reporting process and the recovery action plan. Our Anti-Bribery sets forth rules governing the giving, offering or receiving of anything of value to or from any non-Nova personnel with the intention of obtaining, securing, promoting or retaining any business activity. The purpose of the policy is to make sure that Nova and its employees do not violate applicable corruption laws and to protect the reputation of the Company. In addition to the anti-fraud policy, in 2021, we implemented an anti-fraud steering committee and forum which oversees and identifies fraud risks across the Company, and implemented an anti-fraud program which is tested and verified on a yearly basis. |
Accounting and Tax Transparency:
Our approach to global taxation for all types of taxes is to consistently comply with legal, regulatory, and internal control requirements as well as support our business and commercial strategy. We are committed to adhere to all applicable global tax laws, filings, and reporting disclosures. We account for tax risks in accordance with the applicable accounting standards and have internal controls in place over our tax reporting processes. Our transfer pricing policies are aligned with the guidelines of the Organization of Economic Co-operation and Development (OECD), as well as with all of the jurisdictions in which we operate. We apply the arm’s length principle when conducting intercompany transactions. We have an established network of internal and external tax and finance professionals who are knowledgeable in various direct and indirect taxes and who monitor ongoing tax law and business changes, so that we may adapt processes and deliverables accordingly. This network, along with our framework regarding internal policies and controls, seeks to ensure the complete and accurate communication of tax positions and risks, through established governance and reporting processes to our management and board of directors. Further details on our accounting and tax practices can be found in Items 10.E of this Annual Report.
Moving forward into 2022
Nova is committed to continue playing a major part in transforming societies to become more responsible, diverse, and sustainable. Indeed, we will continue to embed ESG responsibilities into our core business, culture and continue influence all our stakeholders. Our planned ESG policies and practices for 2022 will include (but are not limited to):
Considering the relevance of social development goals for our ESG overall strategy, as well as the wider community in which we operate
Further exploring how a broader ESG approach can underpin good practice for our company and its impact
Documentation, standardization and publication of company policies
Setting KPI’s and goals for the following years to assess company’s progress
Further investigating ESG priorities such as safety, belonging of our employees, sustainability development and collaborating with the local community.
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Capital Expenditures
Our capital expenditures are primarily for network infrastructure, computer hardware and software, leasehold improvements of our facilities, expansion of clean room facilities and system demonstration and development tools. None of these assets are held as collateral or guarantee other obligations. For additional information on our capital expenditures, see “Item 5B. Liquidity and Capital Resources” in this annual report on Form 20-F.
Government Regulation
For information relating to the impact of certain government regulations on our business, see “Item“Item 5.C – Grants from the Israel Innovation Authority” on this annual report on Form 20-F.Annual Report.
4.COrganizational Structure
Our Subsidiaries
Our subsidiaries as of the end of 2021 and the countries of their incorporation are as follows. All of our subsidiaries are wholly owned by the Company:
Name of Subsidiary | Country of Incorporation |
| Nova Measuring Instruments, Inc. | Delaware, U.S. |
| Nova Measuring Instruments K.K. | Japan |
| Nova Measuring Instruments Taiwan Ltd. | Taiwan |
| Nova Measuring Instruments Korea Ltd. | Korea |
| Nova Measuring Instruments GmbH | Germany |
| Nova Measuring Instruments (Shanghai) Co.,Ltd | China |
As of January 25, 2022, with the closing of the acquisition transaction of ancosys GmbH, the following subsidiaries were added:
| Name of Subsidiary | Country of Incorporation | Ownership |
| ancosys GmbH | Germany | 100% owned by Nova Measuring Instruments GmbH |
| ancosys Korea LLC | Korea | 100% owned by ancosys GmbH |
| ancosys Instrument Taiwan Ltd | Taiwan | 100% owned by ancosys GmbH |
| ancosys Inc. | Delaware | 100% owned by ancosys GmbH |
4.DProperty, Plant and Equipment
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In September 2019, our Israel headquarters moved to a new lease agreement for the lease of a total of approximately 12,000 square meters at a new building being built at the Science Park in Rehovot, with the intention to move our Israel headquarters during 2019.Rehovot. The lease periodagreement in Rehovot is expected to extend for a period of ten years.until 2029. We have the option to extend thethis lease period by two periods of five years each, subject to customary conditions. The lease period for thean additional space of approximately 2,0002,500 square meters is expected to beginin Rehovot, began in 2021 and will extend through the same lease periods asperiods.
As of the initial space. The manufacturing facility for Optical CD product lines and several R&D laboratories areend of 2021, the lease agreement in Ness Ziona is expected to remain at the same location in Ness-Ziona, which lease term extendsextend until January 31, 2026.
Our subsidiaries lease offices in various locations, for use as a research and development, manufacturing, service and pre-sale facility (depending on each subsidiary’s needs). Our U.S. subsidiary, (Nova Measuring Instruments, Inc.) leases approximately 1,885 square meters including approximately 450 square meters of production facilities. The current lease agreement of the premises expires on January 31, 2020 (with, at Nova Measuring Instruments, Inc.’s sole discretion, a right to extend the lease period for an additional two years). Nova Measuring Instruments, Inc. is expected to move intoleases approximately 3,800 square meters of a newly leased space,in Fremont, CA, which includes approximately 850 square meters of production facilities, duringfacilities. In addition to this space, the first halfUS entity entered into a new lease agreement for an additional 2,880 square meter facility, of 2019. This new facility leasewhich approximately 700 square feet will be allocated as an engineering cleanroom. Both Fremont leases are now synchronized to expire on March 31, 2026 (with, at Nova Measuring Instruments, Inc.’s sole discretion, a right2029 with an option to extend the lease period for an additional five years). Our Japanese subsidiary leasesyears, subject to customary conditions. In addition, we lease approximately 9070 square meters ourin New York, approximately 200 square meters in Oregon and approximately 160 square meters in Idaho.Our Taiwanese subsidiary leases a new space of approximately 1,0251,750 square meters andwhich includes a cleanroom facility, our Korean subsidiary leases approximately 1,0601,250 square meters. Ourmeters, our Subsidiary in China leases approximately 1,200 square meters our European subsidiary leases approximately 200150 square meters in Germany and France.France, and our Japanese subsidiary leases approximately 100 square meters.
We believe that our facilities and equipment are in good operating condition and adequate for their present usage.
None.
Item 5. Operating and Financial Review and Prospects
Information in this Operating Review and Financial Prospects Section should be read in conjunction with our consolidated financial statements and notes thereto which are included elsewhere in this report.
Executive Overview
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Our business is greatly affected by the level of spending on capital equipment by semiconductor manufacturers. In addition, demand for our products and services is affected by the timing of new product announcementsIC capacity expansion and releasesramping up of new technology nodes, by the timing of releasing products by us and our competitors, market acceptance of our new or enhanced products and changes or advancesimprovements in semiconductor design or manufacturing processes.
In the recent five years (2013-2018)(2016-2021), we were able to presentachieve positive Compound Annual Growth Rate (CAGR) of products revenues of approximately 18%22%, while Gartner Inc. estimates that the Wafer Fab Equipment (“WFE”)Process Control segment have experiencedhas achieved a CAGR of approximately 14%16.9% (Gartner Q4-2021 forecast, published on December 2021). We believe that our improved performance is attributed mainly to our continued diversification in revenue contribution. In the last fiveDuring these years, we successfully diversified our technology through acquisition to include X-rayX-Ray capabilities on top of our Optical technology, to measure both Dimensional and Material parameters, we added advanced machine learning algorithms on top of our physical modeling, and we advanced our traditional tool set to include the most advanced capabilities.capabilities in both hardware and software. We also diversified our revenue mix to include approximately 50% contribution from Memory, with several large customers.across semiconductor segments and territories. During these years, we benefited from market growth as well beingwere also able to increase our total available market withthrough development of new applicationstechnologies used for Materials and Dimensions metrology.metrology, addressing emerging applications in Memory and Foundry/Logic.
In 2018,2021, product sales accounted for approximately 77%81.0% of our total revenues, and services accounted for approximately 23%19.0%.
As of the end of 2018,2021, we had overall cash reserves, net of long term debt related to convertible senior notes, of approximately $178$370 million, and working capital of approximately $233$278 million. In January 2022, we used approximately $80 million of this cash to pay for the acquisition of ancosys.
Our service organization is operatedoperating on a profit and loss basis and is measured as a cost center in each territory and on a global basis. Thethe objectives of our service organization are defined and measured by: customer satisfaction;satisfaction, quality parameters, such as time to repair and mean time between failures;support parameters; and by profit and loss criteria. The service organization provides support to all products we sell, during both the warranty period and the post warranty period. Service revenues are mostly driven by extended warrant, Time and Materials requests, service contracts and proactive sales to the install base to improve productivity and metrology capabilities.
Significant Events in 2018and2021 and Outlook for 20192022
During 2018,2021, we demonstrated several significant achievements:
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Diversified customer mix, including several major leading customers.
| o | Hardware and Software coupling |
| o | Unique Optical and |
| o | Holistic offering, including Integrated and Standalone metrology |
| o | Materials and Dimensions solutions |
Continuous proliferation of Nova’s recent optical solutions – PRISM and ELIPSON.
Introduction of several new generations of Dimensional and Materials metrology platforms. Introduction of Machine Learning solutions (NovaFIT) to enhance metrology measurements and to complement the traditional Physical modeling (NovaMARS).
Deepening collaboration with several research institutes and customers' development centers, utilizing a variety of our products, leading to our positioning as a long-term technology development and high-volume manufacturing partner.
The acquisition of ancosys, a privately held company headquartered in Germany, closed in January 2022. ancosys is a leading provider of chemical analysis and metrology solutions for advanced semiconductor manufacturing.
ESG (Environment, Social and Governance) – during 2021 the company has built & embraced an enhanced Corporate Social Responsibility Strategy. We are determined as a company to play a vital role in creating a world that values equality, safety and environmental health for the benefit of future generations to come. We are committed to proactively invest in embedding social responsibility as part of our culture and business management to support our values.
In 2019,2022, we plansplan to focus on the following:
| Investing in the organization development to enhance the human capital and the strength of the global teams based on our values and culture. Continue to strengthen our competitive and market position, through unique innovation and technical leadership. |
Continue our plans to generate revenues and competitive edge through SW algorithm and Machine Learning solutions.
Strengthening the partnership with our customers and build a “Customer Centric” approach to accommodate and deliver customers’ requirements along the semiconductor lifecycle.
Build an extensive roadmap for ancosys' chemical metrology products in order to enhance Nova's existing product's offering.
Create synergy between Nova and ancosys' technologies towards a combined offering for advanced applications, which require dimensional, material and chemical metrology.
Grow our clean room and production facilities to meet the semiconductor demand cycle around the globe.
Elevate our investment in ESG programs in order to promote social responsibilities programs through our five pillars program (for details refer to Environmental, Social and Governance (ESG) chapter in Item 4.B in this Annual Report).
The challenges and risks we faceNova faces in meeting ourits plans include:
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On time delivery of the required solutions to meet the current and future needs of our existing and new customers.
Achieving long-term growth targets while supporting extensive growth in all our activities. Building a solid global infrastructure to accommodate further growth. |
In order to address thesethe risks and challenges associated with the COVID 19 pandemic Nova implemented a thorough and detailed global plan to secure the employees safety and health, guarantee supply chain resiliency, assure business continuity and continuous support to our customers.
In order to address the technical and roadmap risks and challenges, we are working closely with leading customers’ process development and research groups and with the leading process equipment manufacturers as well as with leading technology research institutes. The purpose of working closely with these entities is to receive from them as early as possible information and feedback on their current and future metrology and process control needs and tune theour roadmap to support such needs.
It is our belief that we haveNova has been able to consistently win and growimprove its market position as a result of a combination of factors:
| Our |
| Our ability to closely team with our customers allows us to predict the industry evolution and process control challenges and by that introduce innovative and advanced metrology solutions to solve industry needs. |
51 Our diversified portfolio, which is a result of continuous investment in research and development, is becoming more attractive to our customers. |
Well controlled P&L and operating model to support our profitable growth and operational resiliency.
Understanding the industry’s challenges for the next several years, it is our belief that we should continue growing going forwardour long-term growth as the adoption of our solutions increases as a function of process complexity and industry development. We believe that our served addressable market is continuously expanding as we penetrate to more steps of the semiconductor manufacturing processes and, as we continue innovating our portfolio for leading new emerging metrology opportunities. We also believe that going forward, as the semiconductor production process is becoming much more complicated with variety of challenges, the necessity for our unique portfolio, combining multiple technologies for both materials, filmMaterials and dimensionalDimensional metrology, will grow in the next few years.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.America generally accepted accounting principles. We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Use of Estimates – General
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our management evaluates its estimates on an ongoing basis, including those related to, but not limited to income taxes and tax uncertainties, collectability of accounts receivable, inventory accruals, fair value and useful lives of intangible assets, lease discount rate, lease period, convertible senior notes borrowing rate, and revenue recognition. These estimates are based on management's knowledge about current events and expectations about actions the Company may undertake in the future. Actual results could differ from those estimates.
Revenue Recognition
Under ASC 606, the company derives revenue from the sales of advanced process control systems, spare parts, labor hours (mainly systems installation) and service contracts.
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Revenues derived from sales of advanced process control systems, spare parts and labor hour are recognized at point in time, when control of the promised goods or services is transferred to the customers, upon fulfillment of the contractual terms.
Revenues derived from service contract, which generally specify fixed payment amounts and contractual terms for periods longer than one month, are recognized ratably over time.
The amount recognized reflects the consideration that the Company expects to be entitled to in exchange for those performance obligations.
Revenues from sales which were not yet determined to be final sales due to acceptance provisions are deferred.
Contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative Standalone Selling Price (“SSP”). Judgment is required to determine the SSP for each distinct performance obligation. The Company uses a range of amounts to estimate SSP when it sells each of the products and services separately and needs to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.
The Company enters into revenue arrangements that includes products and services which are generally distinct and accounted for as separate performance obligations. The Company determines whether arrangements are distinct based on whether the customer can benefit from the product or service on its own or together with other resources that are readily available and whether the Company's commitment to transfer the product or service to the customer is separately identifiable from other obligations in the contract.
Investments in marketable securities are classified as available for sale at the time of purchase. Available for sale securities are carried at fair value based on quoted market prices, with unrealized gains and losses, reported in accumulated other comprehensive income (loss) in shareholders’ equity. Realized gains and losses on sales of marketable securities, are included in financial expenses (income), net. The amortized cost of marketable securities is adjusted for amortization of premium and accretion of discount to maturity, both of which, together with interest, are included in financial expenses (income), net.
The Company classifies its marketable securities as either short term or long term based on each instruments’ underlying contractual maturity date. Marketable securities with maturities of 12 months or less are classified as short-term and marketable securities with maturities greater than 12 months are classified as long-term.
The Company accounts for Credit losses in accordance with ASU 2016-13, Topic 326 “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments” which modified the other than temporary impairment model for available for sale debt securities. The guidance requires the Company to determine whether a decline in fair value below the amortized cost basis of an available for sale debt security is due to credit related factors or noncredit related factors. A credit related impairment should be recognized as an allowance on the balance sheet with a corresponding adjustment to earnings, however, if the Company intends to sell an impaired available for sale debt security or more likely than not would be required to sell such a security before recovering its amortized cost basis, the entire impairment amount would be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis.
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Inventories
Inventories are stated at the lower of either the actual cost or net realizable value. Inventory write-downs are provided to cover risks arising from slow-moving items, technological obsolescence, excess inventories, discontinued products, and for market prices lower than cost, if any. We periodically evaluates the quantities on hand relative to historical and projected sales volume (which is determined based on an assumption of future demand and market conditions), the age of the inventory and the expected consumption of service spare parts. At the point of the loss recognition, a new lower cost basis for that inventory is established. Any adjustments to reduce the cost of inventories to their net realizable value of the inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements for the next twenty-four months. As demonstratedare recognized in earnings in the past, demand for ourcurrent period.
Inventory includes costs of products can fluctuate significantly. A significant increasedelivered to customers and not recognized as cost of sales, where revenues in the demand forrelated arrangements were not recognized.
To support the our products could result in a short-term increase inservice operations, we maintains service spare parts inventory purchases while a significant decrease in demand could result in an increase inand reduce the amount of excess inventory quantities on hand, which could lead to losses. In addition, our industry is characterized by rapid technological change, frequent new product developments, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if our inventory is determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination. Likewise, if our inventory is determined to be undervalued, we may have over-reported our costs of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on thenet carrying value of ourthis inventory and our reported operating results.
Goodwill
Goodwill and other purchased intangible assets have been recorded as a result of the acquisition of ReVera. Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired, and related liabilities. Goodwill amount on December 31, 20182021 was $20$20.1 million. We have not yet concluded the purchase price allocation analysis of ancosys acquisition, which was closed in January 2022. We expect this analysis to significantly increase the goodwill amounts in future balance sheets.
Goodwill is not amortized, but rather is subject to an impairment test. In accordance with ASC 350, “Intangibles – Goodwill and Other”, at least annually (in the fourth quarter), or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Company has an 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 value prior to performing the quantitative goodwill impairment test. The Company operates in one operating segment, and this segment comprises its only reporting unit.
Following the adoption of ASU 2017-04, "Simplifying the Test for Goodwill Impairment", as part of the quantitative goodwill impairment test, any excess of the carrying value of the reporting unit over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to the fair value of the reporting unit. For the year ended December 31, 2018,2021, we performed an annual impairment analysis, using market capitalization, and no impairment losses have been identified.
Intangible assets
As a result of the acquisition of ReVera in April 2015, our balance sheet included acquired intangible assets, in the aggregate amount of approximately $12.8$5.1 million and $10.2$2.6 million as of December 31, 20172020 and 2018,2021, respectively. We have not yet concluded the purchase price allocation analysis of ancosys acquisition, which was closed in January 2022. We expect this analysis to significantly increase the intangible assets amounts in future balance sheets.
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In 2015, we allocated the purchase price of ReVera to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. These valuations require management to make significant estimations and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include future expected cash flows from technology acquired, backlog and customer relationships. Management’s estimates of fair value are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.
Intangible assets are comprised of acquired technology, customer relations, backlog and IP R&D.&D.
We are subject to income taxes in Israel, the United States and 2018,numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our taxes. Although we believe our reserves are reasonable, no impairment chargesassurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made.
Our accounting for certain income tax effects is incomplete, but we have determined reasonable estimates for those effects. Our reasonable estimates are included in our financial statements as of December 31, 2021.
Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
Convertible senior notes
The Company accounts for its convertible senior notes in accordance with ASC 470-20 "Debt with Conversion and Other Options". Pursuant to ASC Subtopic 470-20, issuers of certain convertible debt instruments, such as the Notes, that may be settled wholly or partially in cash upon conversion are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The liability component at issuance is recognized at fair value, based on the fair value of a similar instrument of similar credit rating and maturity that does not have a conversion feature. The equity component is based on the excess of the principal amount of the convertible senior notes over the fair value of the liability component and is recorded in additional paid-in capital. The equity component, net of issuance costs and deferred tax effects is presented within additional paid-in-capital and is not remeasured as long as it continues to meet the conditions for equity classification. The difference between the principal amount and the liability component represents a debt discount that is amortized to financial expense over the respective terms of the Notes using an effective interest rate method. The Company allocated the total issuance costs incurred to the liability and equity components of the convertible senior notes based on their relative values.
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Issuance costs attributable to the liability and equity components were identified.$5,894 and $518, respectively. Issuance costs attributable to the liability are netted against the principal balance and will be amortized to financial expense using the effective interest method over the contractual term of the notes. The effective borrowing rate of the liability component of the notes (after deduction of the abovementioned issuance costs attributed to the liability component) is 2.365%. This borrowing rate was based on Company's synthetic credit risk rating.
For a discussion of other significant accounting policies used in the preparation of our financial statements and recent accounting pronouncements, see Note 2 to our consolidated financial statements contained elsewhere in this report.
New Accounting Pronouncements
For information regarding new accounting pronouncements, see Note 2W2X to our consolidated financial statements contained elsewhere in this annual report.Annual Report.
5.AOperating Results
Overview
| 2016 | 2017 | 2018 | ||||||||||
| Taiwan, R.O.C. | 45 | % | 31 | % | 25 | % | ||||||
| USA | 9 | % | 17 | % | 8 | % | ||||||
| Korea | 16 | % | 28 | % | 32 | % | ||||||
| China | 19 | % | 17 | % | 23 | % | ||||||
| Other | 11 | % | 8 | % | 12 | % | ||||||
| Total | 100 | % | 100 | % | 100 | % | ||||||
For the distribution of our total revenues, from products and services, by geographic areas, see Note 15a to our consolidated financial statements.
The sales cycle forof our systems typically ranges from six (6) to twelve (12) monthsis long and depends upon the status of our system’s integration with a particular manufacture and model of process equipment, the evaluation criteria of our customers, and the technology or application of the process. Additionally, the rate and timing of customer orders may vary significantly from month to month as a function of the specific timing of fab expansions. Accordingly, if sales of our products do not occur when we expect or we are unable to adjust our estimates on a timely basis, our expenses and inventory levels may fluctuate relative to revenues and total assets. In 2018, our inventory levels at the end of each quarter ranged from $39 million to $42 million. We schedule production of our systems based upon order backlog and customer forecasts. We include in backlog only those orders to which the customer has assigned a purchase order number and for which delivery has been specified.
Our revenues increased by 13%54.5% in 20182021 following an increaseincreased by 19.8% in 2020, and decrease of 35%10.4% in 2017, and an increase of 10% in 2016.
The following table shows the relationship, expressed as a percentage, of the listed items from our consolidated income statements to our total revenues for the periods indicated:
Percentage of Total Revenues Year ended December 31,:
| Percentage of Total Revenues | ||||||||||||
| Year ended December 31, | ||||||||||||
| 2016 | 2017 | 2018 | ||||||||||
| Revenues from product sales | 74.7 | % | 78.5 | % | 77.0 | % | ||||||
| Revenues from services | 25.3 | % | 21.5 | % | 23.0 | % | ||||||
| Total revenues | 100 | % | 100 | % | 100 | % | ||||||
| Cost of products sale | 30.7 | % | 28.0 | % | 28.6 | % | ||||||
| Cost of services | 15.5 | % | 12.9 | % | 13.6 | % | ||||||
| Expense related to settlement of IIA grants | 7.9 | % | - | - | % | |||||||
| Total cost of revenues | 54.1 | % | 40.9 | % | 42.2 | % | ||||||
| Gross profit | 45.9 | % | 59.1 | % | 57.8 | % | ||||||
| Operating expenses: | ||||||||||||
| Research and development expenses, net | 21.3 | % | 17.5 | % | 18.1 | % | ||||||
| Sales and marketing expenses | 13.1 | % | 11.1 | % | 11.5 | % | ||||||
| General and administrative expenses | 4.2 | % | 3.6 | % | 3.5 | % | ||||||
| Amortization of intangible assets | 1.1 | % | 1.2 | % | 0.7 | % | ||||||
| Total operating expenses | 39.7 | % | 33.0 | % | 33.8 | % | ||||||
| Operating profit | 6.2 | % | 26.0 | % | 24.1 | % | ||||||
| Financial income, net | 0.7 | % | 1.0 | % | 1.2 | % | ||||||
| Income before income taxes | 6.9 | % | 27.1 | % | 25.3 | % | ||||||
| Income tax expenses (benefit) | 1.0 | % | 6.1 | % | 3.6 | % | ||||||
| Net income | 5.9 | % | 20.9 | % | 21.7 | % | ||||||
| 2019 | 2020 | 2021 | ||||||||||
| Revenues from product | 74.3 | % | 77.7 | % | 81.0 | % | ||||||
| Revenues from services | 25.7 | % | 22.3 | % | 19.0 | % | ||||||
| Total revenues | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
| Cost of revenues products | 29.9 | % | 29.2 | % | 31.1 | % | ||||||
| Cost of revenues services | 15.9 | % | 14.1 | % | 11.9 | % | ||||||
| Total cost of revenues | 45.8 | % | 43.2 | % | 43.0 | % | ||||||
| Gross profit | 54.2 | % | 56.8 | % | 57.0 | % | ||||||
| Operating expenses: | ||||||||||||
| Research and development, net | 19.8 | % | 19.7 | % | 15.8 | % | ||||||
| Sales and marketing | 12.5 | % | 10.9 | % | 9.5 | % | ||||||
| General and administrative | 4.5 | % | 4.6 | % | 4.2 | % | ||||||
| Amortization of intangible assets | 1.2 | % | 0.9 | % | 0.5 | % | ||||||
| Total operating expenses | 38.0 | % | 36.1 | % | 30.0 | % | ||||||
| Operating income | 16.2 | % | 20.6 | % | 27.0 | % | ||||||
| Financial income (expenses), net | 1.4 | % | 0.3 | % | (0.8 | )% | ||||||
| Income before income taxes | 17.6 | % | 21.0 | % | 26.2 | % | ||||||
| Income tax expenses | 1.9 | % | 3.2 | % | 3.8 | % | ||||||
| Net income | 15.6 | % | 17.8 | % | 22.4 | % | ||||||
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Comparison of Years Ended December 31, 20182021 and 20172020
Revenues. Our revenues in 20182021 increased by $29.1$146.7 million, or 13.1%54.5%, compared to 2017.2020. Revenues attributable to product sales were $193.3$337.0 million, an increase of $127.7 million, or 61.0%, compared to 2020. Revenues attributable to services were $79.1 million, an increase of $19.0 million, or 10.9%31.6%, compared to 2017. Revenues attributable to services were $57.8 million, an increase of $10.2 million, or 21.4%, compared to 2017.2020. The increase in product revenues in 20182021 was attributed to XPS products.higher demand for our products across all main product lines, including revenues from new product line introduced in 2021. The increase in services revenues isin 2021 was attributed mainly to the increase in our systems installed base and to higher professional services and time and materials revenues, as a result of the higher installed base of systems.sales.
Cost of Revenues and Gross Profit. Cost of revenues consists of labor, material and overhead costs of manufacturing our systems, royalties, and the costs associated with our worldwide service and support infrastructure. It also consists of inventory write-offs and provisions for estimated future warranty costs for systems we have sold. Our cost of revenues attributable to product sales in 20182021 was $71.7$129.5 million. Our gross margin attributable to product revenues in 20182021 was 62.9%61.6%, compared to 64.3%62.5% in 2017.2020. The decrease in products gross margins in 20182021 is related mainly to the decrease in software sales which have adifferent product mix as well as to higher gross margin.
Our cost of services in 20182021 was $34.2$49.2 million, relativecompared to $28.6$37.9 million in 2017.2020. Gross margin attributable to service revenues in 20182021 was 40.9%37.8%, compared to 40.1%36.9% in 2017.2020. The increase in services gross margins in 2021 is related mainly to the increase in service revenues which also included a more favorable service revenue mix.
Research and Development Expenses, net. Consist primarily of salaries and related expenses and also include consulting fees, subcontracting costs, related materials and overhead expenses, after offsetting grants received or receivable from the IIA and the European Community.Community, as well as other funding for research and development activities. Our net research and development expenses in 20182021 were $45.5$65.9 million, an increase of $6.5$12.9 million, or 16.7%24.2%, compared to 2017,2020, after offsetting grants received of $5.8$4.9 million in 20182021 and $4.6$5.6 million in 2017.2020. Research and development expenses excluding grants received or receivable in 20182021 were $51.2$70.8 million, compared to $43.6$58.6 million in 2017.2020, and increased due to higher investment in existing and new products and technologies and higher personnel costs. In 2018,2021, net research and development expenses represented 18.1%15.8% of our revenues, compared to 17.5%19.7% of our revenues in 2017. The increase in research and development expenses in 2018 is mainly related to the investments in new technologies, which are aimed to expand our addressable markets, towards their market introduction in 2019-2020.2020.
Sales and Marketing Expenses. Sales and marketing expenses are mainly comprised of salaries and related costs for sales and marketing personnel, travel related expenses, overhead and commissions to our representatives and sales personnel. Starting 2015, sales and marketing expenses also include amortization of intangibles related to customer relations. Our sales and marketing expenses in 20182021 were $28.8$39.3 million, an increase of $4.3$10.0 million, or 17.5%34.0%, compared to 2017.2020. The increase in sales and marketing expenses in 20182021 was mainly attributed to anthe higher personnel costs and higher commissions due to the increase in headcount and related labor costs of sales and marketing personnel and commissions.revenues. Sales and marketing expenses represented 11.5% our revenues in 2018 compared to 11.1%9.5% of our revenues in 2017.2021 compared to 10.9% of our revenues in 2020.
General and Administrative Expenses. General and administrative expenses are comprised of salaries and related expenses and other non-personnel related expenses such as legal expenses. Our general and administrative expenses in 20182021 were $8.7$17.3 million, an increase of $0.6$4.8 million, or 7.8%38.4%, compared to 2017.2020. The increase in general and administration expenses was attributed mainly to the increase in headcounthigher personnel costs and related labor costs.overhead, including acquisition related expenses. In 2018,2021, general and administration expenses represented 3.5%4.2% of our revenues, compared to 3.6%4.6% of our revenues in 2017.2020.
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Amortization of Intangible Assets. As part of the acquisition of ReVera on April 2, 2015, the Company acquired $12.3 million of intangible asset related to technology. In both 2021 and 2020, the Company recorded $2.5 million of amortization of intangible assets respectively.
Financial income (expense), net.Financial income (expenses), net is comprised of interest income, financial expenses related to the Convertible Senior Notes, exchange rate impact and bank charges. In 2021, we recorded $3.1 million of net financial expenses compared to $0.9 million of net financial income in 2020. The increase in financial expenses was mainly attributed to the $4.3 million of financial expenses related to the Convertible Senior Notes which reflect full year expenses compared to $0.9 million in 2020 which reflect expenses of less than one quarter. In addition, in 2021 our interest income was $2.2 million compared to $4.1 million in 2020 which mainly attributed to the less favorable interest economic environment. This was offset by $0.9 million exchange rate loss in 2021 compared to $2.2 million exchange rate loss in 2020 which was attributed to strengthen of the NIS compared to the USD.
Income Tax Expenses. Income tax expenses are comprised of current tax expenses and deferred tax expenses/income. In 2018,2021, we recorded $9.1$16.2 million of income tax expenses, reflecting effective tax rate of 14.3%.14.8 %. In 2017,2020, we recorded $13.6$8.6 million of income tax expenses, reflecting effective tax rate of 21%15.2%. The decrease in the effective tax rate in 20182021 is attributed mainly to increase in US territory tax benefits, which was partially off-set by $3.7 million taxes related to US Tax Cuts and Jobs Act.elective tax settlement in Israel.
Comparison of Years Ended December 31, 20172020 and 20162019 is incorporated by reference to the Company’s Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 1, 2021.
5.BLiquidity and Capital Resources
As of December 31, 2018,2021, we had working capital of approximately $233.5$278.6 million, compared to working capital of approximately $180.1$497.8 million as of December 31, 2017.2020. The increasedecrease in our reported working capital in 2021 was related mainly to classification of convertible senior notes in the amount of $183.0 million to current liabilities, and to classification of marketable securities investment with maturity dates which are longer than one year in the amount of $137.4 million to non-current assets. Excluding these classifications, our working capital is relatedincreased by approximately $101.2 million mainly toas a result of our fluent net profits and cash flow.in 2021.
Cash and cash equivalents, short-term and long-term deposits and marketable securities as of December 31, 20182021 were $177.8$552.9 million compared to $149.8$427.9 million as of December 31, 2017.2020, and increased mainly as a result our fluent operating cash flow. In January 2022, we used approximately $80 million of this cash to pay for the acquisition of ancosys.
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Trade accounts receivables increased from $40.9$63.3 million as of December 31, 20172020 to $53.5$68.4 million as of December 31, 2018, mainly as a result of the higher quarterly sales levels and the timing of tool shipments in the last quarter of the year.2021.
Inventories increased from $34.9$61.7 million as of December 31, 20172020 to $41.8$78.7 million as of December 31, 2018.2021. The increase in inventory is related to new products as well as to the higheroverall increase in our business volumes in 2018 compared to 2017.levels for products and services.
Operating activities in 20182021 generated positive cash flow from operating activities of $36.1$132.3 million compared to a positive cash flow from operating activities of $61.8$60.3 million in 2017.2020. The decreaseincrease in operating cash flow in 20182021 is mainly related to working capital requirements which included increased accounts receivables and inventories.higher profitability.
The following table describes our investments in capital expenditures during the last three years:
| 2016 | 2017 | 2018 | ||||||||||||||||||||||
| Domestic | Abroad | Domestic | Abroad | Domestic | Abroad | |||||||||||||||||||
| (US dollars, in thousands) | ||||||||||||||||||||||||
| Electronic equipment | 1,618 | 136 | 2,320 | 177 | 2,400 | 237 | ||||||||||||||||||
| Office furniture and equipment | 83 | - | 141 | 105 | 21 | 19 | ||||||||||||||||||
| Leasehold improvements | 1,183 | 113 | 3,488 | 64 | 493 | 508 | ||||||||||||||||||
| Total | 2,884 | 249 | 5,949 | 346 | 2,914 | 764 | ||||||||||||||||||
| 2019 | 2020 | 2021 | ||||||||||||||||||||||
| Domestic | Abroad | Domestic | Abroad | Domestic | Abroad | |||||||||||||||||||
| Electronic equipment | 3,975 | 418 | 2,742 | 431 | 2,356 | 1,134 | ||||||||||||||||||
| Office furniture and equipment | 2,192 | 604 | 28 | 510 | 22 | 283 | ||||||||||||||||||
| Leasehold improvements | 11,231 | 2,849 | 1,865 | 867 | 371 | 650 | ||||||||||||||||||
| Total | 17,398 | 3,871 | 4,635 | 1,808 | 2,749 | 2,067 | ||||||||||||||||||
In 2018,2021, the investment in capital expenditures was financed from our fluent operating cash flow. Weflow, and included mainly investments in electronic equipment. In 2022, we expect our capital spending to significantly increase our capital spending in 2019, to approximately $25more than $20 million, mainly for leasehold improvementsas a result of expected investments in our new officemanufacturing and demonstration facilities and for electronic equipment used in our research and development labs. We expect capital expenditures to reduce once we complete the transition to the new office facilities.Israel.
Our principal liquidity requirement is expected to be for working capital and capital expenditures, as well as additional acquisitions. We believe that our current cash reserves will be adequate to fund our planned activities for at least the next twelve months. Our long-term capital requirements will be affected by many factors, including the success of our current products, our ability to enhance our current products and our ability to develop and introduce new products that will be accepted by the semiconductor industry. We plan to finance our long-term capital needs with our cash reserves together with positive cash flow from operations, if any. If these funds are insufficient to finance our future business activities, which may include acquisitions, we would have to raise additional funds through the issuance of additional equity or debt securities, through borrowing or through other means. We cannot assure that additional financing will be available on acceptable terms.
Presently, weour short-term debt is comprised from Convertible Senior Notes.
We do not have no long-term debt, nor anya readily available source of long-term debt financing such as a line of credit.
With regard to usage of hedging financial instruments and the impact of inflation and currency fluctuations, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk” in this annual report on Form 20-F.Annual Report.
5.CResearch and Development, Patents and Licenses, etc.
For information regarding our research and development activities, see “Item 4B – Research and Development” in this annual report on Form 20-F.Annual Report.
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Grants from the Israeli Innovation Authority & European Programs
IIA sponsoring for generic research and development projects of large Israeli companies
We participate in a generic research and development programs sponsored by the IIA, available for Israeli companies that meet specific criteria’s set forth by the IIA. Companies eligible to participate in this programthese programs receive IIA funding intended to focus on long-term creation of know-how and technological infrastructure, used for the development or production of future innovative products. These programs do not require payments of royalties to the IIA, but all other restrictions under the Innovation Law, such as local manufacturing obligations and know-how transfer limitations, as further detailed hereunder, are applicable to the know how developed by us with the funding received in such program.programs.
IIA sponsoring for Israeli research and development consortiums
In 20182020 and 2017,2019, and in previous years, we participated in a consortium program sponsored by IIA. Under the terms of this program, we cooperate with additional companies, Universities and research institutes in Israel, organized in a consortium for the development of new technologies. The rules of the consortium include several references to the distribution of knowledge between the consortium members, requires us to provide the other members in the consortium with a non-sublicensablenon-sub-licensable license to use the “new information” developed by such member, without consideration. These programs do not require payments of royalties to the IIA, but all other restrictions under the Innovation Law, such as local manufacturing obligations and know-how transfer limitations, as further detailed hereunder, are applicable to the know how developed by us with the funding received in such program.
programs. Joint programs of the European Research Area and the IIA
We participate in European consortiums,consortia, which are joint programs governed by the Electronic Component Systems for European Leadership Joint Undertaking (the(the “JU”) as part of the Horizon 2020 cooperation between the European Research Area and the IIA (the “EU Consortiums”).
Some of the obligations and undertakings specified hereunder in connection with our IIA activities (such as the restrictions under the Innovation Law and obligation to grant certain access rights to our technology and intellectual property rights) apply with respect to some of these joint projects. In addition, the participation in an EU Consortium includes specific obligations, such as the following: The budgeted grant will be paid to the company pursuant to certain rules regarding ‘eligible costs’; Obligation to properly implement the activities assigned under the specific EU Consortium project; Restrictions in contributions of third parties (by service or otherwise); Obligation to keep information up to date and to inform about events and circumstances likely to affect the consortium activity; Obligations related to records keeping, investigations and audits by the JU in order to verify the proper implementation of the specific EU Consortium project and compliance with the obligations under the terms of the program, including assessing deliverables and reports during a period of up to two years following the receipt by the company of the full grant payment; Obligations related to Intellectual property allocation generated by an EU Consortium, background intellectual property designation prior to the commencement of the EU Consortium’s project and the provision of access rights to results obtained as part of the EU Consortium. Breach of such obligations may result in the reduction of the aggregate expected grant amount or claiming back previously received grants. In addition, the company may be subject to administrative and financial penalties such as temporary exclusion from all JU European Consortiums and fines of up to 10% of the maximum expected grant, as well as to contractual liabilities.
European Research Area program
We also participate in European consortiums which are not part of the JU (Joint Undertaking) program, thus, these programs are funded only by the European commission with no national funding from the Israel Innovation Authority. The restrictions under the Israeli Innovation Law do not apply to the project under these programs. Some of the specific obligations mentioned in the previous paragraph apply to the projects under these programs.
Past royalty bearing programs and royalties arrangements
Some of our previous research and development efforts were financed in part through royalty-bearing grants. We were obligated to pay royalties of 5% in 2016 and 2015 and in previous years, of revenues derived from sales of products funded with these grants. This obligation included different annual interest rates ranging up to 5%. In August 2016, we entered into a royalty buyout arrangement, or the Arrangement, with the IIA. As part of the Arrangement we paid approximately $12.9 million to the IIA in September 2016. The contingent net royalty liability to the IIA at the time we executed the Arrangement was approximately $24 million..million. As a result of the foregoing payment, we are released from any future royalty payments on these previous funds received from the IIA. However, to the extent that we will be able to commercialize products that were developed as part of IIA programs and were declared as “failed” at the time of the Arrangement, we will be required to pay royalties to the IIA from income generated from such commercialization. Currently, we do not anticipate that such failed projects will generate revenues in the future. We note that the Arrangement does not release the Company from other obligations towards the IIA as further detailed herein. See also Note 8A to our consolidated financial statements contained elsewhere in this report. In addition, in the future, we may, alone or together with third parties, participate in research and development programs, which may bear royalty obligations (depending on the specific terms of the applicable program).
Pertinent obligations under the Israeli Encouragement of Research, Development and Technological Innovation in the Industry Law 1984
Under the Encouragement of Research, Development and Technological Innovation in the Industry Law 1984 and the provisions of the applicable regulations, rules, procedures and benefit tracks, together the Innovation Law, a qualifying research and development program is typically eligible for grants of up to 50% of the program’s pre-approved research and development expenses. The program must be approved by a committee of the IIA. The recipient of the grants is required to return the grants by the payment of royalties on the revenues generated from the sale of products (and related services) developed (in whole or in part) under IIA program up to the total amount of the grants received from IIA, linked to the U.S. dollar and bearing annual interest.interest (as determined in the Innovation Law). Following the full payment of such royalties and interest, there is generally no further liability for royalty payment for our currently developed and sold products. Nonetheless, the restrictions under the Innovation Law (as generally specified below) will continue to apply even after our company has repaid the grants, including accrued interest, in full.
The main pertinent obligations under the Innovation Law are as follows:
Local Manufacturing Obligation. The terms of the grants under the Innovation Law require that we manufacture the products developed with these grants in Israel. Under the regulations promulgated under the Innovation Law, the products may be manufactured outside Israel by us or by another entity only if prior approval is received from the IIA (such approval is not required for the transfer of less than 10% of the manufacturing capacity in the aggregate, as declared to be manufactured out of Israel in the applications for funding, in which case a notice should be provided to the IIA). This approval may be given only if we abide by all the provisions of the Innovation Law and related regulations. Ordinarily, as a condition to obtaining approval to manufacture outside Israel, we would be required to pay royalties at an increased rate (usually 1% in addition to the standard rate and increased royalties cap between 120% and 300% of the grants, depending on the manufacturing volume that is performed outside Israel). We note that a company also has the option of declaring in its |
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Know-How transfer limitation. The Innovation Law restricts the ability to transfer know-how funded by the IIA outside of Israel, including by way of a license to a non-Israeli entity. Transfer of IIA funded know-how outside of Israel requires prior approval of the IIA. The IIA approval to transfer know-how created, in whole or in part, in connection with an IIA-funded project to third party outside Israel is subject to payment of a redemption fee to the IIA calculated according to a formula provided under the Innovation Law that is based, in general, on the ratio between the aggregate IIA grants to the company’s aggregate investments in the project that was funded by these IIA grants, multiplied by the transaction consideration, taking into account depreciation mechanism, and less royalties already paid to the |
Approval of the transfer of IIA funded technology to another Israeli company requires a pre-approval by IIA and may be granted only if the recipient undertakes to fulfil all the liabilities to IIA and undertakes abides by all the provisions of the Innovation law and related regulations, including the restrictions on the transfer of know-how and manufacturing rights outside of Israel and the obligation to pay royalties. In light of the Arrangement (as further discussed below), in certain circumstances, under such sale transactions (i.e., the transfer of IIA funded technology or portion thereof to another Israeli company), we might be obligated to pay royalties to the IIA from any income derived from such a sale transaction.
Licensing arrangements. Under the terms of the Innovation Law, licensing know how developed under the IIA programs outside of Israel, requires prior consent of IIA and payment of license fees to IIA, calculated in accordance with the licensing rules promulgated under the Innovation Law. The payment of the license fees does not discharge the company from the obligation to pay royalties or other payments due to IIA in accordance with Innovation Law. |
These restrictions may impair our ability to enter into agreements for those products or technologies which were developed with assistance of the IIA grants without the approval of the IIA. We cannot be certain that any approval of the IIA will be obtained on terms that are acceptable to us, or at all. Furthermore, in the event that we undertake a transaction involving the transfer to a non-Israeli entity of know-how developed with IIA funding pursuant to a merger or similar transaction, the consideration available to our shareholders may be reduced by the amounts we are required to pay to the IIA. Any approval, if given, will generally be subject to additional financial obligations. Failure to comply with the requirements under the Innovation Law may subject us to mandatory repayment of grants received by us (together with interest and penalties), as well as may expose us to criminal proceedings. In addition, IIA may from time to timetime-to-time audit sales of products which it claims incorporate technology funded via IIA programs and this may lead to additional royalties being payable on additional products.
5.DTrend Information
For Information regarding most significant recent trends in our market, see “Item 4B– Our Market – The World Economy – Update” in this annual report on Form 20-F.Annual Report.
| Payment due by Period (US Dollars, in $ thousands) | ||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
| Operating Lease Obligations | $ | 48,542 | $ | 3,135 | $ | 6,896 | $ | 6,021 | $ | 32,489 | ||||||||||
| Purchase Obligations | 31,028 | 27,564 | 3,459 | 3 | 2 | |||||||||||||||
| Total | 79,570 | 30,699 | 10,355 | 6,024 | 32,491 | |||||||||||||||
6.ADirectors and Senior Management
The following is the list of senior management and directors as of February 14, 2019:2022:
Name | Age | Position |
Michael Brunstein (3) | Chairman of the Board of Directors | |
Avi Cohen (1)(2) | Director | |
| Raanan Cohen (2)(3) | Director | |
| Zehava Simon (1)(2) | Director (External Director until May 2018) | |
| Dafna Gruber (1) | Director (External Director until May 2018) | |
| Director | ||
Eitan Oppenhaim | Director, | |
| President and Chief Executive Officer | ||
Dror David | Chief Financial Officer | |
Shay Wolfling | Chief Technology Officer | |
| Adrian S. Wilson | President of US subsidiary & General Manager Material Metrology Division | |
| Corporate VP and General Manager Dimensional Metrology Division |
| (1) | Member of the audit committee |
| (2) | Member of the compensation committee |
| (3) | Member of the Nominating committee |
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Dr. Michael Brunstein was named chairman of our board of directors in June 2006, after serving as member of our board of directors from November 2003. During the years 1990 and 1999, Dr. Brunstein served as Managing Director of Applied Materials Israel Ltd. Prior to that, Dr. Brunstein served as President of Opal Inc., and as a Director of New Business Development in Optrotech Ltd. Dr. Brunstein holds a B.Sc. in Mathematics and Physics from The Hebrew University, Jerusalem, and a M.Sc. and a Ph.D. in Physics from Tel Aviv University, Israel.
Mr. Avi Cohenhas served as a director of the Company since 2008.He also, serves as executive chairman of XJet Ltd. (a private company) and Chakratec Ltd. (a public company) as well as on the board of directors of Cortica Ltd. and CGS Tower Networks Ltd. From July 2016 to September 2017 Mr. Cohen served as the Chief Executive Officerchief executive officer of MX1, a global media service provider founded in July 2016 as a result of athe acquisition of RR Media (Nasdaq: RRM) by SES S.A. and the following merger between RR Media, Ltd., and SES Platform Services GmbH. From July 2012 and until itstill the merger, with SES Platform Services GmbH, Mr. Cohen served as the chief executive officer of RR Media Ltd. (previously known as RRsat Global Communications Network Ltd.), which was a public company traded on Nasdaq.Media. Prior to that, until March 2012, Mr. Cohen served as Presidentpresident and Chief Executive Officerchief executive officer of Orbit Technologies, a public company traded on the TASE. PriorFrom September 2006 to joining Orbit in December 2008, Mr. Cohen served as Chief Operating Officerchief operating officer and Deputydeputy to the chief executive officer of ECI Telecom Ltd. a leading supplier of best-in-class networking infrastructure equipment for carrier and service provider networks worldwide. Prior to joining ECI, in September 2006, Mr. Cohen served in a variety of executive management positions at KLA-Tencor.KLA (Nasdaq: KLAC). From 2003 Mr. Avi Cohenhe was a Group Vice President, Corporate Officergroup vice president, corporate officer and Membermember of the Executive Management Committee based at the corporate headquarters in the U.S. During his tenure, he successfully led the creation of KLA-Tencor’s global Metrology Group.executive management committee. From 1995 he was the Presidentpresident of KLA-TencorKLA Israel responsible for the Optical Metrology Division. Beforeoptical metrology division. Prior to joining KLA-Tencor,KLA, Mr. Cohen also spent three years as Managing Directormanaging director of Octel Communications, Israel, after serving as Chief Executive Officerchief executive officer of Allegro Intelligent Systems, which he founded and which was acquired by Octel. Mr. Cohen is currently a Director of BioFishency Ltd. ESC-BAZ Ltd., Beit Issie Shapiro, Israel Consumer Council and Israel Wine Institute. Mr. Cohen holds B.Sc. and M.Sc. degrees in electrical engineering and applied physics from Case Western Reserve University, USA.
Mr. Raanan Cohen was appointed as a director of the Company by our board of directors in February 2014. Prior to that and until December 2012, Mr. Cohen has served as the President and Chief Executive Officer of Orbotech Ltd., a public company traded on Nasdaq. Mr. Cohen has also served in a range of other executive positions at Orbotech Ltd, including Co-President for Business and Strategy, EVP and President of the Printed Circuit Board (PCB) Division, Vice President for the PCB-AOI product line and President and chief executive officer of Orbotech, Inc. Prior to its merger with Orbotech in 1991, Mr. Cohen held various positions at Orbot, another manufacturer of AOI systems. Prior to joining Orbot in 1984, he worked at Telrad Networks Ltd. Mr. Cohen currently serves as the Chief Executive Officer of EyeWay Vision Ltd., as a member of the board of directors of Utilight Ltd., all private companies.company. Mr. Cohen holds a B.Sc. in Computer Science from the Hebrew University in Jerusalem, Israel.
Ms. Zehava Simonwas elected as the Company’s external director in accordance with the provisions of the Companies Law in June 2014 and reelected in June 2017. Effective as of May 2018, and our adoption of the exemption under the Regulation (as defined below), Ms. Simon is no longer classified as an external director under the Companies Law. Ms. Simon served as a Vice President of BMC Software from 2000 until 2013 and in her last position (as of 2011) acted as Vice President of Corporate Development. From 2002 to 2011, Ms. Simon served as Vice President and General Manager of BMC Software in Israel. In this role, she was responsible for directing operations in Israel and India as well as offshore sites. Prior to that, Ms. Simon held various positions at Intel Israel., which she joined in 1982, including leading of Finance & Operations and Business Development for Intel in Israel. Ms. Simon is currently a board member of Audiocodes Ltd., a public company traded on Nasdaq and TASE, Nice Systems, a public company traded on Nasdaq and TASE, and Amiad water systems, a public company traded on London Stock Exchange.TASE. Ms. Simon is a former member of the board of directors of Insightec Ltd. (2005-2012), M-Systems Ltd., a Nasdaq listed company which was acquired in 2006 by SanDisk Corp., a public company traded on Nasdaq as well (2005-2006) and Tower Semiconductor Ltd., a public company traded on TASE and Nasdaq (1999-2004). Ms. Simon holds a B.A. in Social Sciences from the Hebrew University, Jerusalem, Israel, a law degree (LL.B.) from the Interdisciplinary Center in HerzliaHerzliya and an M.A. in Business and Management from Boston University, USA.
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Ms. Dafna Gruber was elected as the Company’s external director in accordance with the provisions of the Companies Law in April 2015 and reelected in April 2018. Effective as of May 2018, and our adoption of the exemption under the Regulation, Ms. Gruber is no longer classified as an external director under the Companies Law.Ms. Gruber has more than 25 years of broad experience, serving as chief financial officer and a senior executive management member in leading hi-tech companies traded on both Nasdaq and TASE. Since September 2017, Ms. Gruber has been serving serves as the chief financial officer of Landa CorporationNetafim Ltd., and thena private company. Prior to that as financial advisor to Landa group, private companies. From October 2015 until September 2017, Ms. Gruber has been serving as the chief financial officer ofin various companies including Aqua security Ltd. Landa Corporation Ltd. and Clal Industries Ltd., a private company. From April 2007 until April 2015, Ms. Gruber served as the chief financial officer of Nice Systems Ltd., a public company traded on Nasdaq and TASE. As a member of the senior management team, Ms. Gruber was a senior member of the strategy and M&A forum of the company. During her employment with Nice, Ms. Gruber was responsible, inter alia, for finance, operation, MIS and IT, legal and investor relations. From 1996 until May 2007, Ms. Gruber was part of Alvarion Ltd., a public company traded on Nasdaq and TASE, mostly as chief financial officer. Prior to that, from 1993 to 1996, Ms. Gruber was a controller at Lannet Data Communications Ltd., subsequently acquired by Lucent Technologies Inc. Ms. Grubercurrently servesas an as an external director at TAT Technologies Ltd. ICL group ltd., Tufin software technologies Ltd and a public company traded on Nasdaq and TASE, since November 2013, and as aboard member of the board of directors of Clal Biotechnologies Ltd., a public company traded on TASE. In addition, Ms. Gruber serves on the boards of directors of several private companies held by Clal IndustriesCellebrite Ltd. Ms. Gruber is a certified public accountant and holds a Bachelor’s degree in Accounting and Economics from Tel Aviv University, Israel.
Mr. Eitan Oppenhaim has been serving as the President and Chief Executive Officer of the Company since July 31, 2013.2013, and was appointed by our board of directors to also serve as a director of the Company in October 2019. He has previously served as the Executive Vice President Global Business Group, since November 2010. From 2009 until 2010, Mr. Oppenhaim served as Vice President and Europe General Manager of Alvarion Ltd., a public company traded on Nasdaq. During the years 2007 through 2009, Mr. Oppenhaim served as Vice President of sales and marketing of OptimalTest Ltd., a public company traded the New York Stock Exchange.Ltd.. Prior to that, from 2002 till 2006, Mr. Oppenhaim served as Vice President – Business Manager of the Flat Panel Displays division of Orbotech Ltd., a public company traded on Nasdaq. From 2001 till 2002, Mr. Oppenhaim served as Managing Director of Asia Pacific at TTI Telecom International, a leading provider of assurance, analytics and optimization solutions to communications service providers (CSP) worldwide. Prior to that, from 1994 till 2001, Mr. Oppenhaim held several key executive positions at Comverse Network Systems Ltd., a public company traded on Nasdaq. Mr. Oppenhaim holds a BA in Economics and Accounting from the Haifa University, Israel and an MBA from Ben-Gurion University, Beer-Sheva, Israel.
Mr. Dror David has served as the Chief Financial Officer since November 2005. Mr. David joined Nova in April 1998, as the Company’s Controller, and since then served in various financial and operational positions, including the position of Vice President of Resources, in which he was responsible for the finance, operations, information systems and human resources functions of the Company. Mr. David was also a leading member in the Company’s initial public offering on Nasdaq in 2000, the Company’s private placement in 2007 and the Company's secondary offering in 2010. Prior to joining Nova, Mr. David spent five years in public accounting with DelloitteDeloitte Touch in Tel Aviv, specializing in industrial high-tech companies. Mr. David is a shareholder and a board member of P2P Ltd., a privately held company. Mr. David is a Certified Public Accountant in Israel, holds a B.A. in Accounting and Economics from Bar Ilan University, and an M.B.A. from Derby University of Britain.
Dr. Shay Wolfling joined Nova in 2011, as Chief Technology Officer. Prior to joining Nova, Dr. Wolfling was an R&D manager at KLA-Tencor-Belgium (formerly ICOS Vision Systems, a public traded company acquired by KLA in 2008), where he led multidisciplinary metrology & inspection development projects. From 2000 until its technology acquisition by ICOS in 2005, Dr. Wolfling was a founder and Vice President of Research and Development of Nano-Or-Technologies, a start-up company with a proprietary technology for 3D optical measurements. Dr. Wolfling took Nano-Or from the idea stage to initial product sales. Prior to founding Nano-Or, Dr. Wolfling was a project manager in Y-Beam-Technologies, a start-up offering laser-based skin treatments. Dr. Wolfling has several patents under his name in the field of optical measurements. Dr. Wolfling holds a B.Sc. in physics and mathematics from the Hebrew University of Jerusalem, Israel, a second degree in physics from Tel-Aviv University, Israel and a Ph.D. in physics from the Hebrew University of Jerusalem, Israel.
Mr. Adrian S. Wilson Joined Nova in January 2018 as General Manager Material Metrology Division.Division and President of our US subsidiary, Nova Measuring Instruments, Inc. Mr. Wilson has over 2025 years of Semiconductor capital equipment and materials experience. Mr. Wilson joins us from Nanometrics Inc, where he held the position of Vice President & General Manager of Advanced Imaging and Analytics Business Unit. Prior to Nanometrics Inc, he held the position of Managing Director of Element Six Technologies Ltd., the non-abrasive arm of the synthetic diamond group of DeBeers, focused on thermal management and optical components for the semiconductor industry. Mr. Wilson has experience in leading both start-ups and divisions within large public multi-nationals’multi-national companies, including KLA-Tencor,KLA, FormFactor IncInc. and Phoenix X-ray Systems & Services Inc,Inc., a capital equipment start-up. Mr. Wilson holds a Bachelor’s Degreebachelor’s degree in Electronics Engineering, post Grad in Marketing Management and a MBA in Technology Management. Mr. Wilson’s accreditations include Fellow of the Chartered Institute of Marketing (UK) and Fellow of the Institute of Directors (UK).
Mr. Gabi Sharon has served as Corporate Vice President of Operations since September 2006. Having joined Nova in 1995, Mr. Sharon served in several key positions in the Company including as Global Customer Support Manager from September 1995 to September 2004. From September 2004 until September 2006 Mr. Sharon managed the Product Development Division, and spearheaded the NovaScan 3090 product line and its successful market launch. For a period of two years, from 2004 to 2006, he also served as the Product Marketing Manager and led the initial penetration of the Copper CMP market. Prior to joining Nova Mr. Sharon served as Project Manager in ECI Israel. Mr. Sharon holds a B.Sc. in Computer Science from Northeastern University, Boston, Massachusetts, and a M.Sc. in Technology Management from Polytechnic University, New York.
Voting Agreement
We are not aware of any voting agreement currently in effect.
6.BCompensation
The aggregate compensation expensed, including share-based compensation and other compensation expensed by us, to our executive officerssenior management members listed in item 6.A in this Annual Report, with respect to the year ended December 31, 20182021 (consisting of 10 persons, including two former executive officers)5 persons) was $6.7approximately $10 million. This amount includes approximately $0.60.5 million set aside or accrued to provide pension, severance, retirement, or similar benefits and amounts expensed by the Company for automobiles made available to its executive officers.officers).
Disclosure regarding the compensation of our senior executives on an individual basis will be disclosed in our proxy statement in connection with the 20192021 annual general meeting of shareholders in accordance with Israeli regulations.
Terms of employment of Mr. Eitan Oppenhaim, our President and Chief Executive Officer and a member of the board of directors, as approved by our shareholders, are as follows:
General
(i) a monthly base salary of NIS 126,000;161,000; (ii) an annual bonus of up to twelve (12)fourteen (14) monthly base salaries (with additional payment of up to 50%100% of the target bonus in the case of over achievement), subject to objectives which are annually predetermined by the board of directors and its committees, in accordance with our compensation policy; (iii) in connection with termination of employment (other than for cause), a three month advance notice and a six month adjustment period, during which Mr. Oppenhaim will be entitled to all of his compensation elements, and to the continuation of vesting of his options. In the event of employment termination during a fiscal year (unless for cause), the bonus shall be prorated (subject to certain adjustments); (iv) customary social benefits such as pension fund or management insurance, education fund, vacation pay, sick leave and convalescence pay; (v) subject to required approvals under applicable law, a directors and officers insurance, including a “run-off” insurance policy; (vi) non-disclosure, non-compete and ownership of intellectual property undertakings; and (vii) monthly travel expenses or a Company car, cellular phone, a land line phone, toll road expenses, a laptop computer and other expense reimbursements pursuant to the Company general policies.
Equity-Based Compensation
Since January 1, 20152019 until December 31, 2018,2021, per the approval of the respective annual general meeting of shareholders, Mr. Oppenhaim was granted a total of 373,33470,000 options to purchase ordinary shares of the Company with a weighted averagean exercise price of $16.94$25.89, and 82,22261,225 restricted share units. The options and restricted share units: vest in equal annual installments over a terms of four years commencing one year following the grant date and the restricted share units vest in equal annual installments over a terms of three years commencing one year from the grant date; All options and restricted share units expire seven (7) years after each grant date; can be cancelled in accordance with the terms and conditions of the applicable incentive plan of the Company or the employment terms of Mr. Oppenhaim; and, were made in accordance with and subject to Section 102 of the Income Tax Ordinance of 1961 (New Version) (the(the “Ordinance”). In addition, Mr. Oppenhaim was granted in July 20172019, July 2020 and May 2018 60,000July 2021, a total of 91,225 performance based restricted units that vest over a period of three (3) years, provided that the Company exceededmeets or exceeds the performance targets for vesting set by the compensation committee and board of directors of the Company, unless such restricted share units have been cancelled in accordance with the terms and conditions of the share incentive plan of the Company or the employment terms of Mr. Oppenhaim. In the event a portion of these restricted share units fails to vest, such portion will be carried forward to the third vesting date and will vest if the Company’s average annual return on equity based on net income during the previous three (3) years shall be no less than ten percent (10%).
Compensation upon Significant Event
Upon the occurrence of a Significant Event, unvested options granted to Mr. Oppenhaim will vest upon the consummation of the Significant Event, and unexercised options may be exercised until the earlier of two years from the consummation of the Significant Event, and termination of the options. Such arrangements will not apply if Mr. Oppenhaim remains the chief executive officer of our company or the surviving entity, and unvested options are replaced for new options of the surviving entity as part of the Significant Event with a vesting schedule and terms identical to the replaced options. Further, upon a Significant Event, Mr. Oppenhaim will be entitled to a special bonus of up to 12 monthly salaries, subject to the approval of the compensation committee and our board of directors and subject to the limitation on a special bonus imposed by our compensation policy. In the event of termination of employment (up to 12 months from the Significant Event), Mr. Oppenhaim will be entitled to the retirement terms under his employment agreement, the special bonus described above and the payment of the annual bonus in full for the year in which the Significant Event has occurred, subject to the annual bonus plan, on an annual basis calculation, and subject to the approval of the compensation committee and our board of directors prior to the consummation of the transaction, or the respective body in the new surviving entity following the transaction, as applicable. A “Significant Event” is defined for this purpose as: (1) the sale of all or substantially all of our company’s assets; (2) a merger of our company with or into another company or entity after which our shareholders will hold 50% or less of the surviving entity; (3) our company becoming a division or a subsidiary of another company; or (4) the purchase of our company's shares, after which the purchaser will hold 50% or more of our company's shares, provided, however, that the purchaser is not one of our institutional investors upon execution of the purchase agreement.
Compensation upon Acquisition
Upon Acquisition of a company (which is not an affiliate of the company), Mr. Oppenhaim will be entitled to receive a bonus of up to 12 monthly salaries subject to the approval of the compensation committee and our board of directors and subject to the limitation on a special bonus imposed by our compensation policy. An “Acquisition” includes, among others, a merger of our company or a subsidiary of our company with or into another entity, such that upon consummation of such transaction our shareholders will hold more than 50% of the surviving entity. In accordance with this entitlement, on February 2022 our compensation committee and board have approved a bonus of 12 monthly salaries for the acquisition of ancosys, to be paid to Mr. Oppenhaim in April 2022.
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Directors and Officers Equity Based Compensation
As of February 14, 2019,2021, a total of 1,027,928317,266 options to purchase our ordinary shares and 130,702207,921 RSU’s were outstanding and held by certain current executive officersdirectors and directorssenior management members listed in item 6.A in this Annual Report (consisting of 1711 persons), of which 509,181208,817 options are currently exercisable or exercisable within 60 days of February 14, 2018, 38,2742021, 68,038 shares are held by trustee due to vested RSUs and 8,2782,595 RSU’s will vest within 60 days of February 14, 2018.2021. See “Item 6E. Share Ownership” in this annual report on Form 20-F.Annual Report.
In accordance with our current equity-based compensation policy, effective August 2017, the exercise price of granted options is equal to the closing sale price of the Company's ordinary shares on Nasdaq on the day of grant.
Compensation of Directors
The total amount paid or payable to the directors including our directors who were in the position of external directors until May 2018, (consisting of eight persons from January until April 2018, and seven persons, from May until December 2017)not including Mr. Oppenhaim), for 20182021 was $0.36approximately $0.35 million.
The compensation arrangement of the Company’sour directors (excluding the chairman of the board of directors and, unless approved otherwise, any other director who is also an employee of the Company), as approved by our shareholders at the 2012 annual general meeting, includes:
The compensation arrangement of Dr. Michael Brunstein, the chairman of our board of directors as approved by our shareholders at the 2006, 2008 and 2010 annual general meetings, includes: (i)includes a gross annual fee of US$110,000 payable monthly in NIS; (ii)NIS.
In the 2019 annual general meeting, our shareholders approved an amendment to the equity-based compensation paid to our directors, such that each member of our board of directors (excluding the chairman) will be granted an annual award of options to purchase up to 10,0003,340 ordinary shares and 2,220 restricted share units, or, options and restricted share units with an aggregate fair market value of US$100,000 (with the same ratio of options and restricted share units), the lower of the two. Such grant will be made to be granted to Dr. Brunsteineach director on the date of each annual general meeting at which the chairman of the board of directorssuch director is elected or reelected, startingreelected. Our chairman will be granted an annual award of options to purchase 15,850 ordinary shares and 10,550 restricted share units, or, options and restricted share units with an aggregate fair market value of US$600,000 (with the 2008same ratio of options and restricted share units), the lower of the two. Such grant will be made on the date of each annual general meeting theat which our chairman is elected or reelected. The exercise price of whicheach option will be determined pursuant to our equity basedequity-based compensation policy and the other terms (i.e., the amount, exercise price and vesting schedule) will be identical to the terms of options granted to other directors on an annual award; and (iii) a biennial award of an option to purchase up to 75,000 ordinary shares to Dr. Brunstein on the date of every other annual general meeting at which the chairman of the board of directors is elected or reelected, starting with the 2010 annual general meeting (and thereafter in 2012). The exercise price of such options is determined pursuant to our equity based compensation policy, and consistent with our compensation policy, the optionsawards will vest quarterlyannually over a period of four years.
On September 12, 2013,June 17, 2019, our shareholders approved our current compensation policy, and on June 25, 2020, our shareholders approved an amendment to the Company's compensation policy.policy related to directors and officers liability insurance policy premium.
6.CBoard Practices
Our Amended and Restated Articles of Association, as adopted by the Company’s shareholders and recently amended on April 26, 2018,June 24, 2021, or the Amended Articles, provide that we may have between five and nine directors. Our board of directors currently consists of seven directors, twothree of which are women.
Under the Companies Law, companies incorporated under the laws of the State of Israel that are “public companies,” including companies with shares listed on the Nasdaq Global Select Market, are required to appoint at least two external directors.
Pursuant to regulations promulgated under the Companies Law, companies with shares traded on a U.S. stock exchange, including the Nasdaq Global Select Market, may, subject to certain conditions, “opt out” from the Companies Law requirements to appoint external directors and related Companies Law rules concerning the composition of the audit committee and compensation committee of the board of directors. In accordance with these regulations, in May 2018, we elected to “opt out” from the Companies Law requirements to appoint external directors and related Companies Law rules concerning the composition of the audit committee and compensation committee of the board of directors.
Under these regulations, the exemptions from such Companies Law requirements will continue to be available to us so long as: (i) we do not have a “controlling shareholder” (as such term is defined under the Companies Law), (ii) our shares are traded on a U.S. stock exchange, including the Nasdaq Global Select Market, and (iii) we comply with the director independence requirements, the audit committee and the compensation committee composition requirements, under U.S. laws (including applicable Nasdaq Rules) applicable to U.S. domestic issuers.
Our board of directors has determined that all of our directors qualify as ‘‘independent directors’’ as defined by The Nasdaq Stock Market Rules.
Our Amended Articles provide that directors may be elected at our annual general meeting of shareholders by a vote of the holders of more than 50% of the total number of votes represented at such meeting, not taking into consideration abstention votes. In addition, our board of directors is authorized to appoint directors, at its discretion, provided that the total number of directors does not exceed the maximum number of directors permitted by the Amended Articles. Our directors (other than the directors who were in the position of external directors until May 2018) serve as such until the next annual general meeting of our shareholders. Effective as of May 2018, and our adoption of the exemption under the Israeli Companies Regulations (Reliefs for Public Companies whose Shares are Listed on a Stock Exchange Outside of Israel), 2000, or the Regulation, our directors in office who were elected and classified as external directors, Ms. Dafna Gruber and Ms. Zehava Simon, are no longer classified as such under the Companies Law. The transition rules set forth under the Regulation provide that such directors have the right to remain in office as our directors at their option after the exemption under the Regulation is adopted until the earlier of such directors’ original end of term of office or the second annual meeting of shareholders after the adoption of the exemption under the Regulation, which in the case of Ms. Gruber is until the date of our annual meeting of shareholders to be held in 2020, and in case of Ms. Simon is until earlier of the date of our annual meeting of shareholders to be held in 2020 and June 2020.
According to the Companies Law, the board of directors of a public company must establish the minimum number of board members that are to have accounting and financial expertise while considering, inter alia, the nature of the company, its size, the scope and complexity of its operations and the number of directors stated in the Amended Articles.
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Our board of directors resolved that the minimum number of board members that need to have accounting and financial expertise is one (1).
Our board of directors determined that each of Ms. Dafna Gruber and Ms. Zehava SimonSarit Sagiv has accounting and financial expertise as described in the regulations promulgated pursuant to the Companies Law, and that, therefore, the requirements of the minimum number of board members that need to have accounting and financial expertise, as set by the board of directors, has been met.
Our board of directors has adopted a training program for newly appointed directors. Once appointed and following the completion of their onboard training, our directors continue to receive ongoing training as part of our directors training and development efforts.
Family Relationships
There are no family relationships between any members of our executive management and our directors.
Board of Directors’ Committees
The Company’s board of directors has appointed the following committees:
Audit Committee
Our Audit Committee is comprised of Dafna Gruber (Chairperson), Zehava Simon, Avi Cohen and Eli Fruchter.Sarit Sagiv. The audit committee is responsible to provide oversight of the accounting and financial reporting process of the Company and the audits of the financial statements of the Company, and assist the Board in its oversight of (i) the integrity of the Company's financial statements and other published financial information, (ii) the Company's compliance with applicable financial and accounting related standards, rules and regulations, (iii) the selection, engagement and termination, subject to shareholder approval, of the Company's independent auditor, (iv) the pre-approval of all audit, audit-related and all permitted non-audit services, if any, by the Company's independent auditor, and the compensation therefor, (v) the Company's internal controls over financial reporting and (vi) risk assessment and risk management.management, including cyber risks.
Under the Companies Law, the audit committee is responsible, among others, for (i) identifying deficiencies in the business management practices of the Company, including by consulting with the internal auditor, and recommending remedial actions with respect to such deficiencies; (ii) reviewing and approving related party transactions, including, among others, determining whether or not such transactions are deemed material actions or extraordinary transactions; (iii) ensuring that a competitive process is conducted for related party transactions with a controlling shareholder (regardless of whether or not such transactions are deemed extraordinary transactions), optionally based on criteria which may be determined by the audit committee annually in advance; (iv) setting forth the approval process for transactions that are 'non-negligible' (i.e., transactions with a controlling shareholder that are classified by the audit committee as non-negligible, even though they are not deemed extraordinary transactions), as well as determining which types of transactions would require the approval of the audit committee, optionally based on criteria which may be determined annually in advance by the audit committee; (v) evaluating the Company’s internal audit program and the performance of the Company’s internal auditor and the resources at his/her disposal; (vi) reviewing the scope of work of the Company’s external auditor and making recommendations regarding his/her salary; and (vii) creating procedures relating to the employees’ complaints regarding deficiencies in the administration of the Company as well as adopting against retaliation. The audit committee is also responsible for reviewing and approving any material change or waiver in the Company's Corporate Code of Conduct regarding directors or executive officers, and disclosures made in the Company's annual report in such regard. The audit committee operates under a charter dully adopted by the board of directors.
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Our board of directors has determined that each member of our audit committee is independent as such term is defined in Rule 10A‑3 under the Exchange Act, and that each member of our audit committee satisfies the additional requirements applicable under the Nasdaq rules to members of an audit committee.
Compensation Committee
OurCompensation Committee is comprised of Zehava Simon Dafna Gruber,(Chairperson), Avi Cohen Raanan Cohen and Miron (Ronnie) Kenneth.Sarit Sagiv. The function of the compensation committee is described in the approved charter of the committee, and includes assisting the board of directors in discharging its responsibilities relating to compensation of the Company’s officers, directors and executives and the overall compensation programs and reviewing and approving, or if required by law, approving and recommending for approval by the board of directors, grants and awards under the Company’s equity incentive plans. The primary objective of the committee is to oversee the development and implementation of the compensation policies and plans that are appropriate for the Company in light of all relevant circumstances, and which provide incentives that fit the Company’s long-term strategic plans and are consistent with the culture of the Company and the overall goal of enhancing shareholder’s value.
Our board of directors has determined that each member of our compensation committee is independent under the Nasdaq rules, including the additional independence requirements applicable to the members of a compensation committee.
Under the Companies Law and our compensation committee charter, our compensation committee is responsible, among others, for (i) recommending to the board of directors regarding its approval of a compensation policy in accordance with the requirements of the Companies Law, and any other compensation policies, incentive-based compensation plans and equity-based plans; (ii) overseeing the development and implementation of such compensation plans and policies that are appropriate in light of all relevant circumstances and recommending to the board of directors regarding any amendments or modifications that the compensation committee deems appropriate; (iii) determining whether to approve transactions concerning the terms of engagement and employment of our officers and directors that require compensation committee approval under the Companies Law or our compensation plans and policies; and (iv) taking any further actions as the compensation committee is required or allowed to under the Companies Law or the compensation plans and policies.
Nominating Committee
Our Nominating Committee is comprised of Ronnie (Miron) Kenneth,Raanan Cohen (Chairperson), Michael Brunstein, Eli Fruchter and Zehava Simon.Dafna Gruber. The function of the nominating committee is described in the approved charter of the committee, and includes responsibility for identifying individuals qualified to become board members and recommending that the board of directors consider the director nominees for election at the general meeting of shareholders. The nominating and corporate governance committee is also responsible for developing and recommending to the board of directors a set of corporate governance guidelines applicable to the Company, periodically reviewing such guidelines and recommending any changes thereto.
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Our audit committee to fulfill the scope and actalso acts as the Company’sour investment committee.
All committees are acting according to written charters that were approved by our board of directors. In February 2012,Additionally, we adopted an internal enforcement plan which was approved by our board of directors. The internal enforcement plan, as part of which we adopted and implementing procedures and policies in order to comply with the provisions of the Israeli Securities Law, 5728-1968 (the “Israeli Securities Law”), the Companies Law and the applicable guidelines issued by Israeli Securities Authority.Law. The internal enforcement plan includes, among others, the board committees’ charters and the internal auditor charter, procedures with respect to related party transactions, insider trading, which prohibits hedging activities, equity-based compensation policy, reporting and complaints, anti-bribery policyand anti-fraud policies and a code of conduct. Each of our committees have the power to retain, terminate and approve the related fees and other retention terms, as it deems appropriate, outside counsel and other experts and consultants to assist the committee in connection with its responsibilities without our board of directorsdirectors’ approval and at the Company's expense.
Approval of Related Party Transaction
The Companies Law requires that office holders of a company, including directors and executive officers, promptly disclose to the board of directors any personal interest they may have and all related material information known to them about any existing or proposed transaction with such company. The approval of the board of directors is required for 'non-extraordinary' transactions between a company and its office holders, or between a company and other persons in which an office holder has a personal interest, unless such company's articles of association provide otherwise. Under the Companies Law, a 'non-extraordinary' transaction between a company or between the company and a third party in which an office holder of a company has a personal interest, will require the approval of the board of directors or a committee authorized by the board of directors, unless such company's articles of association provide otherwise. Our Amended Articles do not provide otherwise, and therefore such transaction requires the approval of our board of directors. If a transaction is an “extraordinary transaction”, it is subject to the approval of the audit committee prior to its approval by the board of directors. For information regarding the necessary approvals under the Companies Law for transactions with office holders and directors regarding their terms of engagement with the company, see “— Compensation of Officers and Directors” in this Item below.
In addition, an extraordinary transaction between a public company and a controlling shareholder (i.e. a shareholder who has the ability to direct the activities of a company, including a shareholder that owns 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights, but excluding a shareholder whose power derives solely from its position on the board of directors or any other position with the company), or in which a controlling shareholder has a personal interest, including a private placement in which the controlling shareholder has a personal interest, a transaction between a public company and a controlling shareholder, the controlling shareholders' relative, or entities under its control, directly or indirectly, with respect to services to be provided to the public company, and a transaction concerning the terms of compensation of the controlling shareholder or the controlling shareholder’s relative, who is an office holder or an employee, requires the approval of the audit committee or, in some cases, the compensation committee (see "— Compensation of Officers and Directors" in this Item below), the board of directors and a majority of the shares voted by the shareholders of the company participating and voting on the matter in a shareholders’ meeting. In addition, the shareholder approval must fulfill one of the following requirements: (i) the majority must include at least a majority of the shares of the voting shareholders who have no personal interest in the transaction (in counting the total votes of such shareholders, abstentions are not taken into account); or (ii) the total of opposition votes among the shareholders who have no personal interest in the transaction may not exceed 2% of the aggregate voting rights in the company. Any such transaction the term of which is more than three years, must be approved in the same manner every three years, unless with respect to certain transactions as permitted by the Companies Law, the audit committee has determined that longer term is reasonable under the circumstances.
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According to the Companies Law, if an extraordinary transaction is discussed by the board of directors or the audit committee, directors and office holders that have personal interest in the proposed transaction, may not participate in the discussion or vote. However, if the majority of the members of the audit committee or the board of directors (as applicable) have personal interest in the proposed transaction, then all directors (including those with personal interest) may participate in the discussion and vote, provided that in the event the majority of the members of the board of directors have personal interest in the transaction, said transaction will also be subject to the approval of the Company's shareholders.
Compensation of Officers and Directors
Under the Companies Law, Israeli public companies are required to establish a compensation committee and adopt a policy regarding the compensation and terms of employment of their directors and officers. For information on the composition, roles and objectives of the compensation committee pursuant to the Companies Law and our compensation committee charter, see above “—Board of Directors”Directors’ Committees — Compensation Committee" in this annual report on Form 20-F.Annual Report.
Pursuant to the Companies Law, the compensation policy must be approved by the company's board of directors after reviewing the recommendations of the compensation committee. The compensation policy also requires the approval of the general meeting of the shareholders, which approval must satisfy one of the following (the "Majority Requirement"): (i) the majority should include at least a majority of the shares of the voting shareholders who are non-controlling shareholders or do not have a personal interest in the approval of the compensation policy (in counting the total votes of such shareholders, abstentions are not be taken into account) or (ii) the total number of votes against the proposal among the shareholders mentioned in paragraph (i) does not exceed two percent of the aggregate voting power in the company. Under certain circumstances and subject to certain exceptions, the board of directors may approve the compensation policy despite the objection of the shareholders, provided that the compensation committee and the board of directors determines that it is for the benefit of the company, following an additional discussion and based on detailed arguments. In August 2016, our compensation committee and board of directors acted accordingly and adopted our amended and restated compensation plan despite our shareholders’ objection.
The Companies Law provides that the compensation policy must be re-approved (and re-considered) every three years, in the manner described above. Moreover, the board of directors is responsible for reviewing from time to time the compensation policy and deciding whether or not there are any circumstances that require an adjustment to the company's compensation policy. When approving the compensation policy, the relevant organs must take into consideration the goals and objectives listed in the Companies Law, and include reference to specific issues listed in the Companies Law. Such issues include, among others (the “Compensation Policy Mandatory Criteria”): (i) the relevant person’s education, qualifications, professional experience and achievements; (ii) such person's position within the company, the scope of his responsibilities and previous compensation arrangements with the company; (iii) the proportionality of the employer cost of such person in relation to the employer cost of other employees of the company, and in particular, the average and median pay of other employees in the company, including contract workers, and the impact of the differences between such person's compensation and the other employees' compensation on the labor relations in the company; (iv) the authority, at the board of director's sole discretion, to lower any variable compensation components or set a maximum limit (cap) on the actual value of the non-cash variable components, when paid; and (v) in the event that the terms of engagement include any termination payments - the term of employment of the departing person, the company’s performance during that term, and the departing person’s contribution to the performance of the company.
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In addition, the Companies Law provides that the following matters must be included in the compensation policy (the "Compensation Policy Mandatory Provisions"): (i) the award of variable components must be based on long term and measurable performance criteria (other than non-material variable components, which may be based on non-measurable criteria taking into account the relevant person's contribution to the performance of the company); (ii) the company must set a ratio between fixed and variable pay, set a cap on the payment of any cash variable compensation components as of the payment of such components, and set a cap on the maximum cash value all non-cash variable components as of their grant date; (iii) the compensation policy must include a provision requiring the relevant person to return to the company any compensation that was awarded on the basis of financial figures that were subsequently restated; (iv) equity based variable compensation components should have an appropriate minimum vesting periods, which should be linked to long term performance objectives; and (v) the company must set a clear limit on termination payments.
Pursuant to the Companies Law, any transaction with an office holder (except directors and the chief executive officer of the company) with respect to such office holder's compensation arrangements and terms of engagement, requires the approval of the compensation committee and the board of directors. Such transaction must be consistent with the provisions of the company's compensation policy, provided that the compensation committee and the board of directors may, under special circumstances, approve such transaction that is not in accordance with the company's compensation policy, if both of the following conditions are met: (i) the compensation committee and the board of directors discussed the transaction in light of the roles and objectives of the compensation committee (also see above "—Board of Directors' Committees — Compensation Committee" in this annual report on Form 20-F)Annual Report) and after taking into consideration the Compensation Policy Mandatory Criteria and including in such transaction the Compensation Policy Mandatory Provisions; and (ii) the company's shareholders approved the transaction, provided that in public companies the approval must satisfy the Majority Requirement. Notwithstanding the above, the compensation committee and the board of directors may, under special circumstances, approve such transaction even if the shareholders' meeting objected to its approval, provided that (i) both the compensation committee and the board of directors re-discussed the transactions and decided to approve it despite the shareholder's objection, based on detailed arguments, and (ii) the company is not a 'Public Pyramid Held Company'. For the purpose hereof, a "Public Pyramid Held Company" is a public company that is controlled by another public company (including companies that issued only debentures to the public), which is also controlled by another public company (including companies that issued only debentures to the public) that has a controlling shareholder.
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Transactions between public companies (including companies that have issued only debentures to the public) and their chief executive officer, with respect to his or her compensation arrangement and terms of engagement, require the approval of the compensation committee, the board of directors and the shareholder's meeting, provided that the approval of the shareholders' meeting must satisfy the Majority Requirement. Notwithstanding the above, the compensation committee and the board of directors may, under special circumstances, approve such transaction with the chief executive officer even if the shareholders' meeting objected to its approval, provided that (i) both the compensation committee and the board of directors re-discussed the transactions and decided to approve it despite the shareholder's objection, based on detailed arguments, and (ii) the company is not a Public Pyramid Held Company. Such transaction with the chief executive officer must be consistent with the provisions of the company's compensation policy, provided that the compensation committee and the board of directors may, under special circumstances, approve such transaction that is not in accordance with the company's compensation policy, if both of the following conditions are met: (i) the compensation committee and the board of directors discussed the transaction in light of the roles and objectives of the compensation committee (see above —“Board of Directors' Committees – Compensation Committee" in this annual report on Form 20-F)Annual Report) and after taking into consideration the Compensation Policy Mandatory Criteria and including in such transaction the Compensation Policy Mandatory Provisions; and (ii) the company's shareholders approved the transaction, provided that in public companies the approval must satisfy the Majority Requirement. In addition, the compensation committee may determine that such transaction with the CEO does not have to be approved by the shareholders of the company, provided that: (i) the chief executive officer is independent based on criteria set forth in the Companies Law; (ii) the compensation committee determined, based on detailed arguments, that bringing the transaction to the approval of the shareholders may compromise the chances of entering into the transaction; and (iii) the terms of the transaction are consistent with the provisions of the company's compensation policy. Under the Companies Law, non-material amendments of transactions relating to the compensation arrangement or terms of engagement of office holders (including the chief executive officer), require only the approval of the compensation committee.
With respect to transactions relating to the compensation arrangement and terms of engagements of directors in public companies (including companies that have issued only debentures to the public), the Companies Law provides that such transaction is subject to the approval of the compensation committee, the board of directors and the shareholders' meeting. Such transaction must be consistent with the provisions of the company's compensation policy, provided that the compensation committee and the board of directors may, under special circumstances, approve such transaction that is not in accordance with the company's compensation policy, if both of the following conditions are met: (i) the compensation committee and the board of directors discussed the transaction in light of the roles and objectives of the compensation committee (see above "—Board Practices –Board of Directors' Committees – Compensation Committee" in this annual report on Form 20-F)Annual Report) and after taking into consideration the Compensation Policy Mandatory Criteria and including in such transaction the Compensation Policy Mandatory Provisions; and (ii) the company's shareholders approved the transaction, provided that in public companies the approval must satisfy the Majority Requirement.
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Pursuant to the Companies Law, a compensation policy must be re-approved (and re-considered) at least once in every three years. OurThe current compensation policy was approved by our shareholders votedin June 2019, and on June 30, 2016 against25, 2020, our shareholders approved an amendment to the amended and restated compensation policy recommended by our board of directors. On August 2, 2016, our board of directors (per the recommendation of our compensation committee) has concluded that the approval of the proposed amended and restated compensation plan is in the interest of the Company, and based on detailed arguments and in accordance with the provisions of the Companies Law, has resolved to approve our amended and restated compensation policy despite the objection of our shareholders. Accordingly, our amended compensation policy is effective as of that date. For the full text of the amended and restated compensation policy see our report on Form 6-K furnishedrespect to the Securitiespremium payable in connection with our directors and Exchange Commission on May 26, 2016.officers liability insurance policy.
Internal Auditor
Under the Companies Law, the board of directors must also appoint an internal auditor nominated by the audit committee. Our internal auditor is Ms. Dana Gottesman-Erlich, CPA (Isr.) of BDO Ziv Haft, an independent registered accounting firm which is a part of the BDO international accounting firm. Ms. Gottesman-Erlich replaced Mr. Guy Sapir, C.P.A (Isr) of Kesselman & Kesselman PwC Israel as our internal auditor as of January 2016. The role of the internal auditor is to examine whether a company’s actions comply with the law and proper business procedure. The internal auditor may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of the company’s independent accounting firm or its representative. The Companies Law defines an interested party as a holder of 5% or more of the shares or voting rights of a company, any person or entity that has the right to nominate or appoint at least one director or the general manager of the company or any person who serves as a director or as the general manager of a company. Our internal auditor is working based on a risk survey and audit plan, which is determined by our audit committee and approved by our board of directors.
6.DEmployees
Set forth below is a chart showing the number of people we employed at the times indicated:
| As of December 31, | ||||||||||||||||||||||||
2016(*) | 2017(*) | 2018(*) | ||||||||||||||||||||||
| As of December 31, | 2019(*) | 2020(*) | 2021(*) | |||||||||||||||||||||
| Total Personnel | 510 | 616 | 662 | 646 | 713 | 819 | ||||||||||||||||||
| Located in Israel | 299 | 352 | 373 | 349 | 385 | 428 | ||||||||||||||||||
| Located abroad | 211 | 264 | 289 | 297 | 328 | 391 | ||||||||||||||||||
| In operations | 83 | 100 | 100 | 108 | 129 | 176 | ||||||||||||||||||
| In research and development | 178 | 216 | 275 | 251 | 300 | 328 | ||||||||||||||||||
| In global business | 214 | 251 | 242 | 247 | 263 | 240 | ||||||||||||||||||
| In general and administration | 35 | 49 | 45 | 40 | 49 | 75 | ||||||||||||||||||
(*)The numbers of employees set forth in this table do not include contractors and an insignificant number of temporary employees retained by the Company from time to time. The numbers do not include employees of ancosys, acquired in January 2022.
In the high-tech industry in general and specifically in the semiconductors industry, there is intense competition for high-skilled employees. Nova believes that the company’s future success will depend, by a large part, on our continued ability to attract, hire and retain qualified and highly motivated employees in every role and seniority level.
We were a member of the Industrialists Association in Israel, an employer’s union until December 31, 2006. Under applicable Israeli law, we and our employees are subject to protective labor provisions such as restrictions on working hours, minimum wages, paid vacation, sick pay, severance pay and advance notice of termination of employment as well as equal opportunity and anti-discrimination laws. Orders issued by the Israeli Ministry of Economy and Industry make certain industry-wide collective bargaining agreements applicable to us. These agreements affect matters such as cost of living adjustments to salaries, length of working hours and week, recuperation and travel expenses.expenses. In Israel, Nova iswe are subject to the instructions of the Extension Order in the Industrial Field for Extensive Pension Insurance 2006 according to the Israeli Collective Bargaining Agreements Law, 1957 (the “Extension Order”). The Extension Order determines the pension terms of the employees which fall under its criteria.
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6.EShare Ownership
Based on information provided to us, our 1711 directors and officerssenior management members listed in Item 6A above,6.A in this Annual Report, have had, as a group, sole voting and investment power for 560,028279,450 shares beneficially owned by them as of February 14, 20182022 (representing 2%approximately 1% of the 27,925,14928,586,276 issued and outstanding ordinary shares of the Companyour company as of such date). Such number includes 512,148208,817 shares subject to options that are immediately exercisable or exercisable within 60 days of February 14, 20182022 (with expiration dates ranging between 20192022 and 2026;2028; exercise prices ($/share) ranging between 0.93$11.68 and 29.45)$102.35), 45,76968,038 shares held by the trustee due to vested RSUs, and 2,1112,595 RSUs to be vested within 60 days as of February 14, 2018.2022. Each of such directors and executive officerssenior management members beneficially owned less than 1% of the Company’sour company’s shares as of such date.
Beneficial ownership of shares is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Ordinary shares that are subject to warrants or options that are presently exercisable or exercisable within 60 days of the date of February 14, 20182022 are deemed to be outstanding and beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage of any other person.
Employee Benefit Plans
The share option plans under which we have outstanding equity grants, are described below:
2007 Incentive Plan (which was active until October 2017) - The maximum number of ordinary shares to be issued under the plan, which was adopted by our shareholders on October 25, 2007, was 2,500,000, subject to future increases or decreases by the Company. On May 1, 2012, the board of directors resolved to increase the aggregate number of shares issuable under the 2007 Incentive Plan by one million shares, and amend the 2007 Incentive Plan to address a change in the clearing procedures of the TASE. On December 17, 2014, the board of directors resolved to increase the aggregate number of shares issuable under the 2007 Incentive Plan by two million shares, and to amend the 2007 Incentive Plan. Such amendment includes, among others, a change of the exercise period in the event of termination, and in case of death, disability or retirement of the optionee. In connection with the aforementioned increases, we have not obtained a shareholder approval as required under Nasdaq Listing Rules and followed in lieu home practice rules that do not require such approval. As of December 31, 2018,2021, options to purchase 3,354,1124,304,112 ordinary shares at an exercise prices which range from $0.43 to $24.70,$24.96, the fair market value of Nova’s stock basedour shares on the dates of grant, were granted under this plan of which, as of December 31, 2018, 2,288,8132021, 2,940,323 options were exercised, 691,720156,639 options were outstanding and exercisable, 932,227 1,207,150 options had been cancelled and 391,352no options were outstanding and unvested. As of December 31, 20182021, a total of 834,142 RSU’s had been granted, of which 622,993728,223 had vested, 97,411105,919 had been cancelled and 113,738no RSU's were outstanding. Following adoption of 2017 share incentive plan, as detailed herein, we have ceased granting equity under the 2007 incentive plan.
2017 Share Incentive Plan - The maximum number of ordinary shares to be issued under the plan, which was adopted by our board of directors on August 1, 2017, is 2,500,000, subject to future increases or decreases by the Company. The Company has used its option as a foreign private issuer to opt out of Nasdaq requirement for a shareholders’ approval of the plan, by providing a legal opinion letter to Nasdaq on August 25, 2017. As of December 31, 2018,2021, options to purchase 314,681635,877 ordinary shares at an exercise prices which range from $22.56 to $31.26,$102.35, the closing price of the Company's ordinary shares on Nasdaq on the day of grant, were granted under this plan of which, as of December 31, 2018, no2021, 134,245 options were exercised, 36,345171,223 options were outstanding and exercisable, 5,680172,729 options had been cancelled and 410,656157,680 were outstanding and unvested. As of December 31, 20182021, 226,303849,823 RSU’s had been granted, of which 12,450310,479 RSU’s had vested, 3,69676,292 had been cancelled and 210,157463,014 RSU's were outstanding.
On September 12, 2013,June 17, 2019, our shareholders (following an approval by our compensation committee and board of directors), approved the Company's compensation policy, which includes, among others, provisions relating to equity-based compensation for Nova's executive officers. On August 2, 2016, our board of directors (per the recommendation of our compensation committee) has concluded that the approval of the proposed amended and restated compensation plan is in the interest of the Company, and based on detailed arguments and in accordance with the provisions of the Companies Law, has resolved to approve our amended and restated compensation policy despite the objection of our shareholders. Accordingly, our amended compensation policy is effective as of that date.
The amended and restated compensation policy provides, among others, that: (i) such equity based compensation is intended to be in a form of share options and/or other equity based awards, such as RSUs, in accordance with the Company's equity incentive plan in place as may be updated from time to time; (ii) all equity-based incentives granted to executive officers will be subject to vesting periods in order to promote long-term retention of the awarded executive officers. Unless determined otherwise in a specific award agreement approved by the compensation committee and the board of directors, grants to executive officers (other than directors) will vest gradually over a period of between three to five years; and (iii) all other terms of the equity awards will be in accordance with Nova's incentive plans and other related practices and policies. The board of directors may, following approval by the compensation committee, extend the period of time for which an award is to remain exercisable and make provisions with respect to the acceleration of the vesting period of any executive officer's awards, including, without limitation, in connection with a corporate transaction involving a change of control, subject to any additional approval as may be required by the Companies Law. The compensation policy also provides that the equity-based compensation will be granted from time to time and be individually determined and awarded according to the performance, educational background, prior business experience, qualifications, role and the personal responsibilities of the executive officer. The fair market value of the equity-based compensation for the executive officers will be determined according to acceptable valuation practices at the time of grant. Our compensation policy provides that equity-based compensation awarded to employees, executive officers or directors shall not be, in the aggregate, in excess of 10% of our share capital on a fully diluted basis at the date of the grant.
Our equity-based compensation policy, which was initially adopted in February 2007 and was most recently amended in December 2018,May 2021, provides, among others, that the exercise price for each option will be equal to the closing sale price of the Company's ordinary shares on Nasdaq on the day of grant.
For additional information regarding our employees’ incentive plans, see Note 9 of our consolidated financial statements, contained elsewhere in this report.
A.Major Shareholders
The following table sets forth certain information regarding the beneficial ownership of our outstanding ordinary shares as of the dates indicated below for each personshareholder who we know beneficially owns five percent or more of the outstanding ordinary shares.
Beneficial ownership of shares is determined under rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power.Applicable percentages are based on 27,925,14928,586,276 ordinary shares outstanding as of February 14, 2018.2022.
| Name | Number of Ordinary Shares Beneficially Owned | Percentage of Ordinary Shares Beneficially Owned | ||||||
Menora Mivtachim Holdings Ltd. and Menora Mivtachim Pensions and Gemel Ltd. (1) | 2,748,785 | 9.84 | % | |||||
The Phoenix Holdings Ltd., Itshak Sharon (Tshuva), and Delek Group Ltd. (2) | 2,228,397 | 7.98 | % | |||||
Harel Insurance Investments & Financial Services Ltd. (3) | 2,095,493 | 7.50 | % | |||||
Clal Insurance Enterprises Holdings Ltd., IDB Development Corporation Ltd. and Eduardo Sergio Elsztain. (4) | 2,025,849 | 7.25 | % | |||||
Renaissance Technologies LLC. (5) | 2,013,700 | 7.21 | % | |||||
Psagot Investment House Ltd. (6) | 1,505,717 | 5.39 | % | |||||
| Name | Number of Ordinary Shares Beneficially Owned | Percentage of Ordinary Shares Beneficially Owned | ||||||
Wasatch Advisors Inc. (1) | 2,651,946 | 9.28 | % | |||||
Migdal Insurance & Financial Holdings Ltd. (2) | 1,939,093 | 6.78 | % | |||||
Harel Insurance Investments & Financial Services Ltd. (3) | 1,890,099 | 6.61 | % | |||||
Menora Mivtachim Holdings Ltd. (4) | 1,730,937 | 6.06 | % | |||||
FMR LLC (5) | 1,514,015 | 5.30 | % | |||||
| (1) | The information is based uponAmendment no. 2 Schedule 13G filed with the SEC by Wasatch Advisors Inc. on February 10, 2022 regarding holdings as of December 31, 2021. |
| (2) | The information is based upon Schedule 13G filed with the SEC by Migdal Insurance & Financial Holdings Ltd. on February 2, 2022regarding holdings as of December 31, 2021. |
| (3) | The information is based upon Amendment no. 8 to Schedule 13G filed with the SEC byHarel Insurance Investments & Financial Services Ltd. on January 31, 2022 regarding holdings as of December 31, 2021. |
| (4) | The information is based upon Amendment no. 4 to Schedule 13G filed with the SEC by Menora Mivtachim Holdings Ltd., Menora Mivtachim Pensions and Gemel Ltd., Menora Mivtahim Insurance Ltd.,Menora Mivtachim Vehistadrut Hamehandesim Nihul Kupot Gemel Ltd. and Shomera Insurance Company Ltd. on February 10, 2022 regarding holdings as of December 31, 2021. |
| (5) | The information is based upon Schedule 13G filed with the SEC by FMR LLC, its subsidiaries and Abigail P. Johnson on February 10, 2022regarding holdings as of December 31, 2021. |
All the shareholders of the Company have the same voting rights.
To our knowledge, the significant changes in the percentage of ownership held by our major shareholders during the past three years have been: (i) the decrease in the percentage of ownership by Clal Insurance Enterprises Holdings Ltd. below 5% in 2017 and increase above 5% in 2018;2019; (ii) the increase in the percentage of ownership held by Wellington Management Group LLP, Wellington Group Holdings LLP, Wellington Investment Advisors Holdings LLP and Wellington Management Company LLP above 5% in 2016, and the decrease in the percentage of ownership below 5% in 2017; (iii) the increase in the percentage of ownership held by Menora Mivtachim Holdings Ltd. above 5% in 2017, (iv) the increase in the percentage of ownership of Psagot Investment House Ltd. above 5% in 2018; (v) the decrease in the percentage of ownership of Yelin Lapidot Holdings Management Ltd., Dov Yelin, Yair Lapidot below 5% in 2018, and (vi)2019; (iii) the decrease ofincrease in the percentage of ownership of Migdal Insurance & Financial Holdings above 5% in 2020; (iv) the decrease in the percentage of ownership by The Phoenix Holdings Ltd., Itshak Sharon (Tshuva), and Delek Group Ltd below 5% in 2018.2020; and (v) the increase in the percentage of ownership by Adage Capital Partners LP, Adage Capital Partners GP, L.L.C and Adage Capital Advisors L.L.C above 5% in 2019 and the decrease to below 5% in 2021; (vi) the increase in the percentage of ownership by Wasatch Advisors Inc. above 5% in 2020. (vii) the increase in the percentage of ownership by FMR LLC above 5% in 2021.
As of February 14, 2019,2022, our ordinary shares were held by 1413 registered holders (not including CEDE & Co.). Based on the information provided to us by our transfer agent, as of February 14, 2018, 122022, 10 registered holders were U.S. domicile holders and held approximately 0.13%0.02% of our outstanding ordinary shares.
Control of Registrant
To the Company’s knowledge, it is not owned or controlled by a foreign government. Except for the shareholders identified above owning more than five percent of the Company’s ordinary shares, the Company has no knowledge of any corporation or other natural or legal person owning a controlling interest in the Company.
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B.Related Party Transactions
In June 2018,2021, we obtained directors’ and officers’ liability insurance for our officers and directors with coverage in an aggregate amount of $50,000,000$30 million (including $5,000,000$10 million Side A DIC). This directors’ and officers’ liability insurance was presented and approved by our compensation committee in accordance with the framework approved byunder our shareholders on June 22, 2017(the “Policy”).compensation policy.
Further, upon circumstances to be approved by the compensation committee (and, if required by law, by the board of directors), we will be entitled to enter into a "run off" insurance policy of up to seven years, with the same insurer or any other insurance, as follows: (i) the limit of liability of the insurer will not exceed the greater of $50 million or 30% of our shareholders equity based on our most recent financial statements at the time of approval by the compensation committee; (ii) the annual premium will not exceed 300% of the last paid annual premium; and (iii) the insurance policy, as well as the limit of liability and the premium for each extension or renewal will be approved by the compensation committee (and, if required by law, by the board of directors) which shall determine that the sums are reasonable considering our exposures covered under such policy, the scope of cover and the market conditions, and that the insurance policy reflects the current market conditions and that it will not materially affect our profitability, assets or liabilities.
We may also extend the insurance policy in place to include cover for liability pursuant to a future public offering of securities as follows: (i) the additional premium for such extension of liability coverage will not exceed 50% of the last paid annual premium; and (ii) the insurance policy as well as the additional premium will be approved by the compensation committee (and if required by law, by the board of directors) which will determine that the sums are reasonable considering the exposures pursuant to such public offering of securities, the scope of cover and the market conditions and that the insurance policy reflects the current market conditions, and it does not materially affect our profitability, assets or liabilities.
In addition, we undertook to indemnifyfollowing the approval by our officers and directors. On June 21, 2012, the shareholders at the annual general meeting approved an amended letter of indemnification to be given to our directors and officers. The aggregate indemnification amount that the Company can pay to all its officers and directors pursuant to these letters of indemnification will not exceed 25% of the Company’s shareholders’ equity, according to the most recent consolidated financial statement prior to the date of indemnification payment. Prior to that,held on June 24, 2021, we undertook to indemnify our officers and directors up to anthe greater of (a) twenty-five percent (25%) of the Company’s total shareholders’ equity according to the Company’s most recent financial statements as of the time of the actual payment of indemnification; (b) US$200 million; (c) ten percent (10%) of the Company "total market cap" (which shall mean the average closing price of the Company’s ordinary shares over the 30 trading days prior to the actual payment of indemnification multiplied by the total number of issued and outstanding shares of the Company as of the date of actual payment); and (d) in connection with or arising out of a public offering of the Company’s securities, the aggregate amount of $10,000,000 proceeds from the sale by the Company and/or 25%any shareholder of the Company’s shareholders equity, the higher of the two.securities in such offering. Pursuant to our amended and restated compensation policy, we may indemnify our directors and officers to the fullest extent permitted by applicable law, for any liability and expense that may be imposed on the director or the officer, as provided in the indemnity agreement between us and such individuals, all subject to applicable law and our articles of association. Our amended and restated compensation policy also provides that we may exempt our directors and officers in advance for all or any of their liability for damage in consequence of a breach of the duty of care vis-a-vis our company, to the fullest extent permitted by applicable law.
For information relating to options granted to officers and directors, see “Item 6E. Share Ownership” in this annual report on Form 20-F. Annual Report. For information regarding our compensation policy and compensation arrangements with our directors and executive officers (including our chairman and chief executive officer), please refer to “Item 6B. Compensation” in this annual report on Form 20-FAnnual Report.
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7.CInterest of Experts and Counsel
Not applicable.
8.AConsolidated Statements and Other Financial Information
See “Item 17. Financial Statements” in this annual report on Form 20-F and pages F-1 through F-30.Annual Report.
Legal Proceedings
From time to time, we or our subsidiaries may be a party to legal proceedings and claims in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, we do not believe they will have a material effect on our consolidated financial position, results of operations, or cash flows.
We are currently not involved in any significant legal proceedings.
Dividend Policies
We anticipate that, for the foreseeable future, we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends for at least the next several years.
The distribution of dividends may be limited by the Companies Law, which permits the distribution of dividends only out of retained earnings or earnings derived over the two most recent fiscal years, whichever is higher, provided that there is no reasonable concern that payment of a dividend will prevent a company from satisfying its existing and foreseeable obligations as they become due. Our Amended and Restated Articles of Association provide that dividends will be paid at the discretion of, and upon resolution by, our board of directors.
In addition, distribution of dividends may be subject to certain tax implication. For additional information regarding tax implication of dividends' distribution, see “Item 10E. Taxation – Israeli Taxation” in this annual report on Form 20-F.Annual Report.
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Export Sales
Substantially all of our products are sold to customers located outside Israel and the United States..
8.BSignificant Changes
Not applicable.
9.AOffer and Listing Details
Our ordinary shares began trading on Nasdaq on April 11, 2000 under the symbol “NVMI”. Our ordinary shares were registered for trading on the Tel Aviv Stock Exchange Ltd. in 2002 under the symbol “נ“נובה”.
9.BPlan of Distribution
Not applicable.
9.CMarkets
Our ordinary shares are quoted on the Nasdaq Global Select Market under the symbol “NVMI” and on the Tel Aviv Stock Exchange.Exchange Ltd.
9.DSelling Shareholders
Not applicable.
9.EDilution
Not applicable.
9.FExpenses on the Issue
Not applicable.
Item 10. Additional Information
10.AShare Capital
Not applicable.
10.BMemorandum and Articles of Association
At the annual general meeting held on June 24, 2021, our shareholders approved the following changes in our amended and restated articles of association: (i) an increase of the authorized share capital of the Company by an additional 20,000,000 (twenty million) ordinary shares, such that the authorized share capital of the Company following such increase consists of 60,000,000 (sixty million) ordinary shares (ii) elimination of the par value of our ordinary shares; (iii) an amendment to Article 94 concerning jurisdiction.
A copy of our amended and restated articles of association is attached as Exhibit 1.1 to this Annual Report. The information called for by this Item is set forth in Exhibit 2.1 to this Annual Report and is incorporated by reference into this Annual Report.
Acquisition of a Controlling Stake.ancosys GmbH
Israeli Lease Agreement
On May 3, 2018, we entered into a lease agreement, or the Lease Agreement, with Bayside Land Corporation Ltd., or Bayside.
Pursuant to the Lease Agreement, we will leaseare currently leasing from Bayside a total of approximately 12,000 square meters at a new building being built at the Science Park in Rehovot, with the intention to move the our headquarters in Israel to such premises.
The lease period for a period of ten years,the Initial Space extends until 2029, or the Initial Lease Period. We will have the option to extend the lease period by two periods of five years each, subject to customary conditions.
The lease period for theLease agreement also includes a leasing of an additional space of approximately 2,0003,000 square meters, or the Additional Space, is expected to beginwhich has started in 2021, and may be extendedwill extend through the same lease periods as the Initial Space. The lease
These leases cannot be terminated by us during the Initial Lease Period. Under certain circumstances, Bayside may terminate the Agreement in the event of change of control in the Company.
The average monthly lease, parking and management costs for the Initial and Additional Space in the Initial Lease Period are expected to be approximately NIS 665,000700,000 per month.month in 2022. After the first 5 years of the Initial period the monthly lease and parking payments for the Initial and Additional Space will be increased by 4%. During each of the additional lease option periods, the monthly lease and parking payments for the Initial and Additional Space will be increased by 2.5%. The monthly lease, parking and management costs for the Additional Space are expected to be NIS 175,000 per month. The monthly lease, parking and management costs will be linked to the Israeli consumer price index.
10.DExchange Controls
Israeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares.
Dividends, if any, paid to holders of our ordinary shares, and any amounts payable upon our dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of our ordinary shares to an Israeli resident, may be paid in non-Israeli currency or, if paid in Israeli currency, may be converted into freely repatriable dollars at the rate of exchange prevailing at the time of conversion.
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10.ETaxation
Israeli Taxation
The following is a summary of the material Israeli tax laws applicable to us, and some Israeli Government programs benefiting us. This section also contains a discussion of some Israeli tax consequences to persons owning our ordinary shares. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of this kind of investor include traders in securities or persons that own, directly or indirectly, 10% or more of our outstanding voting capital, all of whomwho are subject to special tax regimes not covered in this discussion. Some parts of this discussion are based on a new tax legislation which has not been subject to judicial or administrative interpretation. The discussion should not be construed as legal or professional tax advice and does not cover all possible tax considerations.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE ISRAELI OR OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY FOREIGN, STATE OR LOCAL TAXES.
General Corporate Tax Structure in Israel
Israeli companies are generally subject to corporate tax on their taxable income at the rate of 23% for the 2018 tax year and thereafter. However, the effective tax rate payable by a company that derives income from an Approved Enterprise, a BenefitedBeneficiary Enterprise, a Preferred Enterprise, a Special Preferred Enterprise, a Preferred Technology Enterprise or aSpecial Preferred Technology Enterprise (as discussed below) may be lower. Capital gains derived by an Israeli company are generally subject to the prevailing regular corporate tax rate.
Income Tax Regulations (Rules on Bookkeeping by Foreign Invested Companies and Certain Partnerships and Determination of 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 management has elected to apply Income Tax Regulations (Rules for Maintaining Accounting Records of Foreign Invested Companies and Certain Partnerships and Determining Their Taxable Income) - 1986. Accordingly, its taxable income or loss is calculated in US Dollars.
Tax Benefits under the Law for the Encouragement of Capital Investments, 1959
Tax benefits prior to the 2005 Amendment
The Law for the Encouragement of Capital Investments, 1959, generally referred to as the “Investments Law”, providesprovided (prior to the 2005 amendment) that a capital investment in eligible facilities may, upon application to the Israeli Authority for Investments and Development of the Industry and Economy (the(the “Investment Center”), be granted the status of an Approved Enterprise. Each certificate of approval for an Approved Enterprise relates to a specific investment program delineated both by its financial scope, including sources or funds, and by its physical characteristics or the facility or other assets, e.g., the equipment to be purchased and utilized pursuant to the program.
A company owning an Approved Enterprise is eligible for a combination of grants and tax benefits (the “Grant Track”). The tax benefits under the Grant Track include, among others, accelerated depreciation and amortization for tax purposes.purposes. The benefits period is ordinarily seven years commencing with the year in which the Approved Enterprise first generates taxable income. The benefits period is limited to 12 years from the earlier of the commencement of production by the Approved Enterprise or 14 years from the date of approval of the Approved Enterprise.
A company owning an Approved Enterprise may elect to forego its entitlements to grants and tax benefits under the Grant Track and apply for alternative package of tax benefits for a benefit period of between seven and ten years (the “Alternative Track”). Under the Alternative Track, a company’s undistributed income derived from the Approved Enterprise will be exempt from corporate tax for a period of between two and ten years, starting from the first year the company derives taxable income under the Approved Enterprise program. The length of this exemption will depend on the geographic location of the Approved Enterprise within Israel. After the exemption period lapses, the company shall be subject to tax at a reduced corporate tax rate between of 10% to 25% depending on the level of foreign investment in the company in each year as detailed above, for the remainder of the benefits period.
We elected to be taxed under the Alternative Track. A company that has elected the Alternative Track and subsequently pays a dividend
Dividends paid to Shareholders out of income derived from theattributed to an Approved Enterprise during the tax exemption period will be subject to corporate tax on the amount that is determined by the distributed amount (grossed up to reflect such pre-tax income that it would have had to earn in order to distribute the dividend) with the effective corporate tax rate which would have been applied had the company not elected the Alternative Track, which is at referred above ranged between 10%-25%, depending on the level of foreign investment in the company in each yare year as explained above. Under the Investments Law, the transfer of funds from the Company to shareholders and other related parties may be deemed to be regarded as a dividend distribution for this purpose in certain circumstances. Dividends paid(or out of anydividends received from a company whose income derived fromis attributed to an Approved EnterpriseEnterprise) are generally subject to withholding tax at source at the reduced rate of 15% (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the Israel Tax Authority (“ITA”), allowing for a reduced tax rate), if the dividend is distributed during the tax exemption period or within 12 years thereafter. After such period, the withholding tax will be applied at a rate of up to 30%, or at a lower rate provided under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). The 15% tax rate is limited to dividends and distributions out of income derived during the benefits period and actually paid at any time up to 12 years thereafter. After this period, the withholding tax is applied at a rate of up to 30%, or at the lower rate under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). In the event, however,case of a company which is considered a Foreign Investment Company as defined in the company qualifies as a FIC, there is no such time limitation.Investment Law, the 12-year limitation on reduced withholding tax on dividends does not apply.
On November 15, 2021 a weighted averagenew amendment of the various applicableInvestment Law was enacted (i) providing a reduced corporate income tax rates, excluding any tax-exempt income. Underon the Investments Law,Trapped Profits distributed within a company that has electedyear from such amendment. The reduced corporate income tax is based on a certain formula and subject to reinvestment of certain amounts in enumerated assets/activities; (ii) harshening the Alternative Track is not obligedrules with respect to distribute retaineddetermining the profits and may generally decide from which year’s profitsa dividend was distributed and providing that part of any dividend distribution, will be deemed as distributed from the Trapped Profits, according to declare dividends.a certain formula.
In December 2021, we entered into an elective tax agreement with the Israeli Tax Authorities and opt-in with the new amendment. The reduced corporate income tax on the Trapped Profits was approximately $5.8M, or 10%, and was provided for in the 2021 financial statements of operations, net of related provisions. We currently intend to reinvest any income derived from our Approved Enterprise program and not to distribute such income as a dividend. See also Note 11B to our consolidated financial statements contained elsewhere in this report.
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Tax benefits under the 2005 Amendment
An amendment to the Investments Law, which is effective as of April 1, 2005, has changed certain provisions of the Investments Law, or the 2005 Amendment. Amendment. An eligible investment program under the 2005 Amendment qualifies for benefits as a “Benefited“Beneficiary Enterprise” (rather than as an Approved Enterprise, which status is still applicable for investment programs approved prior to December 31, 2004April 1, 2005 and/or investment programs under the Grant Track). According to the 2005 Amendment,, only Approved Enterprises receiving cash grants require the prior approval of the Investment Center. As a result, a company iswas no longer required to obtain the advance approval of the Investment Center in order to receive the tax benefits previously available under the alternative benefits program. Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet the criteria for tax benefits set forth in the 2005 Amendment. A company that hashad a BenefitedBeneficiary Enterprise may, at its discretion, approach the ITA for a pre-ruling confirming that it is in compliance with the provisions of the Investment Law.
The duration of the tax benefits described herein is limited to the earlier of seven (7) or ten (10) years (depending on the geographic location of the BenefitedBeneficiary Enterprise within Israel) from the Commencement Year (as described below) or 12 or 14 years from the first day of the Year of Election (as described below), depending on the location of the company within Israel. Commencement Year is defined as the later of the first tax year in which a company had derived liable income for tax purposes from the BenefitedBeneficiary Enterprise, or the Year of Election, which is defined as the year in which a company requested to have the tax benefits apply to the BenefitedBeneficiary Enterprise. The tax benefits granted to a BenefitedBeneficiary Enterprise are determined, depending on the geographic location of the BenefitedBeneficiary Enterprise within Israel, according to one of the following, which may be applicable to us:Israel.
The benefits available to a BenefitedBeneficiary Enterprise are subject to the continued fulfillment of conditions stipulated in the Investment Law and its regulations. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index and interest, or other monetary penalty.
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As a result of the 2005 Amendment, tax-exempt income generated under the provisions of the Investments Law, as amended, will subject us to taxes upon distribution or liquidation and we may be required to record deferred tax liability with respect to such tax-exempt income. On November 15, 2021 a new amendment of the Investment Law was enacted (i) providing a reduced corporate income tax on the Trapped Profits distributed within a year from such amendment. The reduced corporate income tax is based on a certain formula and subject to reinvestment of certain amounts in enumerated assets/activities.; (ii) harshening the rules with respect to determining the profits from which a dividend was distributed and providing that part of any dividend distribution, will be deemed as distributed from the Trapped Profits, according to a certain formula.
In December 2021, we entered into an elective tax agreement with the Israeli Tax Authorities and opt-in with the new Amendment. The reduced corporate income tax on the Trapped Profits was approximately $5.8M, or 10%, and was provided for in the 2021 financial statements of operations, net of related provisions. We had three Approved Enterprise plans under the Investments Law, which entitled us to certain tax benefits. In addition, in 2011, based on Company investments in property and equipment in the years 2008 and 2009, the Company submitted the applicable form as a Benefited Enterprise in accordance with the 2005 Amendment to the Investments Law. The year of election was 2010.
Tax benefits under the 2011 Amendment
On December 29, 2010, the Israeli Parliament approved the 2011 amendment to the Investments Law (the “2011 Amendment”). The 2011 Amendment significantly revised the tax incentive regime in Israel, commencing on January 1, 2011.
The 2011 Amendment introduced a new status of “Preferred Enterprise”, replacing the existed status of “Benefited“Beneficiary Enterprise” and introduced new benefits for income generated by a “Preferred Company” through its Preferred Enterprise. A Preferred Company is an industrial company that meets certain conditions (including a minimum threshold of 25% export). However, under the 2011 Amendment the requirement for a minimum investment in productive assets in order to be eligible for the benefits granted under the Investments Law as with respect to “Benefited“Beneficiary Enterprise” was cancelled.
A Preferred Company is entitled to a reduced flat tax rate with respect to theits preferred income attributed to the Preferred Enterprise, at the following rates:
| Tax Year | Development Region “A” | Other Areas within Israel |
| 2011-2012 | 10% | 15% |
| 2013 | 7% | 12.5% |
| 2014-2016 | 9% | 16% |
| 2017 onwards | 7.5% | 16% |
* In December 2016, the Israeli Parliament (the Knesset) approved an amendment to the Investments Law pursuant to which the tax rate applicable to Preferred Enterprises in Development Region "A" would be reduced to 7.5% as of January 1, 2017.
The classification of income generated from the provision of usage rights in know-how or software that were developed in the Preferred Enterprise, as well as royalty income received with respect to such usage, as Preferred Enterprisepreferred income is subject to the issuance ifof a pre-ruling from the ITA stipulates that such income is associated with the productive activity of the Preferred Enterprise in Israel.
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In addition, the 2011 Amendment introduced a new status of “Special Preferred Company” which is an Industrial company meeting, in addition to the conditions prescribed for “Preferred Company” certain additional conditions (including that the total Preferred Enterprise income is at least NIS 1.5 billion in 2016 and NIS 1 billion in 2017 and thereafter)part of a group that generates income of at least NIS 10 billion). The tax rate applicable for a period of 10 years to income generated by such an enterprise will be reduced to 5%, if located in Development Region “A”, or to 8%, if located in other area within the State of Israel.
Dividends distributed from preferred income which is attributed to a “Preferred Enterprise” or a “Special Preferred Enterprise” will be subject to withholding tax at source at the following rates: (i) Israeli resident corporations – 0% (although, if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply), (ii) Israeli resident individuals – 20% (iii) non-Israeli residents - 20% (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). In 2017 to 2019, dividends paid out of preferred income attributed to a Special Preferred Enterprise, directly to a foreign parent company, are subject to withholding tax at source at the rate of 5% (temporary provisions).The
The 2011 Amendment also revised the Grant Track to apply only to the approved programs located in Development Region “A” and shall provide not only cash grants (as prior to the 2011 Amendment) but also the granting of loans. The rates for grants and loans shall not be fixed but up to 20% of the amount of the approved investment (may be increased with additional 4%).investment. In addition, a company owning a Preferred Enterprise under the Grant Track may be entitled also to the tax benefits which are prescribed for a Preferred Enterprise.
The provisions of the 2011 Amendment do not apply to existing “Benefited“Beneficiary Enterprises” or “Approved Enterprises”, which will continue to be entitled to the tax benefits under the Investments Law, as has been in effect prior to the 2011 Amendment, unless the company owning such enterprises had made an election to apply the provisions of the 2011 Amendment (such election cannot be later rescinded), which is to be filed with the ITA, not later than the date prescribed for the filing of the company’s annual tax return for the respective year. A company owning a BenefitedBeneficiary Enterprise or Approved Enterprise which made such election by June 30, 2015, will be entitled to distribute income generated by the Approved/BenefitedBeneficiary Enterprise to its Israeli corporate shareholders tax free.
Until the end of 2015, we did not utilize tax benefits related to Preferred Enterprises. In 2016, we started utilizingutilized such benefits, with a related tax rate which could range 12% toof 16%.
The New Technological Enterprise Incentives Regime—the 2017 Amendment
The 2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and became effective on January 1, 2017. The 2017 Amendment provides new tax benefits for two types of “Technology Enterprises”, as described below, and is in addition to the other existing tax beneficial programs under the Investment Law.
The new incentives regime will apply to “Preferred Technological Enterprises” that meet certain conditions, including: (1) the R&D expenses in the three years preceding the tax year were at least 7% on average of one year out of the company's turnover or exceeded NIS 75 million (approximately $21 million); for a year; and (2) one of the following: (a) at least 20% of the workforce (or at least 200 employees) are employedemployees whose full salary has been paid and reported in the Company’s financial statements as R&D;&D expenses; (b) a venture capital investment approximately equivalent to at least $2NIS 8 million was previously made in the company and the company did not change its line of business; (c) growth in sales by an average of 25% or more, over the three years preceding the tax year, provided that the turnover was at least NIS 10 million (approximately $2.8 million), in the tax year and in each of the preceding three years; or (d) growth in workforce by an average of 25% or more, over the three years preceding the tax year, provided that the company employed at least 50 employees, in the tax year and in each of the preceding three years.
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A “Special Preferred Technological Enterprise” is an enterprise that meets conditions 1 and 2 above, and in addition is part of a group that has total annual consolidated revenues aboveat least NIS 10 billion (approximately $2.8 billion).billion.
Preferred Technological Enterprises will be subject to a reduced corporate tax rate of 12% on their income that qualifies as “Preferred Technology Income”, as defined in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technology Enterprise located in Development Region "A". These corporate tax rates shall apply only with respect to the portion of intellectual property developed in Israel. In addition, a Preferred Technology Company will enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain “Benefited Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefited Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million (approximately $56 million), and the sale receives prior approval from the IIA. Special Preferred Technological Enterprises will be subject to 6% on “Preferred Technology Income” regardless of the company’s geographic location within Israel.
In addition, a Special Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefited“Beneficiary Intangible Assets” to a related foreign company if the BenefitedBeneficiary Intangible Assets were either developed by an Israeli companythe Special Preferred Technology Enterprise or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from the IIA.
A Special Preferred Technology Enterprise that acquires Benefited Intangible Assets from a foreign company for more than NIS 500 million (approximately $142 million), will be eligible for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.
Dividends distributed by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld. If such dividends are, distributed to a parent foreign company holdingthat holds solely or together with other foreign companies at least 90% of the shares of the distributing company and other conditions are met, the withholding tax rate will be 4% (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate).
We reviewed the criteria for the tax rate of a “Preferred Technological Enterprise” and a “Special Preferred Technological Enterprise” and concluded that we are entitled to the reduced tax rate under the “Preferred Technological Enterprises” tax incentive regime starting 2017. We have notified the ITA that we elected applying this status starting 2017. We cannot asses at this stageAs part of these tax incentives, the ITA position.Company is required to allocate its taxable income between income from preferred technological enterprise and income related to preferred enterprise or regular corporate income.
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Law for the Encouragement of Industry (Taxes), 5729-1969
An Industrial Company is entitled to certain tax benefits, including:including: (i) a deduction an amortization of the cost of purchases of patents,purchased patent, the right to use patent or know-how and certain other intangible property rights (other than goodwill) ) that were purchased in good faith and are used for the development or promotion of the Industrial Enterprise, over aan eight-year period, of eight years,beginning from the year in which such rights were first used,, (ii) the right to elect to file consolidated tax returns with additional Israeli Industrial Companies controlled by it, and (iii)(iii) the right to deduct expenses related to public offerings in equal amounts over a period of three years beginning from the year of the offering.offering.
Eligibility for benefits under the Encouragement of Industry Law is not contingent upon the approval of any governmental authority.
We believe that we qualify as an “Industrial Company” within the meaning of the Industry Encouragement Law. There is no assurance that we qualify or will continue to qualify as an Industrial Company or that the benefits described above will be available to us in the future.
Taxation of the Company Shareholders
Capital Gains
Capital gain tax is imposed on the disposition of capital assets by an Israeli resident, and on the disposition of such assets by a non-Israelnon-Israeli resident if those assets are either (i) located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation, or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a tax treaty between Israel and the seller’s country of residence provides otherwise. The Ordinance distinguishes between “Real Gain” and the “Inflationary Surplus”. Real Gain is the excess of the total capital gain over Inflationary Surplus computed generally on the basis of the increase in the Israeli Consumer Price Index (CPI) or, in certain circumstances, according to the change in the foreign currency exchange rate, between the date of purchase and the date of disposition.disposition.
Generally, the capital gain accrued by individuals on the sale of our ordinary shares will be taxed at the rate of 25%. However, if the individual shareholder is a “Controlling Shareholder” (i.e., a person who holds, directly or indirectly, alone or together with such person’s relative or another person who collaborates with such person on a permanent basis, 10% or more of one of the Israeli resident company’s means of control) at the time of sale or at any time during the preceding twelve (12) months period (or claims a deduction for interest and linkage differences expenses in connection with the purchase and holding of such shares), such gain will be taxed at the rate of 30%.
The Real Gain derived by corporations will be generally subject to the ordinary corporate tax (2%rate (23% in 2018 and thereafter).
Individual and corporate shareholder dealing in securities in Israel are taxed at the tax rates applicable to business income – 23% for corporations in 2018 in 2018 and thereafter and a marginal tax rate of up to 47% in 20182020 for individuals, unless the benefiting provisions of an applicable treaty applies.
Notwithstanding the foregoing, capital gain derived from the sale of our ordinary shares by a non-Israeli shareholder may be exempt under the Ordinance from Israeli taxation provided that the following cumulative conditions, among other things, are met: (i) the shares were purchased upon or after the registration of the securities on the stock exchange, (this condition will not apply to shares purchased on or after January 1, 2009), (ii) the seller does not have a permanent establishment in Israel to which the derived capital gain is attributed. ; and (iii) with respect to our ordinary shares listed on a recognized stock exchange outside of Israel, so long as neither the shareholder nor the particular capital gain is otherwise subject to the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985. Non-Israeli corporations will not be entitled to the foregoing exemptions if (i) an Israeli resident has a controlling interest, directly or indirectly, alone or together with another (i.e., together with a relative, or together with someone who is not a relative but with whom, according to an agreement, there is regular cooperation in material matters of the company, directly or indirectly), or together with another Israeli resident, exceed 25% in one or more of the means of control in such non-Israeli resident corporation or (ii) Israeli residents are the beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli resident corporation, whether directly or indirectly.
In addition, the sale of shares may be exempt from Israeli capital gain tax under the provisions of an applicable tax treaty. For example, the U.S.-Israel Double Tax Treaty exempts U.S. resident from Israeli capital gain tax in connection with such sale, exchange or disposition provided, among others, that (i) the U.S. resident owned, directly or indirectly, less than 10% of an Israeli resident company’s voting power at any time within the 12 month period preceding such sale; (ii) the seller, being an individual, is present in Israel for a period or periods of less than 183 days in the aggregate at the taxable year; and (iii) the capital gain from the sale was not derived through a permanent establishment of the U.S. resident which is maintained in IsraelIsrael; (iv) the capital gain arising from such sale, exchange or disposition is not attributed to real estate located in Israel; (v) the capital gains arising from such sale, exchange or disposition is not attributed to royalties; and (vi) the shareholder is a U.S. resident (for purposes of the U.S.-Israel Double Tax Treaty) and is holding the shares as a capital asset. However, under the U.S.-Israel Double Tax Treaty, a U.S. resident would be permitted to claim a credit for the Israeli 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 Double Tax Treaty does not provide such credit against any U.S. state or local taxes.
Either the purchaser, the stockbrokers or financial institution, through which payment to the seller is made, are obliged, subject to the above-mentioned exemptions, to withhold Israeli tax at source from such payment. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, in the form of a merger or otherwise, the ITA may require from shareholders who are not liable for Israeli tax to sign declarations in forms specified by this authority or obtain a specific exemption from the ITA to confirm their status as non-Israeli resident.
At the sale of securities traded on a stock exchange a detailed return, including a computation of the tax due, must be filed and an advanced payment must be paid on January 31 and July 31 of every tax year in respect of sales of securities made within the previous six months. However, if all tax due was withheld at source according to applicable provisions of the Ordinance and regulations promulgated thereunder the aforementioned return need not be filed and no advance payment must be paid. Capital gain is also reportable on the annual income tax return.
Dividends
A distribution of dividends from income, which is not attributed to an Approved Enterprise/BenefitedBeneficiary Enterprise/Preferred Enterprise /Preferred Technological Enterprise to an Israeli resident individual, will generally be subject to income tax at a rate of 25%. However, a 30% tax rate will apply if the dividend recipient is a “Controlling Shareholder” (as defined above) at the time of distribution or at any time during the preceding 12 months period. If the recipient of the dividend is an Israeli resident corporation, such dividend will be exempt from income tax provided the income from which such dividend is distributed was derived or accrued within Israel.
Distribution of dividends from income attributed to a Preferred Enterprise or a Preferred Technological Enterprise is generally subject to a withholding tax at asource at the rate of 20%. However, if such dividends are distributed to an Israeli company, no withholding tax is imposed, (although,although, if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty willmay apply (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for an exemption)). Dividends distributed from income attributed to an Approved Enterprise and/or a BenefitedBeneficiary Enterprise are generally subject to a withholding tax at source at the rate of 15%. Those rates may be further reduced under the provisions of any applicable double tax treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate).
The Ordinance generally provides that a non-Israeli resident (either individual or corporation) is subject to an Israeli income tax on the receipt of dividends at the rate of 25% (30% if the dividends recipient is a “Controlling Shareholder” (as defined above), at the time of distribution or at any time during the preceding 12 months period); those rates are subject to a reduced tax rate under the provisions of an applicable double tax treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). For example, under the U.S.-Israel Double Tax Treaty the following rates will generally apply in respect of dividends distributed by an Israeli resident company to a U.S. resident: (i) if the U.S. resident is a corporation which holds during that portion of the taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10% of the outstanding shares of the voting stock of the Israeli resident paying corporation and not more than 25% of the gross income of the Israeli resident paying corporation for such prior taxable year (if any) consists of certain type of interest or dividends – the maximum tax rate is 12.5% on dividends, not generated by an Approved Enterprise or Benefited Enterprise, (ii) if both the conditions mentioned in section (i) above are met and the dividend is paid from an Israeli resident company’s income which was entitled to a reduced tax rate applicable to an Approved Enterprise or Benefited Enterprise –Enterprise– the tax rate is 15%, and (iii) in all other cases, the tax rate is 25%, or the domestic rate (if such is lower). The aforementioned rates under the U.S.-Israel Double Tax Treaty will not apply if the dividend income was derived through a permanent establishment of the U.S. resident maintained in Israel.
If the dividend is attributable partly to income derived from an Approved Enterprise, a BenefitedBeneficiary Enterprise a Preferred Enterprise, or a Technological Preferred Enterprise, and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income.
Payors of dividends on our shares, including the Israeli stockbroker effectuating the transaction, or the financial institution through which the securities are held, are generally required, subject to any of the foregoing exemption, reduced tax rates and the demonstration of a shareholder of his, her or its foreign residency, to withhold taxes upon the distribution of dividends at a rate of 25%, provided that the shares are registered with a Nominee Company (for corporations and individuals)individuals, whether the recipient is a Controlling Shareholder or not).
A non-Israeli resident who receives dividends from which tax was withheld is generally exempt from the obligation to file tax returns in Israel with respect to such income, provided that (i) such income was not generated from business conducted in Israel by the taxpayer, (ii) the taxpayer has no other taxable sources of income in Israel with respect to which a tax return is required to be filed, and (iii) the taxpayer is not obligated to pay excess tax (as further explained below).
Excess Tax
Individuals who are subject to tax in Israel are also subject to an additional tax at a rate of 3% on annual income exceeding NIS 641,880 663,240 for 2018 2022 and thereafter, which amount is linked to the Israeli Consumer Price Index))Index, including,(including, but not limited to income derived from dividends, interest and capital gains.gains).
Estate and Gift Tax
Israeli law presently does not impose estate or gift taxes.
Foreign Exchange Regulations
Non-residents of Israel who hold our ordinary shares are able to receive any dividends, and any amounts payable upon the dissolution, liquidation and winding up of our affairs, repayable in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli income tax is generally required to have been paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of currency exchange control has not been eliminated, and may be restored at any time by administrative action.
U.S. Taxation
The following discussion describes certain material United States (“U.S.”) federal income tax consequences generally applicable to U.S. holders (as defined below) of the purchase, ownership and disposition of our ordinary shares. This summary addresses only holders who acquire and hold ordinary shares as “capital assets” for U.S. federal income tax purposes (generally, assets held for investment purposes).
For purposes of this discussion, a “U.S. holder” is a beneficial owner of ordinary shares who is:
| An individual citizen or resident of the U.S. (as determined under U.S. federal income tax rules); |
94 a corporation (or another entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the U.S., any state thereof, or the District of Columbia; |
| an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or |
| a trust, if (a) a U.S. court is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions; or (b) the trust has in effect a valid election in effect under applicable Treasury Regulations (as defined below) to be treated as a United States person. |
This summary is for general information purposes only and does not purport to be a comprehensive description of all of the U.S. federal income tax considerations that may be relevant to a decision to purchase, hold or dispose of the Company’s ordinary shares. In addition, the possible application of U.S. federal estate or gift taxes or any aspect of state, local or non-U.S. tax laws is not considered. This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations promulgated under the Code by the U.S. Treasury Department (including proposed and temporary regulations) (the “Treasury Regulations”), rulings, current administrative interpretations and official pronouncements by the Internal Revenue Service (the “IRS”), and judicial decisions, all as currently in effect and all of which are subject to differing interpretations or to change, with a retroactive effect. Such changes could materially and adversely affect the tax consequences described below. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below.
This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular U.S. holder based on the holder’s particular circumstances, including, but not limited to:
| persons who own, directly, indirectly or constructively, 10% or more (by voting power or value) of our outstanding voting shares; |
| persons who hold the ordinary shares as part of a hedging, straddle or conversion transaction; |
| persons whose functional currency is not the U.S. dollar; |
| persons who acquire their ordinary shares in a compensatory transaction; |
| broker-dealers; |
| insurance companies; |
| regulated investment companies; |
| real estate investment companies; |
| qualified retirement plans, individual retirement accounts and other tax-deferred accounts; |
| traders who elect to mark-to-market their securities; |
| tax-exempt organizations; |
| banks or other financial institutions; |
| U.S. expatriates and certain former citizens and long-term residents of the United States; and persons subject to the alternative minimum tax. |
The tax treatment of a partner in a partnership (or other entity or arrangement classified as a partnership for U.S. federal income tax purposes) may depend on both the partnership’s and the partner’s status and the activities of the partnership. Partnerships (or other entities or arrangements classified as a partnership for U.S. federal income tax purposes) that are beneficial owners of ordinary shares, and their partners and other owners, should consult their own tax advisers regarding the tax consequences of the acquisition, ownership and disposition of ordinary shares.
THIS SUMMARY OF MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. EACH HOLDER SHOULD CONSULT ITS TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO IT OF AN INVESTMENT IN THE ORDINARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE UNITED STATES FEDERAL INCOME TAX LAWS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE UNITED STATES FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY FOREIGN, STATE OR LOCAL JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
Distributions on the Ordinary Shares
We currently do not intend to distribute dividends for at least the next several years. However, if we make any distributions of cash or other property to a U.S. holder of our ordinary shares, the amount of the distribution for U.S. federal income tax purposes will equal the amount of cash and the fair market value of any property distributed and will also include the amount of Israeli taxes withheld, if any, as described above under “[Israel Taxation] — Dividends” above. In general (and subject to the PFIC rules discussed below), any distribution paid by us on the ordinary shares to a U.S. holder will be treated as dividend income to the extent the distribution does not exceed our current and/or accumulated earnings and profits, as determined under U.S. federal income tax principles. The amount of any distribution which exceeds these earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. holder’s tax basis in its ordinary shares to the extent thereof, and then as capital gain income (long-term capital gain if the U.S. holder’s holding period exceeds one year), from the deemed disposition of the ordinary shares (subject to the PFIC rules discussed below). Corporate holders generally will not be allowed a deduction for dividends received on the ordinary shares.
The amount of any dividend paid in NIS (including amounts withheld to pay Israeli withholding taxes) will equal the U.S. dollar value of the NIS calculated by reference to the exchange rate in effect on the date the dividend is received by the U.S. holder, regardless of whether the NIS are converted into U.S. dollars. A U.S. holder will have a tax basis in the NIS equal to their U.S. dollar value on the date of receipt. If the NIS received are converted into U.S. dollars on the date of receipt, the U.S. holder should generally not be required to recognize foreign currency gain or loss in respect of the distribution. If the NIS received are not converted into U.S. dollars on the date of receipt, a U.S. holder may recognize foreign currency gain or loss on a subsequent conversion or other disposition of the NIS. Such gain or loss will be treated as U.S. source ordinary income or loss.
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Dividends paid by us generally will be foreign source, “passive income” for U.S. foreign tax credit purposes. U.S. holders may elect to claim as a foreign tax credit against their U.S. federal income tax liability the Israeli income tax withheld from dividends received on the ordinary shares. The Code provides limitations on the amount of foreign tax credits that a U.S. holder may claim. U.S. holders that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income tax withheld, but only for a year in which these U.S. holders elect to do so for all foreign income taxes. The rules relating to foreign tax credits are complex (and may also be impacted by the tax treaty between the United States and Israel), and you should consult your tax advisor to determine whether you would be entitled to this credit.
Under current law, certain distributions treated as dividends that are received by an individual U.S. holder from a “qualified foreign corporation” generally qualify for a 20% reduced maximum tax rate so long as certain holding period and other requirements are met. A non-U.S. corporation (other than a corporation that is treated as a PFIC with respect to the U.S. holder for the taxable year in which the dividend is paid or the preceding taxable year) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this provision and which includes an exchange of information program, or (ii) with respect to any dividend it pays on stock which is readily tradable on an established securities market in the United States. Dividends paid by us in a taxable year in which we are not a PFIC and with respect to which we were not a PFIC in the preceding taxable year with respect to the U.S. holder are expected to be eligible for the 20% reduced maximum tax rate, although we can offer no assurances in this regard. However, any dividend paid by us in a taxable year in which we are a PFIC or were a PFIC in the preceding taxable year with respect to the U.S. holder will be subject to tax at regular ordinary income rates (along with any applicable additional PFIC tax liability, as discussed below).
The additional 3.8% tax on “net investment income” (described below) may apply to dividends received by certain U.S. holders who meet certain modified adjusted gross income thresholds.
Sale, Exchange or Other Taxable Disposition of the Ordinary Shares
Upon the sale, exchange or other taxable disposition of the ordinary shares (subject to the PFIC rules discussed below), a U.S. holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. holder’s tax basis in the ordinary shares. The gain or loss recognized on the sale or exchange of the ordinary shares generally will be long-term capital gain (currently taxable at a reduced rate for non-corporate U.S. holders) or loss if the U.S. holder’s holding period of the ordinary shares is more than one year at the time of the disposition. The deductibility of capital losses is subject to limitations.
Gain or loss recognized by a U.S. holder on a sale or exchange of ordinary shares generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes. Under the tax treaty between the United States and Israel, gain derived from the sale, exchange or other taxable disposition of ordinary shares by a holder who is a resident of the U.S. for purposes of the treaty and who sells the ordinary shares within Israel may be treated as foreign source income for U.S. foreign tax credit purposes.
The additional 3.8% tax on “net investment income” (described below) may apply to certain U.S. holders who meet certain modified adjusted gross income thresholds, including capital gains.
Passive Foreign Investment Companies
In general, a foreign (i.e., non-U.S.) corporation will be a PFIC for any taxable year in which, after applying the relevant look-through rules with respect to the income and assets of its subsidiaries, either (1) 75% or more of its gross income in the taxable year is “passive income,” or (2) assets held for the production of, or that produce, passive income comprise 50% or more of the average of its total asset value in the taxable year. For purpose of the income test, passive income generally includes dividends, interest, royalties, rents, annuities and net gains from the disposition of assets, which produce passive income. For purposes of the asset test, assets held for the production of passive income includes assets held for the production of, or that produce dividends, interest, royalties, rents, annuities, and other income that are considered passive income for purposes of the income test. In determining whether we meet the asset test, cash is considered a passive asset and the total value of our assets generally will be treated as equal to the sum of the aggregate fair market value of our outstanding stock plus our liabilities. If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income. The income test is conducted at the taxable year-end. The asset test is conducted on a quarterly basis and the quarterly results are then averaged together.
If a corporation is treated as a PFIC for any year during a U.S. holder’s holding period and the U.S. holder does not timely elect to treat the corporation as a “qualified electing fund” under Section 1295 of the Code or elect to mark its ordinary shares to market (both elections described below), any gain on the disposition of the shares will be treated as ordinary income, rather than capital gain, and the holder will be required to compute its tax liability on that gain, as well as on dividends and other distributions, as if the income had been earned ratably over each day in the U.S. holder’s holding period for the shares. The portion of the gain and distributions allocated to prior taxable years in which a corporation was a PFIC will be ineligible for any preferential tax rate otherwise applicable to any “qualified dividend income” or capital gains, and will be taxed at the highest ordinary income tax rate in effect for each taxable year to which this portion is allocated. An interest charge will be imposed on the amount of the tax allocated to these taxable years. A U.S. holder may elect to treat a corporation as a qualified electing fund only if the corporation complies with requirements imposed by the IRS to enable the shareholder and the IRS to determine the corporation’s ordinary incomeearnings and net capital gain. Additionally, if a corporation is a PFIC, a U.S. holder who acquires shares in the corporation from a decedent generally will be denied the normally available step-up in tax basis to fair market value for the shares at the date of death of the decedent and instead will have a tax basis equal to the decedent’s tax basis if lower than fair market value. These adverse tax consequences associated with PFIC status could result in a material increase in the amount of tax that a U.S. holder would owe and an imposition of tax earlier than would otherwise be imposed and additional tax form filing requirements. Unless otherwise provided by the IRS, if a corporation is classified as a PFIC, a U.S. person that is a direct or indirect holder generally will be required to file IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, or any applicable successor form, to report its ownership interest in such entity.
If a corporation is treated as a PFIC with respect to a U.S. holder for any taxable year, the U.S. holder will be deemed to own shares in any of the foreign entities in which such corporation holds equity interests that are also PFICs (or “lower-tier PFICs”), and the U.S. holder may be subject to the tax consequences described above with respect to the shares of such lower-tier PFIC such U.S. holder would be deemed to own.
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Status of Nova as a PFIC.Under the income test, less than 75% of our gross income was passive income in 2017. For 2018,2021.Under the asset test, while we continued to have substantial amounts of cash and short-term deposits and the market value of our ordinary shares continued to be volatile, a determination of the value of our assets by reference to the average market value of our ordinary shares and our liabilities results in a conclusion that the average value of our passive assets did not exceed 50% of the average value of our gross assets in 2017.2021. Nonetheless, there is a risk that we were a PFIC in 20182021 or we will be a PFIC in 20192022 or subsequent years. For example, taking into account our existing cash balances, if the value of our stock were to decline materially, it is possible that we could become a PFIC in 2019 or a subsequent year. Additionally, due to the complexity of the PFIC provisions and the limited authority available to interpret such provisions, there can be no assurance that our determination regarding our PFIC status could not be successfully challenged by the IRS.
Available Elections. If we become a PFIC for any taxable year, U.S. holders should consider whether or not to electan election to treat us as a “qualified electing fund” or to elect to “mark-to-market” theirour ordinary shares in order tomay mitigate the adverse tax consequences of PFIC status.status to a U.S. holder.
If a U.S. holder makes a qualified electing fund election (a “QEF election”) for its ordinary shares that is effective from the first taxable year that the U.S. holder holds our ordinary shares and during which we are a PFIC, the electing U.S. holder will avoid the adverse consequences of our being classified as a PFIC, but will instead be required to include in income a pro rata share of our net capital gain, if any, and other earnings and profits (“ordinary earnings”) as long-term capital gains and ordinary income, respectively, on a current basis, in each case whether or not distributed, in the taxable year of the U.S. holder in which or with which our taxable year ends. A subsequent distribution of amounts that were previously included in the gross income of U.S. holders should not be taxable as a dividend to those U.S. holders who made a QEF election. In the event we incur a net loss for a taxable year, such loss will not be available as a deduction to an electing U.S. holder, and may not be carried forward or back in computing our net capital gain or ordinary earnings in other taxable years. The tax basis of the shares of an electing U.S. holder generally will be increased by amounts that are included in income, and decreased by amounts distributed but not taxed as dividends, under the QEF rules described above. In order to make (or maintain) a QEF election, the U.S. holder must annually complete and file IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, or any applicable successor form. However, we do not expect that we will prepare or provide to U.S. Holders a “PFIC annual information statement,” which would enable a U.S. Holder to make one type of a QEF election.
Alternatively, if a U.S. holder elects to “mark-to-market” its ordinary shares, the U.S. holder generally will include in its income any excess of the fair market value of our ordinary shares at the close of each taxable year over the holder’s adjusted basis in such ordinary shares. A U.S. holder generally will be allowed an ordinary deduction for the excess, if any, of the adjusted tax basis of the ordinary shares over the fair market value of the ordinary shares as of the close of the taxable year, or the amount of any net mark-to-market gains recognized for prior taxable years, whichever is less. A U.S. holder’s adjusted tax basis in the ordinary shares generally will be adjusted to reflect the amounts included or deducted under the mark-to-market election. Additionally, any gain on the actual sale or other disposition of the ordinary shares generally will be treated as ordinary income. Ordinary loss treatment also will apply to any loss recognized on the actual sale or other disposition of ordinary shares to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included with respect to such ordinary shares. If a U.S. holder makes a valid mark-to-market election with respect to our ordinary shares for the first taxable year of the U.S. holder in which the U.S. holder holds (or is deemed to hold) our ordinary shares and for which we are determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above in respect of its ordinary shares. A mark-to-market election applies to the tax year for which the election is made and to each subsequent year, unless our ordinary shares cease to be marketable, as specifically defined, or the IRS consents to revocation of the election. No view is expressed regarding whether our ordinary shares are marketable for these purposes or whether the election will be available. However, because a mark-to-market election likely cannot be made for any lower-tier PFICs, if we are a PFIC, a U.S. holder will generally continue to be subject to the PFIC rules discussed above with respect to such holder’s indirect interest in any investments that we hold that are treated as an equity interest in a PFIC for U.S. federal income tax purposes. As a result, it is possible that any mark-to-market election will be of limited benefit.
If a U.S. holder makes either the QEF election or the mark-to-market election, distributions and gain will not be recognized ratably over the U.S. holder’s holding period or be subject to an interest charge as described above. Further, the denial of basis step-up at death described above will not apply. If a U.S. holder makes the QEF election, gain on the sale of the ordinary shares will be characterized as capital gain. However, U.S. holders making one of these two elections may experience current income recognition, even if we do not distribute any cash. The elections must be made with the U.S. holder’s federal income tax return for the year of election, filed by the due date of the return (as it may be extended) or, under certain circumstances provided in applicable Treasury Regulations, subsequent to that date.
The foregoing discussion relating to the QEF election and mark-to-market elections assumes that a U.S. holder makes the applicable election with respect to the first year in which Nova qualifies as a PFIC. If the election is not made for the first year in which Nova qualifies as a PFIC, the procedures for making the election and the consequences of election will be different.
SPECIFIC RULES AND REQUIREMENTS APPLY TO BOTH THE QEF ELECTION AND THE MARK-TO-MARKET ELECTION, AND YOU ARE URGED TO CONSULT YOUR TAX ADVISOR CONCERNING OUR PFIC STATUS AND THE VARIOUS ELECTIONS YOU CAN MAKE.
Medicare Tax on Net Investment Income
A U.S. holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, will be subject to a 3.8% tax on the lesser of (1) the U.S. holder’s “net investment income” for the relevant taxable year and (2) the excess of the U.S. holder’s modified adjusted gross income for the taxable year over a certain threshold. A U.S. holder’s “net investment income” generally may include its dividend income and its net gains from the disposition of shares, unless such dividends or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). If you are a U.S. holder that is an individual, estate or trust, you are urged to consult your tax advisors regarding the applicability of the Medicare tax to your income and gains in respect of your investment in the shares and the interaction of these rules with the rules applicable to income included as a result of the QEF election.
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United States Information Reporting and Backup Withholding
In general, U.S. holders may be subject to certain information reporting requirements under the Code relating to their purchase and/or ownership of stock of a foreign corporation such as the Company. Failure to comply with these information reporting requirements may result in substantial penalties.
Specifically, certain U.S. Holders holding specified foreign financial assets, including our ordinary shares, with an aggregate value in excess of the applicable U.S. dollar threshold, are subject to certain exceptions, required to report information relating to our Ordinary Shares by attaching a complete IRS Form 8938, Statement of Specified Foreign Financial Assets, to their tax returns, for each year in which they hold our ordinary shares. U.S. Holders are urged to consult their own tax advisors regarding information reporting requirements relating to the ownership of our Ordinary Shares.
In addition, and as discussed in the section of this annual reportAnnual Report entitled “U.S. Taxation – Passive Foreign Investment Companies”, if a corporation is classified as a PFIC, a U.S. person that is a direct or indirect holder generally will be required to file an informational return annually on IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, or any applicable successor form, to report its ownership interest in such entity, unless otherwise provided by the IRS.
Dividend payments and proceeds from the sale or disposal of ordinary shares may be subject to information reporting to the IRS and possible U.S. federal backup withholding. Certain holders (including, among others, corporations) generally are not subject to information reporting and backup withholding. A U.S. holder generally will be subject to backup withholding if such holder is not otherwise exempt and such holder:
fails to furnish its taxpayer identification number, or TIN, which, for an individual, is ordinarily his or her social security number;
| fails to certify, under penalties of perjury, that it has furnished a correct TIN and that the IRS has not notified the U.S. holder that it is subject to backup withholding. |
Any U.S. holder who is required to establish exempt status generally must file IRS Form W-9 (“Request for Taxpayer Identification Number and Certification”).
Backup withholding is not an additional tax and may be claimed as a refund or a credit against the U.S. federal income tax liability of a U.S. Holder, provided that the required information is timely furnished to the IRS.
10.FDividends and Paying Agents
Not applicable.
10.GStatements by Experts
Not applicable.
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10.HDocuments on Display
As a foreign private issuer, are exempt from the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. Furthermore, as a foreign private issuer, we are also not subject to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act. In addition, we are not be required under the Exchange Act to file annual or other reports and consolidated financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. Instead, we must file with the SEC, within 120 days after the end of each fiscal year, or such other applicable time as required by the SEC, an annual report on Form 20-FAnnual Report containing consolidated financial statements audited by an independent registered public accounting firm. We also intend to furnish certain other material information to the SEC under cover of Form 6-K.
We maintain a corporate website at www.novameasuring.com.www.novami.com. Information contained on, or that can be accessed through, our website does not constitute a part of this annual report on Form 20-F.Annual Report. We have included our website address in this annual report on Form 20-FAnnual Report solely as an inactive textual reference.
10.ISubsidiary Information
Not applicable.
Market Risk
Market risk represents the risk of loss that may impact the consolidated financial position, results of operations or cash flows of the Company. The Company is exposed to market risk in the area of foreign exchange rates, as described below.
The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments that could expose it to significant market risk.
Impact of Currency Fluctuation
Because our results are reported in U.S. Dollars, changes in the rate of exchange between the Dollar and local currencies in those countries in which we operate (primarily the NIS, the Euro and the Japanese Yen)NIS) will affect the results of our operations. The dollar cost of our operations in countries other than the U.S., is negatively influenced by revaluation of the U.S. dollar against other currencies. During 2018,2021, the value of the U.S. dollar revaluated against the NIS by 8.1%, devaluated against the Yen by approximately 2.0% and revaluated against the Euro by approximately 4.6%. During the first six months of 2018 the value of the U.S. dollar revaluated against the NIS by approximately 5.3%, devaluated against the Yen by approximately 2.1% and revaluated against the Euro by 3.6%3.3%. During the last six months of 2018 the value of the U.S. dollar revaluated against the NIS by approximately 2.7%, devaluated against the Yen by approximately 0.1% and revaluated against the Euro by approximately 1.0%.
As of December 31, 2018,2021, the majority of our net monetary assets were denominated in dollars and the remainder was denominated mainly in NIS. Net monetary assets that are not denominated in dollars or dollar-linked NIS were affected by the currency fluctuations in 2018,2021 and are expected to continue to be affected by such currency fluctuations in 2019. Starting January 1st, 2019,2022. As of December 31 ,2021 the Company recorded a NIS and Israel CPI linked lease liability, under the implementation of ASC 842 for lease accounting, we expect to record a NIS and Israel CPI linked liability, in the amount of approximately $16$27.3 million This liability is also expected to be affected by such currency fluctuations across the term(including exchange rate differences of the lease.$0.8 million).
In 2017,2020, we entered into currency-forward transactions and currency-put options (NIS/dollar) of approximately $58$100 million with settlement dates through 2017-2018,2020-2021, designed to reduce cash-flow exposure to the impact of exchange-rate fluctuations on firm commitments of approximately $58$100 million. In accordance with ASC 815-10, we recorded in 20172020 an increase of approximately $0.16$0.6 million in fair market value in "Other Comprehensive Income". Short-term exposures to changing foreign exchange rates are primarily due to operating cash flows denominated in foreign currencies and transactions denominated in non-functional currencies. Our most significant foreign currency exposures are related to our operations in Israel. We have used foreign exchange forward contracts to partially cover known and anticipated exposures. We estimate that an instantaneous 10% depreciation in NIS from its level against the dollar as of December 31, 2017,2020, with all other variables held constant, would increasedecrease the fair value of our net assetsliabilities denominated in foreign currency,NIS, held at December 31, 2017,2020, by approximately $0.11$1.9 million.
In 2018,2021, we entered into currency-forward transactions and currency-put options (NIS/dollar) of approximately $77$147 million with settlement dates through 2018-2019,2021-2022, designed to reduce cash-flow exposure to the impact of exchange-rate fluctuations on firm commitments of approximately $77$147 million. In accordance with ASC 815-10, we recorded in 2018 a2021 an decrease of approximately $0.3$0.4 million in fair market value in "Other Comprehensive Income". Short-term exposures to changing foreign exchange rates are primarily due to operating cash flows denominated in foreign currencies and transactions denominated in non-functional currencies. Our most significant foreign currency exposures are related to our operations in Israel. We have used foreign exchange forward contracts to partially cover known and anticipated exposures. We estimate that an instantaneous 10% depreciation in NIS from its level against the dollar as of December 31, 2018,2021, with all other variables held constant, would increasedecrease the fair value of our net assetsliabilities denominated in foreign currency,NIS, held at December 31, 2018,2021, by approximately $0.25$2.2 million.
Not applicable.
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modification to the Rights of Security Holders and Use of Proceeds
Not applicable.
Item 15. Controls and Procedures
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions;
provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, 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.
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Our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2018,2021, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, our management concluded that, as of December 31, 2018,2020, the Company’s internal control over financial reporting was effective.
Our board of directors has determined that our audit committee includes onetwo audit committee financial expert,experts, as defined by Item 16A of Form 20-F. Our board of directors has determined that each of Ms. Dafna Gruber and Ms. Sarit Sagiv is an “audit committee financial expert” as defined by the SEC rules as well as an independent director as such term is defined by Rule 5605(a)(2) of the Nasdaq Stock Market and has the requisite financial experience as defined by the Nasdaq rules.
Item 16B.16B. Code of Ethics
The Company has adopted a written code of conduct that applies to all Company employees, including the Company’s directors, principal executive officer, principal financial officer and principal accounting officer.
You may review our code of conduct on our website: http:https://www.novameasuring.comwww.novami.com/, under “Corporate/“Investors/Corporate Governance”.
Item 16C.16C. Principal Accountant Fees and Services
During the last threefour fiscal years, Kost Forer Gabbay & Kasierer, an independent registered accounting firm and a member firm of Ernst & Young Global (“Kost Forer Gabbay & Kasierer”) has acted as our registered public accounting firm and independent auditors. The following table provides information regarding fees paid by us to Kost Forer Gabbay & Kasierer for all services, including audit services, for the years ended December 31, 20172020 and 2018:2021:
| 2020 | 2021 | |||||||
| Audit Fees | 586,000 | 570,000 | ||||||
| Tax Fees | 89,000 | 64,000 | ||||||
| Other Fees | 125,000 | 314,000 | ||||||
| Total | 800,000 | 948,000 | ||||||
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| 2017 | 2018 | |||||||
| Audit Fees | $ | 285,000 | $ | 310,000 | ||||
| Tax Fees | 10,000 | $ | 58,000 | |||||
| Other Fees | 2,500 | $ | 4,000 | |||||
| Total | $ | 297,500 | $ | 372,000 | ||||
“Audit fees” are fees associated with the annual audit and reviews of the Company’s quarterlyCompany consolidated financial results submitted on Form 6-K,statements and services that generally the independent accountant provides, such as consents and assistance with and review of documents filed with the SEC as well as certain fees related to the audit in connection with our issuance of convertible senior notes in October 2020. The audit fee also includes consultations on various accounting issues, and performance of local statutory audits. The audit fee includesaudits, fees associated with the audit of management assessment of internal control over financial reporting, annual tax returns and audit of reports to IIA.
“Tax Fees”. The tax are fees to Kost Forer Gabbay & Kasierer during the year ended December 31, 2017 included services related to tax assessment. The tax fees during the year ended December 31, 2018 include services related to ad-ad hoc tax advice. consulting services and opinions.
“Other Fees” include services related to SEC regulation consulting, IIA application supportorganizational consultation, and Europe funding reporting requirements.due diligence services.
Our audit committee has adopted a pre-approval policy for the engagement of our independent accountant to perform certain services. Pursuant to this policy, which is designed to assure that such engagements do not impair the independence of our auditors, all audit, audit related and tax services must be specifically approved by the audit committee and certain other non-audit, non-audit related and non-tax services may be approved without consideration of specific case-by-case provided certain terms and procedures are met. The Company’s audit committee approved all of the services provided by Kost Forer Gabbay & Kasierer in fiscal years 20182021 and 2017.2020.
The Company has not obtained any exemption from applicable audit committee listing standards.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliates Purchasers
| Period | (a) Total Number of Ordinary Shares Purchased | (b) Average Price Paid per Ordinary Share | (c) Total Number of Ordinary Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) | ||||||||||||
| January-October 2018 | N\A | N\A | N\A | N\A | ||||||||||||
| November 2018 | 100,000 | $ | 23.51 | 100,000 | $ | 22.65 | ||||||||||
| December 2018 | 100,000 | $ | 24.50 | 200,000 | $ | 20.2 | ||||||||||
Item 16F. Change In Registrant’s Certifying Accountant
Item 16G. Corporate Governance
There are no significant ways in which the Company’s corporate governance practices differ from those followed by domestic companies listed on the Nasdaq Global Select Market. However, on August 1, 2017, our board of directors resolved to adopt the 2017 Share Incentive Plan, in connection of which, we have elected to follow home country practice rules which do not require the approval of our shareholders for such action rather than the applicable Nasdaq’s shareholder approval requirement.
Not applicable.
Not applicable.
PART III
Item 17. Financial Statements
Not applicable.
Item 18. Financial Statements
See pages F-1 through F-30.F-35.
Item 19. Exhibits
See Exhibit Index.
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NOVA LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 20182021
NOVA LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 20182021
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  | Kost Forer Gabbay & Kasierer 144 Menachem Begin Road, Building A, Tel-Aviv 6492102, Israel | Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com |
To the Shareholders and the Board of Directors of
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Nova Measuring Instruments Ltd. (the “Company”)Company) as of December 31, 2018,2021 and 2017,2020, the related consolidated statements of operations, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2018,2021, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018,2021 and 2017,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018,2021, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 28, 2019, March 1, 2022, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company'sCompany’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the 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 financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of 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 a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F - 3
Valuation of excess and obsolete inventory reserve | ||
Description of the Matter | The Company’s inventories totaled $78.7 million as of December 31, 2021. As described in Note 2i to the consolidated financial statements, the Company assesses the value of inventories, including raw materials, service inventory, work-in-process and finished goods, in each reporting period, and values its inventories at the lower of cost or net realizable value. Reserves for potential excess and obsolete inventory are made based on management's analysis of inventory levels, future sales forecasts, the expected consumption of service spare parts, and market conditions. Auditing management's estimates for valuation of inventories involved subjective auditor judgment due to the significant assumptions made by management about the future salability of the inventories. These assumptions include the assessment, by inventory category (finished goods, work-in-process, service inventory and raw materials), of future usage and market demand for the Company's products. | |
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company's excess and obsolete inventory reserve process, including management's assessment of the underlying assumptions and data. Our substantive audit procedures included, among others, evaluating the significant assumptions stated above and the accuracy and completeness of the underlying data management used to value excess and obsolete inventory. We compared the cost of on-hand inventories to historical sales and evaluated adjustments to sales forecasts for specific product considerations, such as technological changes or alternative uses. We also assessed the historical accuracy of management's estimates and performed sensitivity analyses over the significant assumptions to evaluate the changes in the obsolete and excess inventory estimates that would result from changes in the underlying assumptions. |
/s/ KOST FORER GABBAY & KASIERER
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
We have served as the Company's auditor since 2015.
Tel-Aviv, Israel
March 1, 2022
F - 4
| Kost Forer Gabbay & Kasierer 144 Menachem Begin Road, Building A, Tel-Aviv 6492102, Israel | Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
NOVA MEASURING INSTRUMENTS LTD.
Opinion on Internal Control overOver Financial Reporting
We have audited Nova Measuring Instruments Ltd. (the "Company")’s internal control over financial reporting as of December 31, 2018,2021, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the CompanyNova Ltd. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018,2021, and 2017,2020, the related consolidated statements of operations, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2018, of2021, and the Companyrelated notes, and our report dated February 28, 2019,March 1, 2022, expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible 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 Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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.
/s/ KOST FORER GABBAY & KASIERER
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
March 1, 2022
F - 45
NOVA MEASURING INSTRUMENTS LTD.
(U.S. dollars in thousands, except share data)
As of December 31, | ||||||||
2 0 2 1 | 2 0 2 0 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | 126,698 | 232,304 | ||||||
Short-term interest-bearing bank deposits | 221,897 | 191,567 | ||||||
Marketable securities (Note 3) | 61,568 | 0 | ||||||
Trade accounts receivable, net of allowance of $37 and $70 at December 31, 2021 and 2020, respectively | 68,446 | 63,314 | ||||||
Inventories (Note 4) | 78,665 | 61,734 | ||||||
Other current assets (Note 5) | 9,242 | 9,782 | ||||||
Total current assets | 566,516 | 558,701 | ||||||
Non-current assets | ||||||||
Marketable securities (Note 3) | 137,415 | 0 | ||||||
Interest-bearing bank deposits | 3,672 | 2,547 | ||||||
Restricted interest-bearing bank deposits | 1,600 | 1,476 | ||||||
Deferred tax assets (Note 14) | 6,161 | 2,869 | ||||||
Severance pay funds (Note 9) | 1,327 | 1,281 | ||||||
Operating lease right-of-use assets (Note 11) | 30,627 | 29,109 | ||||||
Property and equipment, net (Note 6) | 34,460 | 34,168 | ||||||
Intangible assets, net (Note 7) | 2,601 | 5,059 | ||||||
Goodwill | 20,114 | 20,114 | ||||||
Other long-term assets | 661 | 462 | ||||||
Total non-current assets | 238,638 | 97,085 | ||||||
TOTAL ASSETS | 805,154 | 655,786 | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Convertible senior notes, net (Note 10) | 183,037 | 0 | ||||||
Trade accounts payable | 36,218 | 24,096 | ||||||
Deferred revenues | 15,338 | 4,717 | ||||||
Operating lease current liabilities (Note 11) | 4,452 | 3,703 | ||||||
Other current liabilities (Note 8) | 48,885 | 28,418 | ||||||
Total current liabilities | 287,930 | 60,934 | ||||||
Non-Current liabilities | ||||||||
Convertible senior notes, net (Note 10) | 0 | 178,808 | ||||||
Accrued severance pay (Note 9) | 3,686 | 3,719 | ||||||
Operating lease long-term liabilities (Note 11) | 33,450 | 31,905 | ||||||
Other long-term liabilities | 6,334 | 8,882 | ||||||
Total non-current liabilities | 43,470 | 223,314 | ||||||
Commitments and contingencies (Note 12) | 0 | 0 | ||||||
TOTAL LIABILITIES | 331,400 | 284,248 | ||||||
SHAREHOLDERS’ EQUITY (Note 13) | ||||||||
Ordinary shares (Note 1): December 31, 2021, no par value - Authorized 60,000,000 shares, Issued and Outstanding 28,579,044. December 31, 2020, NIS 0.01 par value - Authorized 40,000,000 shares, Issued and Outstanding 28,176,862 | 0 | 74 | ||||||
Additional paid-in capital | 139,847 | 129,274 | ||||||
Accumulated other comprehensive income (loss) | (814 | ) | 570 | |||||
Retained earnings | 334,721 | 241,620 | ||||||
Total shareholders’ equity | 473,754 | 371,538 | ||||||
Total liabilities and shareholders’ equity | 805,154 | 655,786 | ||||||
| As of December 31, | ||||||||
| 2 0 1 8 | 2 0 1 7 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 22,877 | $ | 27,697 | ||||
| Short-term interest-bearing bank deposits | 152,951 | 121,390 | ||||||
Trade accounts receivable, net of allowance for doubtful accounts of $94 and $94 at December 31, 2018 and 2017, respectively | 53,531 | 40,949 | ||||||
| Inventories (Note 3) | 41,786 | 34,921 | ||||||
| Other current assets | 10,432 | 6,951 | ||||||
| Total current assets | 281,577 | 231,908 | ||||||
| Non-Current assets | ||||||||
| Long-term interest-bearing bank deposits | 2,000 | 750 | ||||||
| Deferred tax assets (Note 10) | 3,873 | 1,957 | ||||||
| Other long-term assets | 529 | 362 | ||||||
| Severance pay funds (Note 7) | 1,394 | 1,503 | ||||||
| Property and equipment, net (Note 4) | 13,756 | 13,891 | ||||||
| Intangible assets, net (Note 5) | 10,187 | 12,800 | ||||||
| Goodwill (Note 5) | 20,114 | 20,114 | ||||||
| Total non-current assets | 51,853 | 51,377 | ||||||
| TOTAL ASSETS | $ | 333,430 | $ | 283,285 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Trade accounts payable | $ | 19,015 | $ | 15,754 | ||||
| Deferred revenues | 3,984 | 10,334 | ||||||
| Other current liabilities (Note 6) | 25,079 | 26,038 | ||||||
| Total current liabilities | 48,078 | 52,126 | ||||||
| Non-Current liabilities | ||||||||
| Accrued severance pay (Note 7) | 2,254 | 2,590 | ||||||
| Other long-term liability | 2,358 | 1,833 | ||||||
| Total non-current liabilities | 4,612 | 4,423 | ||||||
Commitments and contingencies (Note 8) | ||||||||
| TOTAL LIABILITIES | 52,690 | 56,549 | ||||||
SHAREHOLDERS’ EQUITY (Note 9) | ||||||||
| Ordinary shares, NIS 0.01 par value - Authorized 40,000,000 shares at December 31, 2018 and 2017; Issued and Outstanding 27,917,505, and 27,898,304 at December 31, 2018 and 2017, respectively | 74 | 74 | ||||||
| Additional paid-in capital | 122,312 | 122,426 | ||||||
| Accumulated other comprehensive income (loss) | (188 | ) | 112 | |||||
| Retained earnings | 158,542 | 104,124 | ||||||
| Total shareholders’ equity | 280,740 | 226,736 | ||||||
| Total liabilities and shareholders’ equity | $ | 333,430 | $ | 283,285 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 56
(U.S. dollars in thousands, except share and per share data)
| Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
| 2 0 1 8 | 2 0 1 7 | 2 0 1 6 | 2 0 2 1 | 2 0 2 0 | 2 0 1 9 | |||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||
| Products | $ | 193,298 | $ | 174,343 | $ | 122,439 | 337,026 | 209,320 | 167,200 | |||||||||||||||
| Services | 57,836 | 47,649 | 41,464 | 79,087 | 60,076 | 57,709 | ||||||||||||||||||
| Total revenues | 251,134 | 221,992 | 163,903 | 416,113 | 269,396 | 224,909 | ||||||||||||||||||
| Cost of revenues: | ||||||||||||||||||||||||
| Products | 71,706 | 62,242 | 50,386 | 129,535 | 78,555 | 67,300 | ||||||||||||||||||
| Services | 34,194 | 28,563 | 25,362 | 49,217 | 37,918 | 35,789 | ||||||||||||||||||
| Expense related to royalty buyout agreement with the Israel Innovation Authority (Note 8) | - | - | 12,875 | |||||||||||||||||||||
| Total cost of revenues | 105,900 | 90,805 | 88,623 | 178,752 | 116,473 | 103,089 | ||||||||||||||||||
| Gross profit | 145,234 | 131,187 | 75,280 | 237,361 | 152,923 | 121,820 | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Research and development expenses, net (Note 2m) | 45,451 | 38,956 | 34,998 | |||||||||||||||||||||
| Sales and marketing expenses | 28,847 | 24,554 | 21,523 | |||||||||||||||||||||
| General and administrative expenses | 8,735 | 8,100 | 6,835 | |||||||||||||||||||||
| Amortization of intangible assets (Note 5) | 1,759 | 1,758 | 1,758 | |||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Research and development, net (Note 2R) | 65,857 | 53,015 | 44,508 | |||||||||||||||||||||
Sales and marketing | 39,336 | 29,321 | 28,213 | |||||||||||||||||||||
General and administrative | 17,324 | 12,514 | 10,066 | |||||||||||||||||||||
Amortization of intangible assets (Note 7) | 2,458 | 2,503 | 2,625 | |||||||||||||||||||||
| Total operating expenses | 84,792 | 73,368 | 65,114 | 124,975 | 97,353 | 85,412 | ||||||||||||||||||
| Operating income | 60,442 | 57,819 | 10,166 | 112,386 | 55,570 | 36,408 | ||||||||||||||||||
| Financing income, net | 2,984 | 2,276 | 1,216 | |||||||||||||||||||||
| Income before tax on income | 63,426 | 60,095 | 11,382 | |||||||||||||||||||||
Financial income (expense), net (Note 17) | (3,133 | ) | 926 | 3,078 | ||||||||||||||||||||
Income before taxes on income | 109,253 | 56,496 | 39,486 | |||||||||||||||||||||
| Income tax expenses | 9,051 | 13,636 | 1,738 | 16,152 | 8,589 | 4,315 | ||||||||||||||||||
| Net income for the year | $ | 54,375 | $ | 46,459 | $ | 9,644 | ||||||||||||||||||
Net income | 93,101 | 47,907 | 35,171 | |||||||||||||||||||||
| Earnings per share: | ||||||||||||||||||||||||
| Basic | $ | 1.94 | $ | 1.68 | $ | 0.35 | 3.28 | 1.71 | 1.26 | |||||||||||||||
| Diluted | $ | 1.89 | $ | 1.63 | $ | 0.35 | 3.12 | 1.65 | 1.23 | |||||||||||||||
| Shares used in calculation of earnings per share: | ||||||||||||||||||||||||
| Basic | 28,022,486 | 27,695,723 | 27,174,850 | 28,371,610 | 28,096,814 | 27,895,096 | ||||||||||||||||||
| Diluted | 28,765,329 | 28,524,259 | 27,503,497 | 29,816,066 | 28,949,739 | 28,574,202 | ||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 67
(U.S. dollars in thousands)
Year ended December 31, | ||||||||||||
2 0 2 1 | 2 0 2 0 | 2 0 1 9 | ||||||||||
Net income | 93,101 | 47,907 | 35,171 | |||||||||
Other comprehensive income, net of tax: | ||||||||||||
Available-for-sale investments (Note 3): | ||||||||||||
Unrealized gain (loss) on available-for-sale marketable securities, net | (1,016 | ) | 0 | 0 | ||||||||
Cash flow hedges (Note 16): | ||||||||||||
Unrealized gain from cash flow hedges | 74 | 1,351 | 236 | |||||||||
Less: reclassification adjustment for net loss included in net income | (442 | ) | (796 | ) | (33 | ) | ||||||
Other comprehensive income (loss) | (1,384 | ) | 555 | 203 | ||||||||
Total comprehensive income | 91,717 | 48,462 | 35,374 | |||||||||
| Year ended December 31, | ||||||||||||
| 2 0 1 8 | 2 0 1 7 | 2 0 1 6 | ||||||||||
| Net income for the year | $ | 54,375 | $ | 46,459 | $ | 9,644 | ||||||
| Other comprehensive income (loss) ("OCI") (Note 13) related to: | ||||||||||||
| Unrealized gain (loss) from cash flow hedges | (489 | ) | 863 | 114 | ||||||||
| Less: reclassification adjustment for net gain (loss) included in net income (loss) | 189 | (701 | ) | (50 | ) | |||||||
| Other comprehensive income (loss) | (300 | ) | 162 | 64 | ||||||||
| Total comprehensive income for the year | $ | 54,075 | $ | 46,621 | $ | 9,708 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 78
(U.S. dollars in thousands, except share amounts)
| Accumulated | ||||||||||||||||||||||||
| Ordinary | Additional | Other | Total | |||||||||||||||||||||
| Shares | Paid-in | Comprehensive | Retained | Shareholders’ | ||||||||||||||||||||
| Number | Amount | Capital | Income (Loss) | Earnings | Equity | |||||||||||||||||||
| Balance as of January 1, 2016 | 27,093,937 | $ | 73 | $ | 112,949 | $ | (114 | ) | $ | 48,152 | $ | 161,060 | ||||||||||||
| Cumulative effect to share based compensation from adoption of a new accounting standard | - | - | 131 | - | (131 | ) | - | |||||||||||||||||
| Issuance of shares in connection with employee share-based plans | 268,022 | 1 | 2,151 | - | - | 2,151 | ||||||||||||||||||
| Issuance of shares upon exercise of options | 70,472 | (* | ) | (* | ) | - | - | (* | ) | |||||||||||||||
| Share based compensation | - | - | 2,735 | - | - | 2,735 | ||||||||||||||||||
| Share repurchase | (81,000 | ) | (* | ) | (937 | ) | - | - | (937 | ) | ||||||||||||||
| Other comprehensive income | - | - | - | 64 | - | 64 | ||||||||||||||||||
| Net income for the year | - | - | - | - | 9,644 | 9,644 | ||||||||||||||||||
| Balance as of December 31, 2016 | 27,351,431 | 74 | 117,028 | (50 | ) | 57,665 | 174,717 | |||||||||||||||||
| Issuance of shares in connection with employee share-based plans | 457,810 | (* | ) | 2,619 | - | - | 2,619 | |||||||||||||||||
| Issuance of shares upon exercise of options | 89,063 | (* | ) | (* | ) | - | - | |||||||||||||||||
| Share based compensation | - | - | 2,779 | - | - | 2,779 | ||||||||||||||||||
| Other comprehensive income | - | - | - | 162 | - | 162 | ||||||||||||||||||
| Net income for the year | - | - | - | - | 46,459 | 46,459 | ||||||||||||||||||
| Balance as of December 31, 2017 | 27,898,304 | 74 | 122,426 | 112 | 104,124 | 226,736 | ||||||||||||||||||
| Cumulative effect from adoption of a new accounting standard – ASC 606 (Note 2l) | - | - | - | - | 43 | 43 | ||||||||||||||||||
| Issuance of shares in connection with employee share-based plans | 99,285 | (* | ) | 361 | - | - | 361 | |||||||||||||||||
| Issuance of shares upon exercise of options | 119,916 | (* | ) | (* | ) | - | - | |||||||||||||||||
| Share based compensation | - | - | 4,326 | - | - | 4,326 | ||||||||||||||||||
| Share repurchase at cost | (200,000 | ) | (* | ) | (4,801 | ) | - | - | (4,801 | ) | ||||||||||||||
| Other comprehensive income | - | - | - | (300 | ) | - | (300 | ) | ||||||||||||||||
| Net income for the year | - | - | - | - | 54,375 | 54,375 | ||||||||||||||||||
| Balance as of December 31, 2018 | 27,917,505 | $ | 74 | $ | 122,312 | $ | (188 | ) | $ | 158,542 | $ | 280,740 | ||||||||||||
Ordinary Shares | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total Shareholders' Equity | ||||||||||||||||||||
Number | Amount | |||||||||||||||||||||||
Balance as of January 1, 2019 | 27,917,505 | $ | 74 | $ | 122,312 | $ | (188 | ) | $ | 158,542 | $ | 280,740 | ||||||||||||
Issuance of shares upon exercise of options | 246,373 | (* | ) | 492 | 0 | 0 | 492 | |||||||||||||||||
Issuance of shares upon vesting of RSU | 118,486 | (* | ) | (* | ) | 0 | 0 | 0 | ||||||||||||||||
Share based compensation | - | 0 | 5,092 | 0 | 0 | 5,092 | ||||||||||||||||||
Share repurchase at cost | (276,747 | ) | (* | ) | (7,159 | ) | 0 | 0 | (7,159 | ) | ||||||||||||||
Other comprehensive income | - | 0 | 0 | 203 | 0 | 203 | ||||||||||||||||||
Net income | - | 0 | 0 | 0 | 35,171 | 35,171 | ||||||||||||||||||
Balance as of December 31, 2019 | 28,005,617 | 74 | 120,737 | 15 | 193,713 | 314,539 | ||||||||||||||||||
Issuance of shares upon exercise of options | 302,730 | (* | ) | 367 | 0 | 0 | 367 | |||||||||||||||||
Issuance of shares upon vesting of RSU | 119,281 | (* | ) | (* | ) | 0 | 0 | 0 | ||||||||||||||||
Share based compensation | - | 0 | 6,949 | 0 | 0 | 6,949 | ||||||||||||||||||
Equity component of convertible senior notes, net of issuance costs and tax | - | 0 | 13,770 | 0 | 0 | 13,770 | ||||||||||||||||||
Share repurchase at cost | (250,766 | ) | (* | ) | (12,549 | ) | 0 | 0 | (12,549 | ) | ||||||||||||||
Other comprehensive income | - | 0 | 0 | 555 | 0 | 555 | ||||||||||||||||||
Net income | - | 0 | 0 | 0 | 47,907 | 47,907 | ||||||||||||||||||
Balance as of December 31, 2020 | 28,176,862 | 74 | 129,274 | 570 | 241,620 | 371,538 | ||||||||||||||||||
Issuance of shares upon exercise of options | 236,652 | (* | ) | 11 | 0 | 0 | 11 | |||||||||||||||||
Issuance of shares upon vesting of RSU | 165,530 | (* | ) | (* | ) | 0 | 0 | 0 | ||||||||||||||||
Share based compensation | - | 0 | 10,488 | 0 | 0 | 10,488 | ||||||||||||||||||
Elimination of the par value of the Ordinary shares (Note 1) | - | (74 | ) | 74 | 0 | 0 | 0 | |||||||||||||||||
Other comprehensive income (loss) | - | 0 | 0 | (1,384 | ) | 0 | (1,384 | ) | ||||||||||||||||
Net income | - | 0 | 0 | 0 | 93,101 | 93,101 | ||||||||||||||||||
Balance as of December 31, 2021 | 28,579,044 | 0 | 139,847 | (814 | ) | 334,721 | 473,754 | |||||||||||||||||
(*) Less than $1
The accompanying notes are an integral part of the consolidated financial statements.
F - 89
(U.S. dollars in thousands)
| Year ended December 31, | ||||||||||||
| 2 0 1 8 | 2 0 1 7 | 2 0 1 6 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income for the year | $ | 54,375 | $ | 46,459 | $ | 9,644 | ||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||
| Depreciation | 5,071 | 3,618 | 4,049 | |||||||||
| Amortization of acquired intangible assets | 2,613 | 2,561 | 2,545 | |||||||||
| Loss related to equipment | - | - | 222 | |||||||||
| Share-based compensation | 4,326 | 2,779 | 2,735 | |||||||||
| Change in deferred tax assets, net | (1,916 | ) | (31 | ) | 633 | |||||||
| Increase (decrease) in accrued severance pay, net | (227 | ) | 94 | 38 | ||||||||
| Decrease (increase) in trade accounts receivables, net | (12,539 | ) | 1,677 | (23,580 | ) | |||||||
| Increase in inventories | (8,123 | ) | (6,858 | ) | (1,670 | ) | ||||||
| Increase in other current and long-term assets | (3,648 | ) | (2,245 | ) | (2,180 | ) | ||||||
| Increase (decrease) in trade accounts payables | 3,261 | (747 | ) | 2,123 | ||||||||
| Increase (decrease) in other current and long-term liabilities | (734 | ) | 8,242 | 3,037 | ||||||||
| Increase (decrease) in short term deferred revenues | (6,350 | ) | 6,262 | (1,756 | ) | |||||||
| Net cash provided by (used in) operating activities | 36,109 | 61,811 | (4,160 | ) | ||||||||
| Cash flows from investment activities: | ||||||||||||
| Increase in short-term interest-bearing bank deposits | (31,561 | ) | (50,844 | ) | (1,248 | ) | ||||||
| Additions to property and equipment | (3,678 | ) | (6,295 | ) | (3,133 | ) | ||||||
| Net cash used in investing activities | (35,239 | ) | (57,139 | ) | (4,381 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Purchases of treasury shares | (4,801 | ) | - | (937 | ) | |||||||
| Shares issued under employee share-based plans | 361 | 2,619 | 2,151 | |||||||||
| Net cash provided by (used in) financing activities | (4,440 | ) | 2,619 | 1,214 | ||||||||
| Increase (decrease) in cash and cash equivalents and restricted cash | (3,570 | ) | 7,291 | (7,327 | ) | |||||||
| Cash, cash equivalents and restricted cash - beginning of year | 28,447 | 21,156 | 28,483 | |||||||||
| Cash and cash equivalents and restricted cash- end of year | $ | 24,877 | $ | 28,447 | $ | 21,156 | ||||||
| Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheet | ||||||||||||
| Cash and cash equivalents | $ | 22,877 | $ | 27,697 | $ | 20,406 | ||||||
| Restricted cash included in Long-term interest-bearing bank deposits | 2,000 | 750 | 750 | |||||||||
| Total cash, cash equivalents, and restricted cash | $ | 24,877 | $ | 28,447 | $ | 21,156 | ||||||
| Supplemental disclosure of cash flow information: | ||||||||||||
| Cash paid during the year for income taxes | $ | 13,048 | $ | 8,158 | $ | 1,902 | ||||||
Year ended December 31, | ||||||||||||
2 0 2 1 | 2 0 2 0 | 2 0 1 9 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | 93,101 | 47,907 | 35,171 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation of property and equipment | 6,475 | 5,875 | 5,401 | |||||||||
Amortization of intangible assets | 2,458 | 2,503 | 2,625 | |||||||||
Amortization of premium and accretion of discount on marketable securities, net | 1,708 | 0 | 0 | |||||||||
Amortization of debt discount and issuance costs | 4,229 | 868 | 0 | |||||||||
Share-based compensation | 10,488 | 6,949 | 5,092 | |||||||||
Net effect of exchange rate fluctuation | (745 | ) | (1,584 | ) | (510 | ) | ||||||
Changes in assets and liabilities: | ||||||||||||
Trade accounts receivables, net | (5,132 | ) | (11,711 | ) | 1,928 | |||||||
Inventories | (18,457 | ) | (16,271 | ) | (7,518 | ) | ||||||
Other current and long-term assets | 192 | 6,878 | (6,161 | ) | ||||||||
Deferred tax assets, net | (2,989 | ) | (193 | ) | (681 | ) | ||||||
Operating lease right-of-use assets | 1,680 | 1,351 | 2,372 | |||||||||
Trade accounts payables | 11,697 | 3,255 | 1,691 | |||||||||
Deferred revenues | 10,621 | 2,461 | (1,728 | ) | ||||||||
Operating lease liabilities | (904 | ) | 91 | 2,685 | ||||||||
Other current and long-term liabilities | 17,919 | 11,520 | 65 | |||||||||
Accrued severance pay, net | (79 | ) | 354 | 260 | ||||||||
Net cash provided by operating activities | 132,262 | 60,253 | 40,692 | |||||||||
Cash flows from investment activities: | ||||||||||||
Change in short-term and long-term interest-bearing bank deposits | (31,456 | ) | (36,016 | ) | (4,181 | ) | ||||||
Investment in marketable securities | (215,091 | ) | 0 | 0 | ||||||||
Proceed from maturities of marketable securities | 12,862 | 0 | 0 | |||||||||
Purchase of property and equipment | (4,816 | ) | (6,443 | ) | (21,269 | ) | ||||||
Net cash used in investing activities | (238,501 | ) | (42,459 | ) | (25,450 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from the issuance of convertible senior notes, net of issuance costs | 0 | 193,588 | 0 | |||||||||
Purchases of treasury shares | 0 | (12,549 | ) | (7,159 | ) | |||||||
Proceeds from exercise of options | 11 | 367 | 492 | |||||||||
Net cash provided by (used in) financing activities | 11 | 181,406 | (6,667 | ) | ||||||||
Effect of exchange rate fluctuations on cash and cash equivalents | 622 | 1,356 | 296 | |||||||||
Increase (decrease) in cash and cash equivalents | (105,606 | ) | 200,556 | 8,871 | ||||||||
Cash and cash equivalents - beginning of year | 232,304 | 31,748 | 22,877 | |||||||||
Cash and cash equivalents - end of year | 126,698 | 232,304 | 31,748 | |||||||||
Supplemental disclosure of non-cash activities: | ||||||||||||
Operating right-of-use assets recognized with corresponding operating lease liabilities | 3,198 | 2,367 | 31,465 | |||||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid during the year for income taxes | 13,275 | 3,981 | 8,342 | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F - 910
NOVA MEASURING INSTRUMENTS LTD.
(U.S. dollars in thousands, except share and per share data)
NOTE 1-GENERAL
Business Description:
Nova Measuring Instruments Ltd. (”Nova” or the “Parent Company”) was incorporated and commenced operations in 1993 in the design, development and production of process control systems, used in the manufacturing of semiconductors. Nova has wholly owned subsidiaries in the United States of America (the “U.S.”), Japan, Taiwan, Korea, China and Germany (together defined as the “Company”).
On July 25, 2021 the Company changed its name from Nova Measuring Instruments Ltd. to Nova Ltd.
The Company continues research and development for the next generation of its products and additional applications for such products. The Company operates in one operating segment.
On April 2, 2015, the Company completed the acquisition of 100% shares of ReVera Inc. (hereinafter – ReVera) a privately-held U.S. company. On December 31, 2017, ReVera, merged into Nova Measuring Instruments, Inc.
The ordinary shares of the Company are traded on the NASDAQ Global Market since April 2000 and on the Tel-Aviv Stock Exchange since June 2002.
On June 24, 2021, the Company increased its authorized share capital to 60,000,000 Ordinary Shares and eliminated the par value of the Ordinary shares.
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES
The Company’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America.
The following is a summary of the significant accounting policies, which were applied in the preparation of these financial statements, on a consistent basis:
| A. | Principles of Consolidation and Basis of Presentation |
The Company’s consolidated financial statements include the financial statements of the Parent CompanyNova Ltd. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
| B. | Use of Estimates in the Preparation of Financial Statements |
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The Company's management evaluates its estimates on an ongoing basis, including those related to, but not limited to income taxes and tax uncertainties, collectability of trade accounts receivable, inventory accruals, fair value and useful lives of intangible assets, lease discount rate, lease period, convertible senior notes borrowing rate and revenue recognition. These estimates are based on management's knowledge about current events and expectations about actions the Company may undertake in the future. Actual results could differ from those estimates.
The novel coronavirus (“COVID-19”) pandemic has created, and may continue to create, significant uncertainty in macroeconomic conditions, and the extent of its impact on the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and the impact on the Company’s customers and its sales cycles. The Company considered the impact of COVID-19 on the estimates and assumptions and determined that there were no material adverse impacts on the consolidated financial statements for the period ended December 31, 2021. As events continue to evolve and additional information becomes available, the Company’s estimates and assumptions may change materially in future periods.
F - 11
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| C. | Financial Statements in U.S. Dollars |
The currency of the primary economic environment in which the operations of the Company and its subsidiaries are conducted is the U.S. dollar (the “dollar”). Accordingly, the Company uses the dollar as its functional and reporting currency. Certain of the dollar amounts in the financial statements may represent the dollar equivalent of other currencies, including the New Israeli Shekel (“NIS”). Transactions and balances denominated in dollars are presented at their dollar amounts. Non-dollar transactions and balances are re-measured into dollars in accordance with the principles set forth in ASC 830, “Foreign Currency Translation”.
All transaction gains and losses of the re-measured monetary balance sheet items are reflected in the statements of operations as financial income or expenses, as appropriate.
| D. | Cash and Cash Equivalents |
Cash and cash equivalents represent short-term highly liquid investments (mainly interest-bearing deposits) with maturity dates not exceeding three months from the date of deposit.
| E. | Short Term Bank Deposit |
| F. | Marketable Securities |
The Company accounts for marketable securities in accordance with ASC Topic 320, “Investments – Debt and Equity Securities”. The Company’s investments in marketable securities consist of high-grade treasury, corporate and municipal bonds.
Investments in marketable securities are classified as available for sale at the time of purchase. Available for sale securities are carried at fair value based on quoted market prices, with unrealized gains and losses, reported in accumulated other comprehensive income (loss) in shareholders’ equity. Realized gains and losses on sales of marketable securities, are included in financial income (expenses), net. The amortized cost of marketable securities is adjusted for amortization of premium and accretion of discount to maturity, both of which, together with interest, are included in financial income (expenses), net.
The Company classifies its marketable securities as either short term or long term based on each instrument’s underlying contractual maturity date. Marketable securities with maturities of 12 months or less are classified as short-term and marketable securities with maturities greater than 12 months are classified as long-term.
The Company accounts for Credit losses in accordance with ASU 2016-13, Topic 326 “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments” which modified the other than temporary impairment model for available for sale debt securities. The guidance requires the Company to determine whether a decline in fair value below the amortized cost basis of an available for sale debt security is due to credit related factors or noncredit related factors. A credit related impairment should be recognized as an allowance on the balance sheet with a corresponding adjustment to earnings, however, if the Company intends to sell an impaired available for sale debt security or more likely than not would be required to sell such a security before recovering its amortized cost basis, the entire impairment amount would be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis.
The Company’s allowance for credit losses on marketable securities was not material for the year ended on December 31, 2021.
F - 12
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| G. | Trade Accounts Receivables |
Trade accounts receivables are statedrecorded and carried at realizable value, net ofthe original invoiced amount less an allowance for doubtful accounts.any potential uncollectible amounts, in accordance with ASC 326. The Company evaluatesmakes estimates of expected credit losses for based upon its outstanding accounts receivable and establishes an allowance for doubtful accounts according to specific identification basis, based on information available on the relevant customer credit condition, current aging,assessment of various factors, including historical experience, the age of the trade receivable balances, credit quality of its customers, current economic conditions, reasonable and based on Company policy. These allowances are re-evaluatedsupportable forecasts of future economic conditions, and adjusted periodically as additional information is available.other factors that may affect its ability to collect from customers.
Business Combination |
The Company accounts for business combination in accordance with ASC No, 805, “Business Combination” (ASC 805). ASC 805 requires recognition of assets acquired and liabilities assumed at the acquisition date, measured at their fair values as of that date. Any access of the fair value of net assets acquired over purchased price and any subsequent changes in estimated contingencies are to be recorded in the consolidated statements of operations.
Inventories |
Inventories are stated at the lower of cost or net realizable value. Inventory write-downs are provided to cover risks arising from slow-moving items, technological obsolescence, excess inventories, discontinued products, and for market prices lower than cost, if any. The Company periodically evaluates the quantities on hand relative to historical and projected sales volume (which is determined based on an assumption of future demand and market conditions) and, the age of the inventory.inventory and the expected consumption of service spare parts. At the point of the loss recognition, a new lower cost basis for that inventory is established. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period.
Inventory includes costs of products delivered to customers and not recognized as cost of sales, where revenues in the related arrangements were not recognized.
To support the Company’s service operations, the Company maintains service spare parts inventory and reduce the net carrying value of this inventory over the service life.
Cost is determined as follows:
Raw materials |
Service inventory, work in process |
| J. | Property and Equipment Property and equipment are presented at cost, net of accumulated depreciation. Annual depreciation is calculated based on the straight-line method over the estimated useful lives of the related assets. Estimated useful life is as follows: |
Years | |
Electronic equipment | 3-7 |
Office furniture and equipment | 3-17 |
Leasehold improvements | Over the shorter of the term of the lease (including its extension periods) or the useful life of the asset |
Depreciation methods, useful lives and residual values are reviewed at the end each reporting year and adjusted if appropriate.
F - 13
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Goodwill and Intangible Assets |
Goodwill and other purchased intangible assets have been recorded as a result of the acquisition of ReVera. Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired, and related liabilities.
Goodwill is not amortized, but rather is subject to an impairment test, in accordance with ASC 350, “Intangibles – Goodwill and Other”, at least annually (in the fourth quarter), or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Company has an 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 value prior to performing the quantitative goodwill impairment test. The Company operates in one1 operating segment, and this segment comprises its only reporting unit.
Following the adoption of ASU 2017-04, "Simplifying the Test for Goodwill Impairment", any excess of the carrying value of the reporting unit over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to the fair value of the reporting unit.
Intangible assets with finite life (refer to note 2T2L for impairment assessment of Intangibleintangible assets with finite life) are amortized over their useful lives using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used, or, if that pattern cannot be reliably determined, using a straight-line amortization method.
Weighted Average Useful Life (Years) | |||
Technology (*) | 3-7 | ||
Customer relationships | 10 | ||
IPR&D (*) | |||
3 | |||
(*) To be determined uponDuring 2021 a completion of the development and successful launch of the IPR&D related product was determined. The useful life of the IPR&D technology was determined to be 3 years and amortizing was initiated, subject to annual impairment assessment.assessment as described in Note 2L
| L. | Impairment of Long-Lived Assets |
Long-lived assets (tangible and intangible assets with finite life), held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets (or asset Group) may not be recoverable. In the event that the sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount of such assets, an impairment charge would be recognized, and the assets (or asset Group) would be written down to their estimated fair values. During the years 2021, 2020 and 2019, no impairment losses have been identified.
IPR&D is tested for impairment annually or more frequently when indicators of impairment exist. The Company first assesses qualitative factors to determine if it is more likely than not that the IPR&D is impaired and whether it is necessary to perform a quantitative impairment test. The qualitative assessment considers various factors, including changes in demand, the abandonment of the IPR&D or significant economic slowdowns in the semiconductor industry and macroeconomic environment. If adverse qualitative trends are identified that could negatively impact the fair value of the asset, then quantitative impairment test is performed to compare the carrying value of the asset to its undiscounted expected future cash flows.
If this test indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using discounted expected future cash flows utilizing an appropriate discount rate.
No impairment losses have been identified during 2016, 20172021, 2020 and 20182019 relating to goodwill and IPR&D.intangible assets.
F - 14
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Accrued Warranty Costs |
Accrued warranty costs are calculated with respect to the warranty period on the Company’s products and are based on the Company’s prior experience and in accordance with management’s estimate. The estimated future warranty obligations are affected by the warranty periods, install base, labor and other related costs incurred in correcting a product failure.
Derivative Financial Instruments |
ASC 815 requires the presentation of all derivatives as either assets or liabilities on the balance sheet and the measurement of those instruments at fair value.
For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. See Note 16 for disclosure of the derivative financial instruments in accordance with such pronouncements.
| O. | Leases |
Under ASC 606
The lease term used to calculate the lease liability includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised. The right-of-use (“ASC 606”ROU”) asset is initially measured as the amount of lease liability, adjusted for any initial lease costs, prepaid lease payments and any lease incentives. Costs incurred for common area maintenance, real estate taxes, and insurance are not included in the lease liability and are recognized as they are incurred.
The Company's leases include office buildings for its facilities and car leases, which supersedes ASC 605, "Revenue Recognition",are all classified as operating leases. Certain lease agreements include rental payments that are adjusted periodically for the consumer price index ("CPI"). The ROU and lease liability were calculated using the modified retrospectiveCPI as of the adoption date and will not be subsequently adjusted, unless the liability is reassessed for other reasons. Certain leases include renewal options that are under the Company's sole discretion. The renewal options were included in the ROU and liability calculation if it was reasonably assured that the Company will exercise the option.
As the Company’s lease arrangements do not provide an implicit rate, the Company uses its incremental estimated borrowing rate at lease commencement to measure ROU assets and lease liabilities. Operating lease expense is generally recognized on a straight-line basis over the lease term. For leases with a term of one year or less, the Company elected not to record the ROU asset or liability.
F - 15
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| P. | Convertible Senior Notes |
The Company accounts for its convertible senior notes in accordance with ASC 470-20 "Debt with Conversion and Other Options". Pursuant to ASC Subtopic 470-20, issuers of certain convertible debt instruments, such as the Notes, that may be settled wholly or partially in cash upon conversion are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The liability component at issuance is recognized at fair value, based on the fair value of a similar instrument of similar credit rating and maturity that does not have a conversion feature. The equity component is based on the excess of the principal amount of the convertible senior notes over the fair value of the liability component and is recorded in additional paid-in capital. The equity component, net of issuance costs and deferred tax effects is presented within additional paid-in-capital and is not remeasured as long as it continues to meet the conditions for equity classification. The difference between the principal amount and the liability component represents a debt discount that is amortized to financial expense over the respective terms of the Notes using an effective interest rate method. ASC 606The Company allocated the total issuance costs incurred to the liability and equity components of the convertible senior notes based on their relative values.
Issuance costs attributable to the liability and equity components were $5,894 and $518, respectively. Issuance costs attributable to the liability are netted against the principal balance and will be amortized to financial expense using the effective interest method over the contractual term of the notes. The effective borrowing rate of the liability component of the notes (after deduction of the abovementioned issuance costs attributed to the liability component) is 2.365%. This borrowing rate was applied to all uncompleted contractsbased on Company's synthetic credit risk rating.
See note 2X regarding the adoption of a new accounting pronouncement as of January 1, 2018, by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of retained earnings at January 1, 2018 and a reduction of $43 in the deferred revenues balance. As part of its assessment process, the Company identified a change in the timing of revenue recognition associated with certain transactions in which recognition was previously subject to final acceptance from the customer. Following the adoption of ASC 606, the associated revenues are recognized upon delivery.2022.
| Q. | Revenue Recognition |
Revenue Recognition Policy
The Company enters into revenue arrangements that include products and services which are generally distinct and accounted for as separate performance obligations. The Company determines whether arrangementspromises are distinct based on whether the customer can benefit from the product or service on its own or together with other resources that are readily available and whether the Company's commitment to transfer the product or service to the customer is separately identifiable from other obligations in the contract.
The companyCompany derives revenue from sales of advanced process control systems, spare parts, labor hours (mainly related to installation) and service contracts.
Revenues derived from sales of advanced process control systems, spare parts and labor hourhours are recognized at a point in time, when control of the promised goods or services is transferred to the customers, upon fulfillment of the contractual terms (typically upon shipment of the systems and spare parts or when the service is completed for labor hours).
Revenues derived from service contracts, are recognized ratably over time in accordance with the term of the contract since the Company has a stand-ready obligation to provide the service. Such contracts generally include a fixed fee.
Revenues from sales which were not yet determined to be final sales due to certain acceptance provisions are deferred.
Contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative Standalone Selling Price (“SSP”). Judgment is required to determine the SSP for each distinct performance obligation. The Company uses a range of amounts to estimate SSP when it sells each of the products and services separately and needs to determine whether there is a discount to be allocated based on the relative SSP of the various products and services.
F - 16
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Remaining Performance Obligations
Remaining performance obligations (RPOs) represent contracted revenues that had not yet been recognized and include deferred revenues and invoices that have been issued to customers but were uncollected and have not been recognized as revenues. As of December 31, 2018,2021, the aggregate amount of the RPOs was $7,983$41,055 comprised of $3,985$15,338 deferred revenues and $3,998$25,717 of uncollected amounts that were not yet recognized yet as revenues. The Company expects the RPO to be recognized as revenues over the next year.
Contract Balances
Contract balances are presented separately on the consolidated balance sheets.
Revenues recognized during 20182021, 2020 and 2019 from deferred revenues amounts included within the deferred revenues balancein current liabilities at the beginning of the period amounted to $21,639.$3,651, $1,544 and $3,481 respectively.
In certain arrangements, the Company receives payment from a customer either before or after the performance obligation has been satisfied. The expected timing difference between the payment and satisfaction of performance obligations for the Company’s general payment terms are less than 1 year;contracts is one year or less; therefore, the company doesn’t record any financing components.Company applies a practical expedient and does not consider the effects of the time value of money.
Research and Development |
Research and development costs are charged to operations as incurred. Amounts received or receivable from the Government of Israel through the Israeli Innovation Authority (“IIA”, formerly known as the Office of the Chief Scientist) or from the European Community as participation in certain research and development programs are offset against research and development costs. The accrual for grants receivable is determined based on the terms of the programs, provided that the criteria for entitlement are expected to be met. Royalty expenses are determined based on actual revenues and presented in cost of revenues. During 2016 the Company entered into a royalty buyout agreement with the Israel Innovation Authority (“IIA”). Refer to note 8A for further details. Research and development grants recognized during the years ended December 31, 2018, 20172021, 2020 and 20162019 were $5,763, $4,634$4,395, $5,645 and $4,261$6,932 respectively.
Income Taxes |
The Company accounts for income taxes utilizing the asset and liability method in accordance with ASC 740, “Income Taxes”. Current tax liabilities are recognized for the estimated taxes payable on tax returns for the current year. Deferred tax liabilities or assets are recognized for the estimated future tax effects attributable to temporary differences between the income tax bases of assets and liabilities and their reported amounts in the financial statements, and for tax loss carryforwards.
Measurement of current and deferred tax liabilities and assets is based on provisions of enacted tax laws, and deferred tax assets are reduced, if necessary, by the amount of tax benefits, the realization of which is not considered more likely than not based on available evidence.
ASC 740-10 requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement.
F - 17
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and liabilities as noncurrent in a classified balance sheet.per share data)
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Share-Based Compensation |
The Company accounts for equity-based compensation using ASC 718-10 “Share-Based Payment,718 “Compensation - Stock Compensation,” which requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant-date fair value of those awards.
Share Options
Under ASC 718, the fair market value of each option grant is estimated on the date of grant using the “Black-Scholes option pricing” method with the following weighted-average assumptions:
| 2 0 1 8 | 2 0 1 7 | 2 0 1 6 | 2 0 2 1 | 2 0 2 0 | 2 0 1 9 | ||||||||||||
| Risk-free interest rate | 2.79% | 1.81% | 1.08% | 0.89% | 0.38% | 1.87% | |||||||||||
| Expected life of options | 4.76 years | 4.70 years | 4.62 years | ||||||||||||||
Expected term of options | 4.97 years | 5.08 years | 4.69 years | ||||||||||||||
| Expected volatility | 31.82% | 28.01% | 28.41% | 39.02% | 36.61% | 33.18% | |||||||||||
| Expected dividend yield | 0% | 0% | 0% | 0% | 0% | 0% | |||||||||||
Expected volatility was calculated based on actual historical share price movements over a term that is equivalent to the expected term of granted options. The expected term of options granted is based on historical experience and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends.
The Company elected to early adopt ASU-2016-19 starting January 1, 2016 and torecognizes compensation expenses for the value of awards granted, based on the accelerated method. The Company account for forfeitures as they occur. The net cumulative effect of this change, in a total amount of $131 thousands, was recognized as a reduction to retained earnings as of January 1, 2016.
Earnings per Share |
Earnings per share are presented in accordance with ASC 260-10, “Earnings per Share”. Pursuant to which, basic earnings per share excludes the dilutive effects of convertible securities and is computed by dividing income (loss) available to commonordinary shareholders by the weighted-average number of ordinary shares outstanding for the period, net of treasury shares. Diluted earnings per share reflect the potential dilutive effect of all convertible securities.options and RSUs. The number of potentially dilutive securitiesoptions and RSUs excluded from diluted earnings per share due to the anti-dilutive effect of out of the money options amounted to 446,301336,857 in 2018, 275,5942021, 492,963 in 2017 and 1,134,9712020, 438,999 in 2016.2019.
Concentrations of Credit Risk |
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, bank deposits, trade receivablesaccounts receivable and foreign currency derivative contracts.
The majority of the Company’s cash and cash equivalents and bank deposits are invested in dollar instruments with major banks in Israel. Management believes that the financial institutions that hold the Company's investments are corporations with high credit standing. Accordingly, management believes that low credit risk exists with respect to these financial investments.
F - 18
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The trade receivablesaccounts receivable of the Company are derived from sales to customers located primarily in Taiwan R.O.C., Korea, China and USA. The management of the Company performed risk assessment on an ongoing basis and believes it bears low risk.
The Company entered into options and forward contracts to hedge against the risk of overall changes in future cash flow from payments of payroll and related expenses as well as other expenses denominated in NIS. The derivative instruments hedge a portion of the Company's non-dollar currency exposure. Counterparty to the Company’s derivative instruments is major financial institution.
Fair Value Measurements |
The fair values of the CompanyCompany’s cash and cash equivalents, short-term interest-bearing bank deposits, trade accounts receivable, and accounts payable approximate their carrying amounts due to their short-term nature.
The Company follows the provisions of ASC No. 820, “Fair Value Measurement” (“ASC 820”), which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
In determining a fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect assumptions that market participants would use in pricing an asset or liability, based on the best information available under given circumstances.
The hierarchy is broken down into three levels, based on the observability of inputs and assumptions, as follows:
Level 1 - Observable inputs obtained from independent sources, such as quoted prices for identical assets and liabilities in active markets.
Level 2 - Other inputs that are directly or indirectly observable in the market place.
Level 3 - Unobservable inputs which are supported by little or no market activity.
In accordance with ASC 820, the Company measures its marketable securities, at fair value using the market approach valuation technique. Marketable securities are classified within Level 2 because these assets are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.
The estimated fair values of the derivative instruments are determined based on market rates to settle the instruments. The fair value of the CompanyCompany’s derivative contracts (including forwards and options) is determined using standard valuation models. The significant inputs used in these models are readily available in public markets or can be derived from observable market transactions and, therefore, the CompanyCompany’s derivative contracts have been classified as Level 2.
Inputs used in these standard valuation models include the applicable spot, forward, and discount rates. The standard valuation model for the Company options contracts also includes implied volatility, which is specific to individual options and is based on rates quoted from a widely used third-party resource.
F - 1719
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| X. | New Accounting Pronouncements |
Recently issued accounting pronouncements not yet adopted:
In August 2017,2020, the FASB issued ASU 2017-12, derivativesAccounting Standards Update No. 2020-06, Debt—Debt with Conversion and hedging (Topic 815)Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Targeted Improvements to Accounting for Hedging Activities, amendmentsConvertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This guidance also eliminates the treasury stock method to hedge accounting guidance. These amendments are intended to better align a Company’s risk management strategiescalculate diluted earnings per share for convertible instruments and financial reporting for hedging relationships. Underrequires the newuse of the if-converted method. This guidance more hedging strategies will be eligible for hedge accounting and the application of hedge accounting is simplified. In addition, the new guidance amends presentation and disclosure requirements. The guidance is effective for fiscal years beginning after December 15, 20182021, including interim periods within those fiscal years.
The Company will adopt this new guidance using the modified retrospective method as of January 1, 2022. The adoption of this new guidance is estimated to result in an increase of approximately $12.1 million to short-term convertible senior notes, in the consolidated balance sheets, to reflect the full principal amount of the convertible notes outstanding net of issuance costs, a reduction of approximately $13.8 million to additional paid-in capital, net of estimated income tax effects, to remove the equity component separately recorded for the conversion features associated with earlythe convertible notes, an increase to deferred tax assets, net of approximately $1.4 million, and a cumulative-effect adjustment of approximately $3.1 million, net of estimated income tax effects, to the beginning balance of retained earnings as of January 1, 2022. The adoption permitted. Theof this new guidance requiresis anticipated to reduce interest expense by approximately $3.1 million during the year ended December 31, 2022. In addition, the required use of a modified retrospective approach. The Company early adoptedthe if-converted method by the new guidance on January 1, 2018. The adoptionin calculating diluted earnings per share is expected to increase the number of the ASU did not have any impact on the Company's consolidated financial statements.potentially dilutive shares in 2022 by up to 2.1 million shares.
In February 2016,October 2021, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), as amended, which2021-08, ASC Topic 805 “Business Combinations”. The standard create an exception to the general recognition and measurement principle for contract assets and contract liabilities from contracts with customers acquired in a business combination. Under this exception, an acquirer applies ASC 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities on the acquisition date. ASC 805 generally requires lesseesthe acquirer in a business combination to recognize operating and financing leasemeasure the assets it acquires and the liabilities it assumes at fair value on the acquisition date. The standard will become effective for fiscal years beginning after December 15, 2022. Early application of the amendments is permitted, and corresponding right-of-use assetsthe Company is currently assessing such early adoption. See also Note 18.
In November 2021, the FASB issued ASU 2021-10, ASC Topic 832 “Disclosures by Business Entities about Government Assistance”. The standard require the following annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy: (1) Information about the nature of the transactions and the related accounting policy used to account for the transactions (2) The line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to provide enhanced disclosures surrounding the amount, timingeach financial statement line item (3) Significant terms and uncertainty of cash flows arising from leasing arrangements.
| As of December 31, | ||||||||
| 2 0 1 8 | 2 0 1 7 | |||||||
| Raw materials | $ | 11,166 | $ | 10,634 | ||||
| Work in process | 18,736 | 15,507 | ||||||
| Finished goods | 11,884 | 8,780 | ||||||
| $ | 41,786 | $ | 34,921 | |||||
F - 1820
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 3 - MARKETABLE SECURITIES
The following is a summary of marketable securities amortized cost, unrealized gains, unrealized losses and fair value as of December 31, 2021:
Marketable securities | Amortized Cost | Unrealized gains | Unrealized losses* | Fair Value | ||||||||||||
Matures within one year: | ||||||||||||||||
Corporate bonds | 53,238 | 0 | (67 | ) | 53,171 | |||||||||||
Governmental bonds | 8,409 | 0 | (12 | ) | 8,397 | |||||||||||
61,647 | 0 | (79 | ) | 61,568 | ||||||||||||
Matures after one year: | ||||||||||||||||
Corporate bonds | 122,701 | 0 | (1,138 | ) | 121,563 | |||||||||||
Governmental bonds | 15,954 | 1 | (103 | ) | 15,852 | |||||||||||
138,655 | 1 | (1,241 | ) | 137,415 | ||||||||||||
200,302 | 1 | (1,320 | ) | 198,983 | ||||||||||||
* All of the unrealized losses have been accumulated during 2021 and are for less than 12 months.
Proceeds from maturity of available-for-sale marketable securities during the year ended December 31, 2021, were $12,862.
The Company had no proceeds from sales of available-for sale, marketable securities during the year ended December 31, 2021, therefore no realized gains or losses from the sale of available for sale marketable securities were recognized.
NOTE 4 - INVENTORIES
| A. | Composition: |
As of December 31, | ||||||||
2 0 2 1 | 2 0 2 0 | |||||||
Raw materials | 22,953 | 17,511 | ||||||
Service inventory | 19,838 | 16,860 | ||||||
Work in process | 19,125 | 16,364 | ||||||
Finished goods | 16,749 | 10,999 | ||||||
78,665 | 61,734 | |||||||
| B. | In the years ended December 31, 2021, 2020 and 2019, the Company wrote down inventories in a total amount of $5,126, $5,664 and $4,435, respectively. |
NOTE 5 - OTHER CURRENT ASSETS
As of December 31, | ||||||||
2 0 2 1 | 2 0 2 0 | |||||||
Governmental institutions | 4,447 | 5,776 | ||||||
Prepaid expenses | 4,412 | 3,331 | ||||||
Other | 383 | 675 | ||||||
9,242 | 9,782 | |||||||
F - 21
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 4
As of December 31, | ||||||||
2 0 2 1 | 2 0 2 0 | |||||||
Cost: | ||||||||
Electronic equipment | 48,604 | 43,671 | ||||||
Office furniture and equipment | 5,006 | 4,828 | ||||||
Leasehold improvements | 24,217 | 27,853 | ||||||
77,827 | 76,352 | |||||||
Accumulated depreciation: | ||||||||
Electronic equipment | 35,040 | 32,019 | ||||||
Office furniture and equipment | 2,755 | 1,554 | ||||||
Leasehold improvements | 5,572 | 8,611 | ||||||
43,367 | 42,184 | |||||||
Net book value | 34,460 | 34,168 | ||||||
| As of December 31, | ||||||||
| 2 0 1 8 | 2 0 1 7 | |||||||
| Cost: | ||||||||
| Electronic equipment | $ | 33,160 | $ | 29,793 | ||||
| Office furniture and equipment | 1,557 | 1,980 | ||||||
| Leasehold improvements | 11,340 | 10,947 | ||||||
| $ | 46,057 | $ | 42,720 | |||||
| Accumulated depreciation: | ||||||||
| Electronic equipment | 25,259 | 22,740 | ||||||
| Office furniture and equipment | 1,237 | 1,428 | ||||||
| Leasehold improvements | 5,805 | 4,661 | ||||||
| 32,301 | 28,829 | |||||||
| Net book value | $ | 13,756 | $ | 13,891 | ||||
Depreciation expenses amounted to $5,071, $3,618$6,475, $5,875 and $4,049$5,401 for the years ended December 31, 2018, 20172021, 2020 and 2016,2019, respectively.
NOTE 5 7- GOODWILL AND INTENGABLE INTANGIBLE ASSETS
| As of December 31, | ||||||||
| 2 0 1 8 | 2 0 1 7 | |||||||
| Original amount: | ||||||||
| Technology | $ | 12,305 | $ | 12,305 | ||||
| Customer relationships | 5,191 | 5,191 | ||||||
| Backlog | 3,506 | 3,506 | ||||||
| IPR&D | 1,927 | 1,927 | ||||||
| 22,929 | 22,929 | |||||||
| Accumulated amortization: | ||||||||
| Technology | 6,592 | 4,834 | ||||||
| Customer relationships | 2,644 | 1,789 | ||||||
| Backlog | 3,506 | 3,506 | ||||||
| IPR&D | - | - | ||||||
| 12,742 | 10,129 | |||||||
| Net book value | $ | 10,187 | $ | 12,800 | ||||
| Year ending December 31, | ||||
| 2019 | $ | 2,625 | ||
| 2020 | 2,503 | |||
| 2021 | 2,297 | |||
| 2022 | 736 | |||
| 2023 | 84 | |||
| Thereafter | 15 | |||
| $ | 8,260 | |||
2020:
As of December 31, | ||||||||
| 2 0 2 1 | 2 0 2 0 | |||||||
| Original amount: | ||||||||
| Technology | 14,232 | 14,232 | ||||||
| Customer relationships | 5,191 | 5,191 | ||||||
19,423 | 19,423 | |||||||
| Accumulated amortization: | ||||||||
| Technology | 12,026 | 10,108 | ||||||
| Customer relationships | 4,796 | 4,256 | ||||||
16,822 | 14,364 | |||||||
| Net book value | 2,601 | 5,059 | ||||||
Amortization expenses amounted as following:
Year ended December 31, | ||||||||||||
| 2 0 2 1 | 2 0 2 0 | 2 0 1 9 | ||||||||||
| Technology | 1,918 | 1,758 | 1,758 | |||||||||
| Customer relationships | 540 | 745 | 867 | |||||||||
| 2,458 | 2,503 | 2,625 | ||||||||||
F - 1922
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 7-INTANGIBLE ASSETS (Cont.)
Annual amortization expenses are expected as follows:
| Year ending December 31, | ||||
| 2022 | 1,378 | |||
| 2023 | 726 | |||
| 2024 | 497 | |||
2,601 | ||||
NOTE 68- OTHER CURRENT LIABILITIES
A.Consists of:of:
| As of December 31, | ||||||||
| 2 0 1 8 | 2 0 1 7 | |||||||
| Accrued salaries and fringe benefits | $ | 14,008 | $ | 13,522 | ||||
| Accrued warranty costs (See B below) | 5,622 | 5,055 | ||||||
| Governmental institutions | 4,417 | 7,215 | ||||||
| Other | 1,032 | 246 | ||||||
| $ | 25,079 | $ | 26,038 | |||||
As of December 31, | ||||||||
2 0 2 1 | 2 0 2 0 | |||||||
Accrued salaries and fringe benefits | 28,176 | 17,773 | ||||||
Accrued warranty costs (See B below) | 8,287 | 4,839 | ||||||
Governmental institutions | 12,372 | 5,758 | ||||||
Other | 50 | 48 | ||||||
48,885 | 28,418 | |||||||
B.Accrued Warranty Costs:
The Company provides standard warranty coverage on its systems. Parts and labor are covered under the terms of the warranty agreement. The Company accounts for the estimated warranty cost as a charge to costs of revenues when revenue is recognized.
Accrued warranty costs presented in:
As of December 31, | ||||||||
2 0 2 1 | 2 0 2 0 | |||||||
Other current liabilities | 8,287 | 4,839 | ||||||
Other long-term liability | 598 | 313 | ||||||
8,885 | 5,152 | |||||||
The following table provides the changes in the product warranty accrual for the fiscal years ended December 31, 20182021 and 2017:2020:
As of December 31, | ||||||||
2 0 2 1 | 2 0 2 0 | |||||||
Balance as of beginning of year | 5,152 | 5,132 | ||||||
Services provided under warranty | (8,798 | ) | (6,752 | ) | ||||
Changes in provision | 12,531 | 6,772 | ||||||
Balance as of end of year | 8,885 | 5,152 | ||||||
| As of December 31, | ||||||||
| 2 0 1 8 | 2 0 1 7 | |||||||
| Balance as of beginning of year | $ | 5,055 | $ | 4,358 | ||||
| Services provided under warranty | (6,428 | ) | (6,189 | ) | ||||
| Changes in provision | 6,995 | 6,886 | ||||||
| Balance as of end of year | $ | 5,622 | $ | 5,055 | ||||
F - 23
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 7 9- LIABILITY FOR EMPLOYEE SEVERANCE PAY, NET
Israeli law and labor agreements determine the obligations of the Company to make severance payments to dismissed employees and to employees leaving employment under certain other circumstances. The obligation for severance pay benefits, as determined by Israeli law, is based upon length of service and the employee’s most recent salary. The liability is partially covered through insurance policies purchased by the Company and deposits in a severance fund.
The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israel's Severance Pay Law, 1963 or labor agreements.
Since July 2008, the Company's agreements with new Israeli employees are under Section 14 of the Israeli Severance Pay Law, 1963. The Company's contributions for severance pay have replaced its severance obligation.
Upon contribution of the full amount of the employee's monthly salary for each year of service, no additional calculations are conducted between the parties regarding the matter of severance pay and no additional payments are made by the Company to the employee.
Labor agreements in Taiwan determine the obligations of the Company to make severance payments to dismissed employees and to employees leaving employment under certain other circumstances. The obligation for severance pay benefits is based upon length of service and the employee’s average salary.
Severance pay expenses (income) for the years ended December 31, 2018, 20172021, 2020 and 2016,2019, amounted to $(161), $168$818, $617 and $120,$640, respectively (excluding the Company’s contributions for severance pay under section 14).
NOTE 10- CONVERTIBLE SENIOR NOTES, NET
In October 2020, the Company issued $175,000 aggregate principal amount, 0% coupon rate, of convertible senior notes due 2025 and an additional $25,000 aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment option of the initial purchasers (collectively, “Convertible Notes” or “Notes”).
The Convertible Notes are convertible based upon an initial conversion rate of 13.4048 of the Company’s ordinary shares per $1,000 principal amount of Convertible Notes (equivalent to a conversion price of approximately $74.60 per ordinary share). The conversion rate will be subject to adjustment upon the occurrence of certain specified events. The Convertible Notes are senior unsecured obligations of the Company.
The Convertible Notes will mature on October 15, 2025, (the "Maturity Date"), unless earlier repurchased, redeemed or converted. Prior to July 15, 2025, a holder may convert all or a portion of its Convertible Notes only under the following circumstances:
| 1. | During any calendar quarter commencing after the calendar quarter ending on March 31, 2021 (and only during such calendar quarter), if the last reported sale price of the Company’s ordinary shares for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; |
| 2. | During the five business day period after any 10 consecutive trading day period (“measurement period”) in which the trading price, determined pursuant to the terms of the Convertible Notes, per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the ordinary shares and the conversion rate on each such trading day; |
| 3. | If the Company calls such Convertible Notes for redemption in certain circumstances, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or |
| 4. | Upon the occurrence of specified corporate events. |
On or after July 15, 2025 until the close of business on the second scheduled trading day immediately preceding the Maturity Date, a holder may convert its Convertible Notes at any time, regardless of the foregoing circumstances.
F - 2024
NOVA MEASURING INSTRUMENTS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 10- CONVERTIBLE SENIOR NOTES, NET (Cont.)
Upon conversion, the Company can pay or deliver cash, ordinary shares or a combination of cash and ordinary shares, at the Company’s election.
The Company may not redeem the notes prior to October 20, 2023, except in the event of certain tax law changes. The Company may, at any time and from time to time, redeem for cash all or any portion of the notes, at the Company's option, on or after October 20, 2023, if the last reported sale price of the Company`s ordinary shares has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which it delivers notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, (plus accrued and unpaid special interest (if any) to, but excluding, the redemption date).
Upon the occurrence of a Fundamental Change as defined in the Indenture, holders may require the Company to repurchase for cash all or any portion of their Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Convertible Notes, (plus accrued and unpaid special interest payable under certain circumstances set forth in the terms of the Convertible Notes (if any) to, but excluding, the fundamental change repurchase date). In addition, in connection with a make-whole fundamental change (as defined in the Indenture), or following our delivery of a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its notes in connection with such a corporate event or redemption, as the case may be.
As of December 31, 2021, condition 1 as stated above has been met, as the Company share price exceeded the abovementioned threshold. The Notes are therefore convertible as of December 31, 2021 and are classified as current liability.
The net carrying amount of the liability and equity components of the Convertible Notes as of December 31, 2021 and December 31, 2020 are as follows:
As of December 31, | ||||||||
Liability component: | 2 0 2 1 | 2 0 2 0 | ||||||
Principal amount | 200,000 | 200,000 | ||||||
Unamortized discount | (12,032 | ) | (15,032 | ) | ||||
Unamortized issuance costs | (4,931 | ) | (6,160 | ) | ||||
Net carrying amount | 183,037 | 178,808 | ||||||
Equity component, net of issuance costs of $518 and deferred taxes of $1,878 | 13,770 | 13,770 | ||||||
Interest expense related to the Convertible Notes was as follows:
Year ended December 31, | ||||||||
2 0 2 1 | 2 0 2 0 | |||||||
Amortization of debt discount | 3,000 | 616 | ||||||
Amortization of debt issuance costs | 1,229 | 252 | ||||||
Total financial expense recognized | 4,229 | 868 | ||||||
As of December 31, 2021, the total estimated fair value of the convertible senior notes was approximately $390,000. The fair value of the convertible senior notes is considered to be Level 2 within the fair value hierarchy and was determined based on quoted price of the convertible senior notes in an over-the-counter market.
F - 25
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 11- LEASES
The Company has operating leases for facilities and vehicles. The Company recognized leased assets of $30,627 and corresponding current liabilities of $4,452, and long-term liabilities of $33,450, as of December 31, 2021. The Company’s leases have remaining terms of 1 to 9 years, some of which include options to extend the leases for up to additional 10 years. The weighted average remaining lease term was 14.6 years and the weighted average discount rate was 4.5% as of December 31, 2021.
Lease expenses amounted to $3,935, $4,654 and $5,166 for the years ended December 31, 2021, 2020 and 2019, respectively. The expected discounted and undiscounted lease payments under non-cancelable leases as of December 31, 2021, excluding non-lease components, were as follows:
Year | ||||
| 2022 | 4,508 | |||
| 2023 | 4,273 | |||
| 2024 | 4,248 | |||
| 2025 | 4,028 | |||
| 2026 | 3,661 | |||
| 2027 and thereafter | 33,436 | |||
| Total lease payments | 54,154 | |||
| Less imputed interest | (16,252 | ) | ||
| Total | 37,902 | |||
Operating cash flows for operating leases amounted to $4,134, $5,840 and $5,326 for the years ended December 31, 2021, 2020 and 2019, respectively.
NOTE 812- COMMITMENTS AND CONTINGENCIES
| Year | ||||
| 2019 | $ | 3,135 | ||
| 2020 | 3,460 | |||
| 2021 | 3,436 | |||
| 2022 | 3,018 | |||
| 2023 | 3,004 | |||
| Thereafter | 32,489 | |||
| Total | $ | 48,542 | ||
NOTE 913 -
SHAREHOLDERS’ EQUITY
A. | Rights of Shares: |
Holders of ordinary shares are entitled to participate equally in the payment of cash dividends and bonus shares (stock dividends) and, in the event of the liquidation of the Company, in the distribution of assets after satisfaction of liabilities to creditors. Each ordinary share is entitled to one vote on all matters to be voted on by shareholders.
B. | Share Repurchase: |
On November 1, 2018, the Company announced $25,000 sharesshare repurchase program, which is planned to be executed by the first half of 2020. Throughprogram. In this framework, through December 31, 2018,2021, the Company repurchased 200,000556,603 ordinary shares for an aggregate amount of $4,801.$14,509.
On October 11, 2020, as part of the authorization of the Senior Convertible Notes Offering (see note 10), the Company’s board of directors approved and authorized a share repurchase for an aggregate amount of up to $20,000. In this framework, on October 14, 2020, the Company repurchased 170,910 ordinary shares for an aggregate amount of $10,000.
All treasury shares have been canceled as of the end of each respective year.
C. | Equity Based Incentive Plans: |
The Company’s Board of directors approves, from time to time, equity-based incentive plans, the last of which was approved in August 2017. Equity basedEquity-based incentive plans include stock options, restricted share units and restricted stock awards to employees, officers and directors.directors.
F - 26
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 13 - SHAREHOLDERS’ EQUITY (Cont.)
Share-based compensation
The following table summarizes the effects of share-based compensation resulting from the application of ASC 718 included in the Statements of Operations as follows:
| Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
| 2 0 1 8 | 2 0 1 7 | 2 0 1 6 | 2 0 2 1 | 2 0 2 0 | 2 0 1 9 | |||||||||||||||||||
| Cost of Revenues: | ||||||||||||||||||||||||
| Product | 515 | 370 | 342 | 1,358 | 927 | 534 | ||||||||||||||||||
| Service | 414 | 269 | 218 | 802 | 437 | 469 | ||||||||||||||||||
| Research and Development expenses | 1,710 | 1,055 | 983 | |||||||||||||||||||||
| Sales and Marketing expenses | 1,026 | 621 | 884 | |||||||||||||||||||||
| General and Administration expenses | 661 | 464 | 308 | |||||||||||||||||||||
| Research and Development | 3,994 | 2,556 | 2,206 | |||||||||||||||||||||
| Sales and Marketing | 2,221 | 1,531 | 1,121 | |||||||||||||||||||||
| General and Administrative | 2,113 | 1,498 | 762 | |||||||||||||||||||||
| Total | $ | 4,326 | $ | 2,779 | $ | 2,735 | 10,488 | 6,949 | 5,092 | |||||||||||||||
As of December 31, 2021, there was $610 of total unrecognized compensation cost related to non-vested employee options and $21,231 of total unrecognized compensation cost related to non-vested employee RSUs. These costs are generally expected to be recognized over a period of four years.
Shares Options
Share options vest over four years and their contractual term may not exceed 10 years. During the period commencing January 1, 2016 and ending July 31, 2017, theThe exercise price of each option wasis the average market price of the underlying share during the period of 30 trade days precedingat the date of each grant. Commencing August 1, 2017, the exercise price is the market price.
The weighted average fair value (in dollars) of the options granted during 2018, 20172021, 2020 and 2016,2019, according to Black-Scholes option-pricing model, amounted to $8.37, $6.64$35.94, $15.46 and $2.89$8.18 per option, respectively.
Summary of the status of the Company’s share option plans as of December 31, 2018,2021, as well as changes during the year then ended, is presented below:
| 2 0 1 8 | ||||||||
| Share | Weighted Average | |||||||
| Options | Exercise Price | |||||||
| Outstanding - beginning of year | 1,417,191 | 14.02 | ||||||
| Granted | 371,419 | 26.22 | ||||||
| Exercised | 117,185 | 10.01 | ||||||
| Expired and forfeited | 141,352 | 14.25 | ||||||
| Outstanding - year end | 1,530,073 | 17.27 | ||||||
| Options exercisable at year-end | 728,065 | 12.71 | ||||||
2021 | ||||||||
Share Options | Weighted Average Exercise Price | |||||||
| Outstanding - beginning of year | 797,279 | 22.29 | ||||||
| Granted | 9,615 | 102.35 | ||||||
| Exercised | (236,652 | ) | 18.76 | |||||
| Expired and forfeited | (84,700 | ) | 23.85 | |||||
| Outstanding - year end | 485,542 | 25.33 | ||||||
| Options exercisable at year end | 327,859 | 21.09 | ||||||
The aggregate intrinsic value represents the total intrinsic value (the difference between the Company's closing share market price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last trading day of the fiscal year. This amount changes based on the fair market value of the Company's shares.
The total intrinsic value of options outstanding as of December 31, 20182021 and 20172020 was $10,665$58,835 and $17,284,$38,514, respectively. The total intrinsic value of options exercisable as of December 31, 20182021 and 20172020 was $7,679$41,117 and $8,254,$24,428, respectively. The total intrinsic value of options exercised during the years 2018, 20172021, 2020 and 20162019 was $2,170, $5,170$18,571, $10,463 and $1,342$4,570 respectively.
F - 27
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 13 - SHAREHOLDERS’ EQUITY (Cont.)
The following table summarizes information about share options outstanding as of December 31, 2018:2021:
| Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||||||||||||
| (US dollars) | (in years) | (US dollars) | (US dollars) | |||||||||||||||||||
| 0.93-3.00 | 2,840 | 0.55 | 1.13 | 2,840 | 1.13 | |||||||||||||||||
| 3.01-7.00 | 10,000 | 1.48 | 4.20 | 10,000 | 4.20 | |||||||||||||||||
| 7.01-8.00 | 16,600 | 0.57 | 7.82 | 16,600 | 7.82 | |||||||||||||||||
| 8.01-9.00 | 62,762 | 1.59 | 8.74 | 62,762 | 8.74 | |||||||||||||||||
| 9.01-10.00 | 19,289 | 1.29 | 9.06 | 18,788 | 9.05 | |||||||||||||||||
| 10.01-20.00 | 796,619 | 3.71 | 11.48 | 531,192 | 11.41 | |||||||||||||||||
| 20.01-31.26 | 621,963 | 6.13 | 26.33 | 87,579 | 26.54 | |||||||||||||||||
| 1,530,073 | 17.26 | 728,065 | 12.71 | |||||||||||||||||||
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||||||||||||
(US dollars) | (in years) | (US dollars) | (US dollars) | |||||||||||||||||||
| 10.24-20.00 | 134,047 | 1.12 | 11.53 | 134,047 | 11.53 | |||||||||||||||||
| 20.01-35.00 | 309,054 | 3.61 | 26.59 | 185,815 | 26.85 | |||||||||||||||||
| 35.01-50.00 | 28,635 | 5.43 | 46.08 | 6,948 | 46.27 | |||||||||||||||||
| 50.01-70.00 | 4,191 | 5.63 | 54.67 | 1,049 | 54.67 | |||||||||||||||||
| 70.01-102.35 | 9,615 | 5.48 | 102.35 | 0 | 0 | |||||||||||||||||
485,542 | 25.33 | 327,859 | 21.09 | |||||||||||||||||||
Restricted Share Units
Restricted Share Units (“RSU”) grants are rights to receive shares of the Company's common stockordinary shares on a one-for-one basis and vestare not entitled to dividends or voting rights, if any, until they are vested. RSU’s vesting schedules are 25% on each of the first, second, third and fourth anniversaries of the grant date, or, 33% on each of the first, second, and are not entitled to dividends or voting rights, if any, until they are vested.third anniversaries of the grant date. The fair value of such RSU grants is being recognized based on a straight-line basisthe accelerated method over the vesting period. period. Performance based RSU grants vest over a period of 3 years and are subject to certain performance criteria; accordingly, compensation expense is recognized for such awards when it becomes probable that the related performance condition will be satisfied.
| Number of RSUs | Weighted average grant date fair value (USD) | 2021 | ||||||||||||||
Number of RSUs | Weighted average grant date fair value (USD) | |||||||||||||||
| Unvested at January 1, 2018 | 292,475 | 17.71 | ||||||||||||||
| Unvested - beginning of year | 468,561 | 39.14 | ||||||||||||||
| Granted | 173,362 | 24.8 | 197,941 | 103.84 | ||||||||||||
| Vested | 99,285 | (165,530 | ) | 35.88 | ||||||||||||
| Canceled | 42,657 | 22.4 | (37,771 | ) | 41.55 | |||||||||||
| Unvested at December 31, 2018 | 323,895 | |||||||||||||||
| Unvested at year end | 463,201 | 67.79 | ||||||||||||||
The total intrinsic value of RSUs vested during the years 2018, 20172021, 2020 and 20162019 was $1,048, $989$17,341, $6,344 and $927,$3,513, respectively.
NOTE 1014- INCOME TAXES
| A. | Income Tax Regulations (Rules on Bookkeeping by Foreign Invested Companies and Certain Partnerships and Determination of their Taxable Income), 1986: |
As a "Controlled Foreign Cooperation" (as defined in the Israeli Law for the Encouragement of Capital Investments-1959), the Company's management has elected to apply Income Tax Regulations (Rules for Maintaining Accounting Records of Foreign Invested Companies and Certain Partnerships and Determining Their Taxable Income) - 1986.-1986. Accordingly, its taxable income or loss is calculated in US Dollars.
F - 28
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 14-INCOME TAXES (Cont.)
| B. | Law for the Encouragement of Capital |
Part of the Company’s investment in equipment has received approvals in accordance with the Law for the Encouragement of Capital Investments, 1959 (“Approved Enterprise” status) in three separate investment plans. The Company has chosen to receive its benefits through the “Alternative Benefits” track, and, as such, is eligible for various benefits. These benefits include accelerated depreciation of fixed assets used in the investment program, as well as a full tax exemption on undistributed income in relation to income derived from the first plan for a period of 4 years and for the second and third plans for a period of 2 years. Thereafter a reduced tax rate of 25% will be applicable for an additional period of up to 3 years for the first plan and 5 years for the second and third plans, commencing with the date on which taxable income is first earned but not later than certain dates. The benefit period of the second and third plan have commenced.
On April 1, 2005, an amendment to the Investment Law came into effect (“the Amendment”) and has significantly changed the provisions of the Investment Law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as a Privileged Enterprise, such as provisions generally requiring that at least 25% of the Privileged Enterprise’s Income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits.
However, the Investment Law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore, the Israeli companies with Approved Enterprise status will generally not be subject to the provisions of the Amendment.
The entitlement to the above benefits is conditional upon the Company fulfilling the conditions stipulated by the above law, regulations published thereunder and the instruments of approval for the specific investments in "Approved Enterprises". In the event of failure to comply with these conditions, the benefits may be canceled, and the Company may be required to refund the amount of the benefits, in whole or in part, including interest.
In the event of distribution by the Company of a cash dividend out of retained earnings that were tax exempt due to its Approved Enterprise status, the Company would have to pay corporate tax of 10% - 25% on the income from which the dividend was distributed based on the extent to which non-Israeli shareholders hold Company’s shares. A 15% withholding tax may be deducted from dividends distributed to the recipients.
On November 15, 2021 a new amendment of the Investment Law (“the Amendment’) was enacted (i) providing a reduced corporate income tax on the Trapped Profits distributed within a year from such amendment. The reduced corporate income tax is based on a certain formula and subject to reinvestment of certain amounts in enumerated assets/activities; (ii) harshening the rules with respect to determining the profits from which a dividend was distributed and providing that part of any dividend distribution, will be deemed as distributed from the Trapped Profits, according to a certain formula.
In 2008, the Company submitted a request to approve a new plan (fourth plan) as a Privileged Enterprise in accordance with the Amendment to the Investment Law. The commencing year was 2010. The expected2010, and the expiration year iswas 2021.
F - 2429
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(
U.S. dollars in thousands, except share and per share data
)NOTE 14-INCOME TAXES (Cont.)
In 2011, new legislation amending to the Investment Law was adopted. Under this new legislation, a uniform corporate tax rate will apply to all qualifying income of certain Industrial Companies (Requirement of a minimum export of 25% of the company's total turnover), as opposed to the current law's incentives, which are limited to income from Approved Enterprises during their benefits period. Under the new law, the uniform tax rate will be 10% in areas in Israel designated as Development Zone A and 15% elsewhere in Israel during 2011-2012, 7% and 12.5%, respectively, in 2013-2014, and 6% and 12%, respectively thereafter. The profits of these Industrial Companies will be freely distributable as dividends, subject to a 15% withholding tax (or lower, under an applicable tax treaty).
Under the transition provisions of the new legislation, the Company may decide to irrevocably implement the new law while waiving benefits provided under the current law or to remain subject to the current law.
In August 2013 "The Arrangements Law" (hereinafter - "the(hereinafter—"the Law") was officially published. The following significant changes affecting taxation were approved:
1. The tax rate on a company in Development area A, effective January 1, 2014 is 9% (instead of 7% in 2014 and 6% in 2015 and thereafter), and the tax rate for companies in all other areas will be 16% (instead of 12.5% in 2014 and 12% in 2015 and thereafter).
2. The tax rate on dividend distributed, generated from "preferred income" or by a company that has an approved enterprise increased effective January 1, 2014 from 15% to 20%.
In 2016, most of the Company’s taxable income in Israel iswas attributable to Preferred Enterprises, with a related tax rate of 16%. In 2015 and 2014, most of the Company’s taxable income in Israel iswas attributable to Approved Enterprise programs with zero tax.
| C. | The New Technological Enterprise Incentives Regime - Amendment 73 to the Investment Law |
In December 2016, the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which includes Amendment 73 to the Law for the Encouragement of Capital Investments ("the 2017 Amendment") was published. According to the 2017 Amendment, Technological preferred enterprise, as defined in the Law for the Encouragement of Capital Investments, 1959 ("the Encouragement Law"), with total consolidated revenues of less than NIS 10 billion, shall be subject to 12% tax rate on income deriving from intellectual property (in development area A - a tax rate of 7.5%).
Any dividends distributed deriving from income from the preferred technological enterprises will be subject to tax at a rate of 20%. The 2017 Amendment further provides that, in certain circumstances, a dividend distributed to a foreign corporate shareholder, would be subject to a 4% tax rate (if the percentage of foreign investors exceeds 90%).
The Company assessed the criteria for qualifying to a “Preferred Technological Enterprise,” status and concluded that the Israeli entity is entitled to the above-mentioned benefits. The Company implemented the new incentives in its tax calculations starting 2017.
| D. | The Tax Cuts and Jobs Act, 2017: |
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “US Tax Act”) that instituted fundamental changes to the taxation of multinational corporations. The Tax Act includes significant changes to the U.S. corporate income tax system, including a Federal corporate rate reduction from 35% to 21%, adjustments to rules relating to limitations on the deductibility of interest expense and executive compensation, the transition of U.S. international taxation from a worldwide tax system to a territorial tax system, and foreign derived intangible income deduction.deduction, rules that impact the utilization of US NOLs and other corporate tax provisions.
F - 2530
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(
)
U.S. dollars in thousands, except share and per share data
)
NOTE 10 14-INCOME TAXES (Cont.)
Foreign-Derived Intangible Income
:The 2017 Tax Act provides tax incentives to U.S. companies to earn income from the sale, lease or license of goods and services abroad (i.e., the portion of a domestic corporation’s intangible income that is derived from serving foreign markets) in the form of a deduction for foreign-derived intangible income (“FDII”). FDII is taxed at an effective rate of 13.1% 13.125% for taxable years beginning after December 31, 2017 and at an effective rate of 16.4%16.406% for taxable years beginning after December 31, 2025. The accounting for the deduction for FDII is similar to a special deduction and should be accounted for based on the guidance in ASC 740-10-25-37. The tax benefits for special deductions ordinarily are recognized no earlier than the year in which they are deductible on a tax return. As of December 31, 2018, the Company has made sufficient progress in its calculations to reasonably estimate the effect on its estimated annual effective tax rate.
| E. | Deferred Taxes: |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred tax assets are as follows:
| As of December 31, | ||||||||
| 2 0 1 8 | 2 0 1 7 | |||||||
| Net operating loss carryforwards | $ | 1,800 | $ | 2,042 | ||||
| Tax credits carryforward | - | *27 | ||||||
| Temporary differences relating to reserve and allowances | 4,234 | 2,602 | ||||||
| Intangible assets | (2,161 | ) | (2,714 | ) | ||||
| 3,873 | 1,957 | |||||||
| Valuation Allowance, net of uncertain tax positions | - | *- | ||||||
| Deferred tax asset, net | $ | 3,873 | $ | 1,957 | ||||
As of December 31, | ||||||||
2 0 2 1 | 2 0 2 0 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | 501 | 505 | ||||||
| Tax credits carryforward | 1,052 | 740 | ||||||
| Reserve and allowances | 8,692 | 5,504 | ||||||
| Operating lease liabilities, net | 328 | 344 | ||||||
| Deferred tax assets before valuation allowance | 10,573 | 7,093 | �� | |||||
| Valuation Allowance | (1,737 | ) | (1,311 | ) | ||||
| Deferred tax assets after valuation allowance | 8,836 | 5,782 | ||||||
| Deferred tax liabilities: | ||||||||
| Convertible senior notes | (1,444 | ) | (1,804 | ) | ||||
| Intangible assets | (578 | ) | (1,109 | ) | ||||
| Reserve and allowances | (653 | ) | 0 | |||||
| Deferred tax liabilities | (2,675 | ) | (2,913 | ) | ||||
| Deferred tax assets | 6,161 | 2,869 | ||||||
Long-term deferred tax assets:
Year ended December 31, | ||||||||
| 2 0 2 1 | 2 0 2 0 | |||||||
| Domestic | 3,414 | 2,011 | ||||||
| Foreign | 2,747 | 858 | ||||||
| 6,161 | 2,869 | |||||||
| As of December 31, | ||||||||
| 2 0 1 8 | 2 0 1 7 | |||||||
| Long-term deferred tax assets | $ | 2,998 | $ | 1,444 | ||||
| $ | 2,998 | $ | 1,444 | |||||
| As of December 31, | ||||||||
| 2 0 1 8 | 2 0 1 7 | |||||||
| Long-term deferred tax assets | $ | 875 | $ | 5,338 | ||||
| $ | 875 | $ | 5,338 | |||||
Under ASC 740-10, deferred tax assets are to be recognized for the anticipated tax benefits associated with net operating loss and tax credits carry-forwards and deductible temporary differences; unless it is more-likely-than-not that some or all of the deferred tax assets will not be realized.
| Year ended December 31, | ||||||||||||
| 2 0 1 8 | 2 0 1 7 | 2 0 1 6 | ||||||||||
| Israel | $ | 41,013 | $ | 51,558 | $ | 14,021 | ||||||
| International (mainly US) | 19,129 | 8,537 | (2,639 | ) | ||||||||
| $ | 60,142 | $ | 60,095 | $ | 11,382 | |||||||
| Year ended December 31, | ||||||||||||
| 2 0 1 8 | 2 0 1 7 | 2 0 1 6 | ||||||||||
| Israel | $ | 5,767 | $ | 12,043 | $ | 2,615 | ||||||
| International (mainly US) | 3,284 | 1,593 | (877 | ) | ||||||||
| $ | 9,051 | $ | 13,636 | $ | 1,738 | |||||||
| Current | $ | 10,793 | $ | 13,584 | $ | 1,105 | ||||||
| Deferred | (1,742 | ) | 52 | 633 | ||||||||
| $ | 9,051 | $ | 13,636 | $ | 1,738 | |||||||
F - 2731
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(
U.S. dollars in thousands, except share and per share data
)NOTE 14-INCOME TAXES (Cont.)
| F. | Income before taxes on income included in the consolidated statements of operations: |
Year ended December 31, | ||||||||||||
| 2 0 2 1 | 2 0 2 0 | 2 0 1 9 | ||||||||||
| Domestic | 76,400 | 42,164 | 25,803 | |||||||||
| Foreign (mainly US) | 32,853 | 14,332 | 13,683 | |||||||||
| 109,253 | 56,496 | 39,486 | ||||||||||
| G. | Income tax expenses (tax benefits) included in the consolidated statements of operations: |
Year ended December 31, | ||||||||||||
| 2 0 2 1 | 2 0 2 0 | 2 0 1 9 | ||||||||||
| Domestic | 12,297 | 7,238 | 4,482 | |||||||||
| Foreign (mainly US) | 3,855 | 1,351 | (167 | ) | ||||||||
16,152 | 8,589 | 4,315 | ||||||||||
| Current | 19,311 | 9,620 | 3,340 | |||||||||
| Deferred | (3,159 | ) | (1,031 | ) | 975 | |||||||
16,152 | 8,589 | 4,315 | ||||||||||
| H. | Tax Reconciliation: |
The following is a reconciliation of the theoretical tax expense, assuming that all income is taxed at the ordinary statutory average corporate tax rate in Israel and the actual tax expense in the statement of operations, is as follows:
Year ended December 31, | ||||||||||||
| 2 0 2 1 | 2 0 2 0 | 2 0 1 9 | ||||||||||
| Income before taxes on income | 109,253 | 56,496 | 39,486 | |||||||||
| Statutory tax expenses | 13,110 | 6,780 | 5,042 | |||||||||
| Effect of non-benefited income New Technological or Preferred Enterprises statuses in Israel | 88 | 130 | 144 | |||||||||
| Permanent differences, including difference between the basis of measurement of income reported for tax purposes and the basis of measurement of income for financial reporting purposes, net | (448 | ) | (199 | ) | (131 | ) | ||||||
| Change in tax reserve for uncertain tax positions | (713 | ) | 1,806 | 850 | ||||||||
| Effect of foreign operations taxed at various rates | 3,249 | 1,381 | 1,173 | |||||||||
| Foreign Derived Intangible Income benefit | (1,785 | ) | (526 | ) | (768 | ) | ||||||
| Tax credits | (1,592 | ) | (1,526 | ) | (777 | ) | ||||||
| Trapped Profits agreement net effect | 3,716 | 0 | 0 | |||||||||
| Adjustments for previous year’s tax | (113 | ) | 249 | (2,121 | ) | |||||||
| Change in valuation allowance | 601 | 413 | 898 | |||||||||
| Other | 39 | 81 | 5 | |||||||||
3,042 | 1,809 | (727 | ) | |||||||||
| Actual tax expenses | 16,152 | 8,589 | 4,315 | |||||||||
| Year ended December 31, | ||||||||||||
| 2 0 1 8 | 2 0 1 7 | 2 0 1 6 | ||||||||||
| Net income before taxes | $ | 63,426 | $ | 60,095 | $ | 11,382 | ||||||
| Statutory tax expenses | 8,100 | 7,674 | 1,821 | |||||||||
| Effect of non-benefited income New Technological or Approved or Preferred Enterprises statuses in Israel | 172 | 181 | 136 | |||||||||
| Permanent differences, including difference between the basis of measurement of income reported for tax purposes and the basis of measurement of income for financial reporting purposes, net | 578 | 1,451 | 588 | |||||||||
| Different tax rates of deferred taxes | - | (226 | ) | (104 | ) | |||||||
| Effect of foreign operations taxed at various rates | 2,034 | 1,888 | (657 | ) | ||||||||
| Foreign Derived Intangible Income benefit | (1,534 | ) | - | - | ||||||||
| Tax credits | 30 | (1,650 | ) | |||||||||
| Adjustments for previous years tax | (369 | ) | 4,174 | (135 | ) | |||||||
| Other | 40 | 144 | *89 | |||||||||
| 951 | 5,962 | (83 | ) | |||||||||
| Actual tax expense (benefit) | $ | 9,051 | $ | 13,636 | $ | 1,738 | ||||||
F - 32
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(
U.S. dollars in thousands, except share and per share data
)NOTE 14- INCOME TAXESNOTE (Cont.)
| I. | Effective Tax Rates: |
The Company’s effective tax rates differ from the statutory rates applicable to the Company for tax year 20182021, primarily due to stock-based compensation deductible expenses, tax credits and 2017foreign derived intangible income benefit in the US.
The Company’s effective tax rates differ from the statutory rates applicable to the Company for tax year 2020, primarily due primarily to effect of New Technological Enterprise statustax credits and U.S. Tax Cuts and Jobs Act of 2017 andforeign derived income benefit in 2016 Preferred Enterprise status.the US.
| J. | Tax Assessments: |
In 2017December 2021 the Parent Company has received final tax assessments for the years 2012-20152016-2019 from the Israeli Tax Authorities. The net effect of
For the tax assessment in the amount of $3,553 is included in the Company’s statement of operations, as well as $355 of interest related to this assessment.
| K. | Undistributed earnings of foreign subsidiaries: |
The Company considers the earnings of certain subsidiaries to be indefinitely invested outside Israel on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and the Company’s specific plans for reinvestment of those subsidiary earnings. The Company has not recorded a deferred tax liability of approximately $6,812$18,381 related to the Israel income taxes of undistributed earnings of foreign subsidiaries indefinitely invested outside Israel. Should the Company decide to repatriate the foreign earnings, the Company would need to adjust the Company’s income tax provision in the period Thethe Company determined that the earnings will no longer be indefinitely invested outside Israel.
| L. | Uncertain Tax Positions: |
The taxation of the Company's business is subject to the application of multiple and sometimes conflicting tax laws and regulations as well as multinational tax conventions. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty.
In addition, the Company classifies interest and penalties recognized in the financial statements relating to uncertain tax position under the income taxes line item.
Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation and the evolution of regulations and court rulings. Consequently, taxing authorities may impose tax assessments or judgments against the Company that could materially impact its tax liability and/or its effective income tax rate.
The Company believes that it has adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement. The final tax outcome of its tax audits could be different from that which is reflected in the Company’s income tax provisions and accruals. Such differences could have a material effect on the Company’s income tax provision and net income in the period in which such determination is made.
The following table summarizes the changes in uncertain tax positions:
| As of December 31, | ||||||||
| 2 0 1 8 | 2 0 1 7 | |||||||
| Balance at the beginning of the year | 1,707 | $ | 1,333 | |||||
| Decrease related to settlements with tax authorities, net | - | (1,142 | ) | |||||
| Decrease related to prior year tax positions, net | (164 | ) | - | |||||
| Increase related to current year tax positions | 684 | 1,516 | ||||||
| Balance at the end of the year | $ | 2,227 | $ | 1,707 | ||||
As of December 31, | ||||||||
2 0 2 1 | 2 0 2 0 | |||||||
| Balance at the beginning of the year | 11,080 | 7,738 | ||||||
| Increase related to prior year tax positions | 271 | 1,950 | ||||||
| Decrease related to prior year tax positions | (4,403 | ) | (622 | ) | ||||
| Increase related to current year tax positions | 1,187 | 2,014 | ||||||
| Balance at the end of the year* | 8,135 | 11,080 | ||||||
F - 33
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(
U.S. dollars in thousands, except share and per share data
)NOTE 14- INCOME TAXES (Cont.)
* The amount for the year ended December 31, 2021 and 2020 includes $2,412 and $2,280 unrecognized tax benefits, respectively, which are presented as a reduction from Other Sources in Israel:deferred tax assets, see Note 14e.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expenses.
| M. | Income from Other Sources in Israel: |
Income not eligible for benefits under the New Technological Enterprise Laws mentioned in ”D””C” above are taxed at the corporate tax rate of 23% in 2018, 24% in 2017 and 25% in 2016..
NOTE 11 15- GEOGRAPHIC AREAS AND MAJOR CUSTOMERS
| A. | Sales by Geographic Area (as Percentage of Total Sales): |
Year ended December 31, | ||||||||||||
2 0 2 1 | 2 0 2 0 | 2 0 1 9 | ||||||||||
% | % | % | ||||||||||
| Taiwan, R.O.C. | 37 | 33 | 37 | �� | ||||||||
| USA | 23 | 23 | 25 | |||||||||
| China | 21 | 19 | 18 | |||||||||
| Korea | 11 | 17 | 9 | |||||||||
| Other | 8 | 8 | 11 | |||||||||
| Total | 100 | 100 | 100 | |||||||||
| Year ended December 31, | ||||||||||||
| 2 0 1 8 | 2 0 1 7 | 2 0 1 6 | ||||||||||
| % | % | % | ||||||||||
| Taiwan, R.O.C. | 31 | 31 | 45 | |||||||||
| USA | 18 | 17 | 9 | |||||||||
| Korea | 21 | 28 | 16 | |||||||||
| China | 18 | 16 | 19 | |||||||||
| Other | 12 | 8 | 11 | |||||||||
| Total | 100 | 100 | 100 | |||||||||
Revenues are attributed to countries based on the geographic location of the customer.
| Year ended December 31, | ||||||||||||
| 2 0 1 8 | 2 0 1 7 | 2 0 1 6 | ||||||||||
| % | % | % | ||||||||||
| Customer A | 20 | 23 | 34 | |||||||||
| Customer B | 19 | 22 | 11 | |||||||||
| Customer C | 14 | 14 | 11 | |||||||||
| Customer D | 9 | 8 | 11 | |||||||||
| Customer E | 5 | 8 | 10 | |||||||||
Sales by |
Year ended December 31, | ||||||||||||
2 0 2 1 | 2 0 2 0 | 2 0 1 9 | ||||||||||
% | % | % | ||||||||||
| Customer A | 31 | 26 | 27 | |||||||||
| Customer B | 21 | 24 | 16 | |||||||||
| Customer C | 9 | 8 | 13 | |||||||||
| C. | Long-lived assets by geographic location: |
As of December 31, | ||||||||
2 0 2 1 | 2 0 2 0 | |||||||
% | % | |||||||
| Israel | 74 | 75 | ||||||
| US | 19 | 20 | ||||||
| Other | 7 | 5 | ||||||
| Total long-lived assets (*) | 100 | 100 | ||||||
(*) Long-lived assets are located in Israel.
F - 34
NOVA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(
U.S. dollars in thousands, except share and per share data
)NOTE 1316- FINANCIAL INSTRUMENTS
| A. | Hedging Activities |
The Company enters into forward contracts, and currency options to hedge its balance sheet exposure as well as certain future cash flows in connection with certain operating expenses (mainly payroll expense) and forecast transactions which are expected to be denominated mainly in New Israeli Shekel ("NIS"). The Company is exposed to losses in the event of non-performance by counterparties to financial instruments; however, as the counterparties are major Israeli banks, credit risk is considered immaterial. The Company does not hold or issue derivatives for trading purposes. The notional amounts of the hedging instruments as of December 31, 20182021 and December 31, 20172020 were $21,093,$32,590, and $14,315$17,675 respectively. The terms of all of these currency derivatives are less than one year.
| B. | Derivative Instruments |
The fair value of derivative contracts as of December 31, 20182020 and December 31, 20172019 was as follows:
Derivative Assets Reported in Other Current Assets | Derivative Liabilities Reported in Other Current Liabilities | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2 0 1 8 | 2 0 1 7 | 2 0 1 8 | 2 0 1 7 | |||||||||||||
| Derivatives designated as hedging instruments in cash flow hedge | $ | - | $ | 138 | $ | 320 | $ | - | ||||||||
| Derivative Assets Reported in Other Current Assets | Derivative Liabilities Reported in Other Current Liabilities | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2 0 2 1 | 2 0 2 0 | 2 0 2 1 | 2 0 2 0 | |||||||||||||
| Derivatives designated as hedging instruments in cash flow hedge | 249 | 644 | 0 | 0 | ||||||||||||
The impact of derivative instrument on total operating expenses in the year ended December 31, 2018, 20172021, 2020 and 20162019 was:
| Year ended December 31, | ||||||||||||
| 2 0 1 8 | 2 0 1 7 | 2 0 1 6 | ||||||||||
| Loss (gain) on derivative instruments | $ | (189 | ) | $ | 701 | $ | 50 | |||||
Year ended December 31, | ||||||||||||
2 0 2 1 | 2 0 2 0 | 2 0 1 9 | ||||||||||
| Loss (gain) on derivative instruments | $ | 453 | $ | 796 | $ | 33 | ||||||
NOTE 17- FINANCIAL INCOME (EXPENSE), NET
Year ended December 31, | ||||||||||||
| 2 0 2 1 | 2 0 2 0 | 2 0 1 9 | ||||||||||
| Interest income | 2,194 | 4,057 | 4,605 | |||||||||
| Financial expense related to the Convertible Senior Notes (Note 10) | (4,229 | ) | (868 | ) | 0 | |||||||
| Exchange rate loss, net | (948 | ) | (2,172 | ) | (1,428 | ) | ||||||
| Bank charges | (150 | ) | (91 | ) | (99 | ) | ||||||
| Total | (3,133 | ) | 926 | 3,078 | ||||||||
NOTE 18- SUBSEQUENT EVENTS
On January 25, 2022, the Company completed its acquisition of all of the outstanding common stock of ancosys GmbH, a provider of chemical analysis and metrology solutions for advanced semiconductor manufacturing. The Company’s total consideration is expected to be approximately $90 million in cash including a performance based contingent consideration of $10 million.
During the year ended December 31, 2021 the Company recognized $999 of acquisition-related costs in the consolidated statements of operations under general and administrative expenses.
F - 35
EXHIBIT INDEX
Number | Description |
101.INS | Inline XBRL Instance Document—the |
101.SCH | Inline XBRL Taxonomy Extension Schema |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase |
104 | Cover page formatted as Inline XBRL and contained in |
107
The registrant hereby certifies that it meets all of the requirements for filing on Form 20‑F and has duly caused and authorized the undersigned to sign this annual reportAnnual Report on its behalf.
NOVA LTD. By:/s/ Eitan Oppenhaim | |||
Eitan Oppenhaim | |||
President and Chief Executive Officer | |||
Date: February 28, 2019March 1, 2022