The loss of some of our customers, or any single key customer, may have a material adverse effect on our operations and financial results and we cannot assure you that we will be able to enter into strategic relationships with any such customer in the future. Payment terms of our customers are, primarily up to 90on average, approximately 70 days net. Approximately 96%95% of our international sales are denominated in U.S. Dollars and may be subject to government controls and other risks, including, in some cases, export licenses, federal restrictions on export, currency fluctuations, political instability, trade restrictions and changes in tariffs and freight rates. We have experienced no material difficulties to date as a result of these factors.
Our arrangements with our customers (and distributors and resellers when applicable) are generally non-exclusive. We have generally experienced good relations with our customers and are not aware of any pending material terminations other than with respect to products that newer technologies have eliminated the need for.
Our customers, distributors and resellers are not under our control. They are not obligated to purchase products from us and may use or represent other lines of products. A reduction in sales effort or discontinuance of sales of our products by our customers could lead to reduced sales and could materially adversely affect our operating results. In addition, our business model also entails the risk that our customers will build up inventories in anticipation of a growth in deployments or sales. If such growth does not occur as anticipated, these customers may substantially decrease the number of products ordered from us in subsequent quarters, discontinue product orders or even attempt to return unused or unsold products. The loss of a major or key customer or group of customers, or a loss or ineffectiveness of some of our relationships at approximately the same time, might have a material adverse effect on us.
Our success and ability to compete are dependent to a significant degree on our technology. In order to establish and protect the technology we develop and/or acquire to use in our products, we primarily rely on a combination of non-disclosure agreements and technical measures, and to a lesser degree on patents. These measures afford only limited protection, and accordingly, there can be no assurance that the steps we take will be adequate to prevent misappropriation of our technology or the independent development of similar technologies by others. Despite our efforts to protect our technology, unauthorized parties may attempt to copy aspects of our products and develop similar hardware or software or to obtain and use information that we regard as proprietary. In addition, there can be no assurance that one or more parties will not assert infringement claims against us. The cost of responding to claims could be significant, regardless of whether the claims are valid. We cannot assure that the scope of any issued patent will adequately protect our intellectual property rights, or that patents will not be challenged, invalidated, or circumvented, or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage.
On April 8, 2010, we filed a patent application with the United States Patents and Trademarks Office, or the USPTO, for the 'Server-Based Network Appliance'. On June 12, 2012 we were issued patent No. 8,199,523 entitled 'Server-Based Network Appliance' from the United States Patent and Trademark Office, which relates to a server-based network appliance in which a computer motherboard is mounted in a case with the bus slots of the motherboard adjacent to the rear side of the case.
On September 16, 2013, we acquired all of the intellectual property related to the unique Virtualization Off-Load Engine developed by Net Perform Technology, Ltd., a privately held company registered in Hong Kong, China. Despite perceived exclusive access to this product, and our best efforts during the acquisition process to secure the same, internal or external parties may assert a claim of infringement regarding such intellectual property. We do not consider this intellectual property to be material for our operations.
On February 8, 2015, we filed a patent application in the USPTO with respect to Hybrid Networking Application Switch. On January 2, 2018, we were issued patent No. 9,858,227 entitled 'Hybrid Networking Application Switch' from the United States Patent and Trademark Office. The patent relates to a unique solution for combining functionalities of a rack mounted networking switch and a rack mounted server into a single rack mounted enclosure comprising a hybrid networking application switch or an accelerated hybrid networking application switch.
For additional information regarding the risks to the Company with respect to patents and other intellectual property rights see the risk factor entitled "We may not be able to protect our intellectual proprietary rights" under Item 3.D. – "Risk Factors".Factors."
The networking and data infrastructure solutions industry is highly competitive. We face competition from numerous companies, some of which are more established, benefit from greater market recognition and have greater financial, production and marketing resources than we do. We cannot guarantee that our present or any contemplated products will continue to be distinguishable from those of our competitors or that the marketplace will find our products preferable to those of our competitors. Furthermore, there can be no assurance that competitive pressures will not result in price reductions that could materially adversely affect our business and financial condition and the results of our operations.
In the Smart Cards products sector, our competition is fragmented, and differs with respect to the specific solution being offered by us. In this sector, Cavium (now a part of Marvel), Mellanox,Marvel, Nvidia, Netronome, Napatech, Myricom (a subsidiary of CSP), Bittware and Nallatech (both now a part of Molex),Molex, Lanner and Caswell compete with certain of our Smart Cards. With respect to the encryption products of our Smart Cards sector, our main competitor is Cavium (now a part of Marvel). In some cases of FPGA based cards, Intel and XilinxAMD also compete with our smart cards,Smart Cards, however, similarly toas with the Server Adapters space, they target mostly the biggest accounts and only with mainstream products while for other accounts they cooperate with us.
We are affected by the terms of research and development grants we have received from the IIA.
Under the R&D Law, research and development programs approved by the Research Committee of the IIA (the "Research Committee") are eligible for "Benefits" which include grants, loans, exemptions, discounts, guarantees and additional means of assistance, but with the exclusion of purchase of shares, provided under various tracks promulgated by the Council body (the "Tracks"). Most Tracks require the repayment of the Benefits in the form of the payment of royalties from the sale of the product developed in accordance with the published Track guidelines and subject to other restrictions. Once a project is approved, the IIA awards grants of up to 50% of the project's expenditures in return for royalties, usually at the rate of 3% to 5% of sales of products developed with such grants. For projects approved after January 1, 1999, the amount of royalties payable was up to a dollar-linked amount equal to 100% of such grants plus interest at LIBOR.LIBOR or other applicable interest rate.
The terms of these grants prohibit the manufacture outside of Israel of the product developed in accordance with the program without the prior consent of the Research Committee. Such approval is generally subject to an increase in royalty rates, as well as in the total amount to be repaid to the IIA to between 120% and 300% of the amount granted, depending on the extent of the manufacturing that is conducted outside of Israel.
The R&D Law, also provides that know-how from the research and development and any derivatives thereof, cannot be transferred or licensed to Israeli third parties without the approval of the Research Committee. The R&D Law stresses that it is not just transfer of know-how that was prohibited, but also transfer of any rights in such know-how. Approval of the transfer and/or license could be granted only if the Israeli transferee undertook to abide by all of the provisions of the R&D Law and regulations promulgated thereunder, including the restrictions on the transfer of know-how and the obligation to pay royalties, if applicable. Generally, royalty payments by the transferor are required in connection with the transfer to an Israeli third party.
In addition, we receive certain tax benefits and reduced tax rates from the Israeli government due to our status as a "Preferred Technological Enterprise" under the Law for the Encouragement of Capital Investments-1959, as amended. See "Item 10.E. – Additional Information – Taxation".Taxation." The entitlement to these benefits is conditional upon our fulfillment of the conditions stipulated by the law and the regulations promulgated thereunder. In the event of failure to comply with these conditions, the benefits could be canceled, and we would be required to refund the amount of the benefits, in whole or in part, with the addition of linkage differences and interest.
We have conducted our manufacturing in Yokne'am, Israel since 2000. We lease our manufacturing facility in Yokne'am pursuant to a sub-lease for a period of three years and four months, ending April 30, 2020. This facility is approximately 2,400 square meters in size plus additional warehouse areas of approximately 250 meters in size and the monthly rental payments (which include rental payments, as well as fees for various management and upkeep services) are approximately US$ 44,200. We are currently in the process of negotiating an extension to this lease, until we finalize the move to our new manufacturing facility as detailed below.
In March 2020, we entered into a lease agreement for the lease of an approximately 4,000 square meter manufacturing facility, as well as an approximately 360 square meters of storage space, in Yokne'am, Israel, for a period of up to 120 months. The monthly rental payments (which include various payments including maintenance services) will vary during the remaining lease period from between approximately US$ 73,300 per month72,300 to approximately US$ 76,600 per month.80,800
In September 2016,2022, we entered into a lease agreement with Naji Ezekiel & Sons - Management and Maintenance Ltd., for the lease of 450approximately 670 square meters of storage space in Yokne'am IllitMigdal Ha’emek, Israel, for a period of 60 months, for monthly rental payments of approximately US$ 13,600. The agreement also includes two options for the extension of the lease: the first, for a period of 36 months commencing on October 1, 2027, which will include a 7% percent increase in the monthly rent, and the monthly payments are approximately US$ 7,000 (which include participation in maintenance and insurance). This agreement is in effectsecond, for a period of 24 months with two options to extend the term by 12 months, atcommencing on October 1, 2030, which will not include an increase of 5% in rental payments per each renewal period. additional rent increase.
In August 2018, we exercised our first option to extend the lease term by 12 months. In addition, in JanuaryOctober 2019, we entered into an addendum to the lease agreement for the lease of additional space of approximately 300 square meters for the same term set forth in the lease agreement, for which the monthly rental payments are equal to US$ 4,700 (which include participation in maintenance and insurance).
On October 29, 2019, we entered into an additionala commercial lease agreement to lease office space in Charlottesville, Virginia, in the United States for a 37-month period commencing on December 1, 2019. The lease agreement includes two options for the extension of the lease for 24-months each. In July 2022, we exercised the first option to extend the lease agreement for a period of 24 months, commencing on January 1, 2023. The facility is approximately 606 square meters in size and the monthly payments are approximately US$ 8,420 for through December 31, 2020,8,900 per month in the first 12 months and approximately US$ 8,600 from January 1, 2021, through December 31, 2021, and US$ 8,760 from January 1, 2022, through December 31, 2022.9,100 per month in the following 12 months.
As ofSince April 2017, we leasehave leased office space of approximately 2,500 square feet in Paramus, New Jersey. Our current lease is until March 2022, and we have an option to renew it for an additional five-year term.June 2027. Currently, the monthly rental payments (including utilities) for this space are approximately US$ 4,190.4,820.
In addition, we lease office space of approximately 1,0001,800 square meters in Søborg, Denmark. The term of the lease agreement expires on September 30, 2020.November 1, 2025. The lease can be terminated by a six-month advanced notice to the landlord. The monthly rental payment (including maintenance services) for this space is approximately US$ 14,500.20,100.
We believe that our facilities in Israel, the United States and Denmark are suitable and adequate for our operations as currently conducted. In the event that additional facilities are required, or we need to seek alternative rental properties, we believe that we could obtain such additional or alternative facilities at commercially reasonable prices.
Item 4A. UNRESOLVED STAFF COMMENTSItem 4A. | UNRESOLVED STAFF COMMENTS |
There are no unresolved staff comments.
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTSItem 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
Overview
Silicom was incorporated in Israel and commenced operations in 1987. We are currently engaged in the design, manufacture, marketing and support of high-performance networking and data infrastructure solutions. Designed primarily to improve performance and efficiency in Cloud and Data Center environments, our solutions increase throughput, decrease latency and boost the performance of servers and networking appliances, the infrastructure backbone that enables advanced Cloud architectures and leading technologies like NFV, SD-WAN and Cyber Security. Our products are used by major Cloud players, service providers, Telcos and Mobile operators and OEMs as components of their infrastructure offerings, including both add-on adapters in the Data Center and stand-alone virtualized/universal CPE devices at the edge. In 2017, 20182020, 2021 and 2019,2022 we recorded sales from all of our networking and data infrastructure solutions of approximately, US$ 125.7107.4 million, US$ 133.8128.5 million and US$ 105.2150.6 million respectively. We primarily sell our products to major Cloud players, service providers, Telcos and Mobile operators and OEMs and, to a lesser extent, through independent distributors (on a non-exclusive basis).
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below.
Revenue recognition – We recognize our revenues in accordance with ASC 606, Revenue from Contracts with Customers. The underlying principle of ASC 606 is to recognize revenue when a customer obtains control of the promised goods at an amount that reflects the consideration that is expected to be received in exchange for those goods. It also requires increased disclosures including the nature, amount, timing, and uncertainty of revenues and cash flows related to contracts with customers. We adopted ASC 606 at the beginning of 2018, and implemented new accounting policies and internal controls necessary to support the requirements of ASC 606. The adoption of ASC 606 did not have any impact on our revenue recognition.
We recognize revenue upon transfer of control of the promised goods in a contract with a customer in an amount that reflects the consideration we expect to receive in exchange for those products. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment or once delivery and risk of loss has transferred to the customer. We account for a contract with customer when we have approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We identify separated contractual performance obligations and evaluate each distinct performance obligation within a contract, whether it is satisfied at a point in time or over time. All of our performance obligations for the reported periods were satisfied at a point in time.
Revenue is allocated among performance obligations in a manner that reflects the consideration that we expect to be entitled to for the promised goods based on standalone selling prices (SSP). SSP are estimated for each distinct performance obligation and judgment may be required in their determination. The best evidence of SSP is the observable price of the product when we sell the goods separately in similar circumstances and to similar customers.
Until January 1, 2018, revenues from sales of products were recognized upon delivery provided that the collection of the resulting receivable was reasonably assured, there was persuasive evidence of an arrangement, no significant obligations remained and the price was fixed or determinable.
Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenues in the consolidated statements of operations.
Recent Accounting Pronouncements.Pronouncements
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual and interim periods in fiscal years beginning after December 15, 2018. In November 2019, the FASB issued ASU 2019-11, which includes several amendments to the credit losses standard (ASU 2016-13), including amendments to the reporting of expected recoveries. We are currently evaluating the impact of the provisions of ASU 2016-13 on our financial position, results of operations and cash flows.Not applicable.
In December 2019, the FASB issued ASU 2019-12, which removes certain exceptions for: recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. This ASU is effective for annual periods in fiscal years beginning after December 15, 2021, and interim periods in fiscal years beginning after December 15, 2022. We do not expect the adoption of ASU 2019-12 to have a material impact on our consolidated balance sheets, results of operations, cash flows or presentation thereof.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment", which eliminates the requirement to calculate the implied fair value of goodwill in step two of the goodwill impairment test. Under ASU 2017-04, goodwill impairment charges will be based on the excess of a reporting unit's carrying amount over its fair value as determined in step one of the testing. ASU 2017-04 is effective for interim and annual testing dates after December 15, 2019, with early adoption permitted for interim and annual goodwill impairment testing dates after January 1, 2017. We do not expect the adoption of ASU 2017-04 to have a material impact on our consolidated balance sheets, results of operations, cash flows or presentation thereof.
A. Operating Results
You should read the following management's discussion and analysis of our financial condition and operating results in conjunction with the consolidated financial statements and the related notes thereto included in this annual report. The following table sets forth, for the periods indicated, the relationship (in percentages) of items from our Consolidated Statement of Operations Data to our total sales:
Year Ended December 31, | | 2017 | | | 2018 | | | 2019 | | 2020 | 2021 | 2022 |
Sales | | 100 | % | | 100 | % | | 100 | % | 100% | 100% | 100% |
Cost of sales | | 63.5 | | | 68.6 | | | 65.7 | | 68.6 | 65.4 | 65.5 |
Gross profit | | 36.5 | | | 31.4 | | | 34.3 | | 31.4 | 34.6 | 34.5 |
Research and development expenses | | 11.1 | | | 11.1 | | | 14.3 | | 16.1 | 15.6 | 13.7 |
Sales and marketing expenses | | 5.3 | | | 5.0 | | | 6.3 | | 5.8 | 5.1 | 4.6 |
General and administrative expenses | | 3.6 | | | 2.9 | | | 4.0 | | 3.7 | 3.6 | 3.0 |
Contingent consideration expense (benefit) | | (3.7 | ) | | - | | | - | | |
Operating Income | | 20.2 | | | 12.4 | | | 9.7 | | 5.8 | 10.2 | 13.2 |
Financial income, net | | 0.2 | | | 0.7 | | | 1.6 | | 1.0 | (0.1) | 1.6 |
Income before income taxes | | 20.4 | | | 13.1 | | | 11.3 | | 6.8 | 10 | 14.9 |
Income tax expenses | | 3.1 | | | 2.2 | | | 1.6 | | 1.4 | 1.8 | 2.7 |
Net Income | | 17.3 | | | 10.9 | | | 9.7 | | 5.4 | 8.2 | 12.2 |
Sales in 2019 decreased2022 increased by 21.3%17.2% to US$ 105,240150,582 thousand compared to US$ 133,753128,460 thousand in 2018. This decrease was mainly attributed to2021, reflecting the lackcontinued high demand for our products and our success in mitigating the impacts of revenues from our largest-ever Cloud related Design Win we lost in March 2018. During 2019 we had no revenues from this Design Win.
Sales in 2018 increased moderately by 6.4% to US$ 133,753 thousand compared to US$ 125,690 thousand in 2017. Our modest growththe global component shortage crisis. The increase in sales was mainly attributed to the following: Onsuccess of our Smart Edge products, expanding our total addressable market for these products beyond SD-WAN to markets such as SASE, Dedicated Internet, as well as other markets.
Sales in 2021 increased by 19.6% to $128,460 thousand compared to $107,398 thousand in 2020, reflecting the positive side, this growthcombined impact of two opposite vectors: the significant increased demand for our products on one hand, and the growing global component shortages crisis on the other hand. The increase in demand and sales was mainly driven byattributed to the continuous success of our continued benefit from our success in expanding our customer base and product offering,Smart Edge products, especially in the SD-WAN market, and to our CPE/EDGE product lines, supporting important market trends like NFV,initial penetration to the 5G/O-RAN market. Both, SD-WAN and Cyber security. However, on the negative side, we lost our largest-ever Cloud related Design Win in March 2018. AllO-RAN, are part of the above led to our modest growth in 2018 compared to 2017.significant Disaggregation and Decoupling industry trends.
Gross profit in 20192022 was US$ 36,09451,956 thousand compared to US$ 42,05644,388 thousand in 2018.2021. Gross profit as a percentage of sales in 20192022 was 34.3%34.5%, compared to 31.4%34.6% in 2018.2021. The higherchange in the gross profit percentage in 20192022 compared to 20182021 was mainly attributed to: (i) a US$ 3.2 million write-off in 2018 related to the loss of our largest-ever Cloud related Design Win, which we announced on March 13, 2018, (ii) changes to the mix of products that we sold in 2019,2022, on which our gross profit is largely dependent. Gross profit was also affected by, among other factors, write-downs of inventory made with respect to any slow moving or obsolete inventory we can no longer use (not including the above mentioned write-off);use; the inventory write-downs as a percentage of sales in 20192022 decreased to 2.0%, compared to 2.9%4.1% in 2018.2021.
Gross profit in 20182021 was US$ 42,05644,388 thousand compared to US$ 45,92833,766 thousand in 2017.2020. Gross profit as a percentage of sales in 20182021 was 31.4%34.6%, compared to 36.5%31.4% in 2017.2020. The lowerhigher gross profit percentage in 20182021 compared to 20172020 was mainly attributed to: (i) a one-time US$ 3.21.7 million write-off related to the lossimpairment of our largest-ever Cloud related Design Win, which we announced on March 13, 2018,intangible assets in 2020, (ii) changes to the mix of products that we sold in 2018,2021, on which our gross profit is largely dependent, whichdependent. Gross profit was influencedalso affected by, our strategic decision to take advantage of increased revenue potential and opportunities, and (iii)among other factors, write-downs of inventory made with respect to any slow moving or obsolete inventory we can no longer use (not including the above mentioned write-off);use; the inventory write-downs as a percentage of sales in 20182021 increased to 2.9%4.1%, compared to 2.3%1.5% in 2017.2020.
Research and development expenses in 20192022 increased moderately by 1.7%2.3% to US$ 15,07520,563 thousand compared to US$ 14,82020,091 thousand in 2018.2021. This increase was mainly attributed to a decrease in capitalization of internal software development costs in the amount of US$ 2,547 thousand in 2022, compared to US$ 3,562 thousand in 2021, as well as an increase in the share-based compensation which amounted to approximately US$ 1,454 thousand in 2022, compared to US$ 1,011 thousand in 2021, offset by a strengthening of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our research and development expenses are incurred in New Israeli Shekels and Danish Krone), which amounted to approximately US$ 1,018 thousand.
Research and development expenses in 2021 increased by 16.5% to US$ 20,091 thousand compared to US$ 17,244 thousand in 2020. This increase was mainly attributed to an increase in our research and development employeesemployees' and subcontractors' related costs, required for our continued investment in new product development, enhancements to existing products and the development of new networking and connectivity technologies expanding our product offering to our target markets, which contributed approximately US$ 1,1694,540 thousand to such increase, offset bycombined with the following factors: (i) a decrease in amortization of acquired intangible assets, which amounted to US$ 0 in 2019, compared to US$ 655 thousand in 2018, (ii) capitalization of internal software development costs in the amount of US$ 1,0183,562 thousand in 2019,2021, compared to US$ 928822 thousand in 2018, (iii) a decrease2020, (ii) an increase in the share-based compensation which amounted to approximately US$ 9001,011 thousand in 2019,2021, compared to US$ 953959 thousand in 2018, and2020, as well as to (iv) the net effect of the strengthening of the US Dollar against the Danish Krone, on the one hand, offset by(iii) a weakening of the US Dollar against the New Israeli Shekel onand the other hand,Danish Krone (since a significant portion of our research and development expenses are incurred in New Israeli Shekels and Danish Krone), which amounted to approximately US$ 116995 thousand.
Research and development expenses in 2018 increased by 6.5% to US$ 14,820 thousand compared to US$ 13,915 thousand in 2017. This increase was mainly attributed to the increase in the number of our research and development employees, to an increase in consultants and subcontracted work, as well as to an increase in other related research and development expenses required for our continued investment in new product development, enhancements to existing products and the development of new networking and connectivity technologies expanding our product offering to our target markets, which contributed approximately US$ 2,308 thousand to such increase, as well as to an increase in the share-based compensation which amounted to approximately US$ 953 thousand in 2018, compared to US$ 832 thousand in 2017, all of which were offset by capitalization of internal software development costs in the amount of US$ 928 thousand, as well as a decrease in amortization of acquired intangible assets, which amounted to approximately US$ 655 thousand in 2018, compared to US$ 1,251 thousand in 2017.46
Sales and marketing expenses in 20192022 increased slightly by 0.1%5.9% to US$ 6,6476,990 thousand compared to US$ 6,6426,599 thousand in 2018.2021. This increase was mainly attributed to our continued investment in the promotion of our networking and data infrastructure solutions, expanding our customer base and product offering, which contributed approximately US$ 465484 thousand, offset by a decrease in amortization of acquired intangible assets which amounted to US$ 0 in 2019, compared to US$ 384 thousand in 2018, as well as to a decreasean increase in the share-based compensation which amounted to approximately US$ 493774 thousand in 2019,2022, compared to US$ 569697 thousand in 2018.2021, offset by a strengthening of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our sales and marketing expenses are incurred in New Israeli Shekels and Danish Krone) which amounted to approximately US$ 170 thousand.
Sales and marketing expenses in 2018 decreased2021 increased by 1.2%6.3% to US$ 6,6426,599 thousand compared to US$ 6,7226,209 thousand in 2017.2020. This decreaseincrease was mainly attributed to a decrease in amortization of acquired intangible assets, which amounted to approximately US$ 384 thousand in 2018, compared to US$ 637 thousand in 2017, offset by our continued investment in the promotion of our networking and data infrastructure solutions, to our target markets including those driven by trends like Cloud Computing, Cyber security, SDN, NFV, Virtualization, SD-WAN and other trends, by, among others, our continued effort to expand exposure of our product offering and expanding our customer base and product offering, which contributed approximately US$ 173 thousand.
General and administrative expenses110 thousand, as well as to an increase in 2019 increased by 5.5% to US$ 4,159 thousand compared to US$ 3,943 thousand in 2018. This increase was mainly attributed to various general and administrative coststhe share-based compensation which amounted to approximately US$ 244697 thousand offset by the net effect of the strengthening of the US Dollar against the Danish Krone, on the one hand, offset byin 2021, compared to US$ 602 thousand in 2020, as well as to a weakening of the US Dollar against the New Israeli Shekel onand the other handDanish Krone (since a significant portion of our sales and marketing expenses are incurred in New Israeli Shekels and Danish Krone) which amounted to approximately US$ 185 thousand.
General and administrative expenses in 2022 decreased by 3.5% to US$ 4,477 thousand compared to US$ 4,641 thousand in 2021. This decrease was mainly attributed to a strengthening of the US Dollar against the New Israeli Shekel and the Danish Krone (since a significant portion of our general and administrative expenses are incurred in New Israeli Shekels and Danish Krone), which amounted to approximately US$ 28 thousand.
General and administrative expenses in 2018 decreased228 thousand, offset by 12.5% to $3,943 thousand compared to $4,507 thousand in 2017. This decrease was mainly attributed to a decreasean increase in payroll related expenses attributed to general and administrative activity which amounted to approximately US$ 35928 thousand, as well as to a decreasean increase in the share-based compensation, which amounted to approximately $530US$ 710 thousand in 2018,2022, compared to $735US$ 674 thousand in 2017.2021.
In 2018, we had a contingent consideration expenseGeneral and administrative expenses in the amount of US$ 0 compared to a contingent consideration benefit in the amount of US$ 4,642 thousand in 2017. For additional information see Note 3 to our financial statements included elsewhere in this annual report.
Financial income, net in 20192021 increased by 78.3%14.2% to US$ 1,6464,641 thousand compared to US$ 9234,065 thousand in 2018. The2020. This increase resultedwas mainly from the net effect of the following factors:attributed to (i) an increase in income from investment in marketable securitiespayroll related expenses attributed to general and bank deposits,administrative activity which was attributedamounted to approximately US$ 313 thousand, (ii) to an increase in funds available for investment,the share-based compensation, which amounted to approximately US$ 2,151674 thousand in 20192021, compared to US$ 808615 thousand in 2018, offset by (ii) the net effect of the2020, as well as to (iii) a weakening of the US Dollar against the New Israeli Shekel on the one hand, offset by a strengthening of the US Dollar againstand the Danish Krone on the other hand, which created(since a net financial expenses in US Dollars from exchange rate differences (asignificant portion of our balance sheet assetsgeneral and obligationsadministrative expenses are denominatedincurred in New Israeli Shekels as well asand Danish Krone) ofwhich amounted to approximately US$ 357 thousand in 2019 compared to a net financial income of US$ 208 thousand in 2018.204 thousand.
Financial income, net in 2018 increased by 491.7%2022 amounted to US$ 9232,464 thousand compared to financial expenses, net of US$ 156152 thousand in 2017.2021. The increase resulted from the net effect of the following factors: (i) an increase in income from investment in marketable securities,change is mainly attributed to increase in the funds available for investment, which amounted to US$ 808 thousand in 2018, compared to US$ 310 thousand in 2017, (ii) a decrease in bank fees, which contributed approximately US$ 16 thousand to the increase, and (iii) a strengthening of the US Dollar against the New Israeli Shekel and the Danish Krone, which created a net financial income in US Dollars from exchange rate differences (a portion of our balance sheet assets and obligations are denominated in New Israeli Shekels as well as Danish Krone) of US$ 2082,308 thousand in 2018,2022 compared to financial expenses of US$ 1,031 thousand in 2021, offset by a decrease in income from investment in marketable securities and bank deposits, which was attributed to a decrease in funds available for investment, which amounted to US$ 230 thousand in 2022 compared to US$ 927 thousand in 2021.
Financial expenses, net in 2021 amounted to US$ 152 thousand compared to financial income, net of US$ 1,034 thousand in 2020. The change is mainly attributed to the following factors: (i) a decrease in income from investment in marketable securities and bank deposits, which was attributed to a decrease in funds available for investment, which amounted to US$ 927 thousand in 2021 compared to US$ 1,953 thousand in 2020, and (ii) a weakening of the US Dollar against the New Israeli Shekel and the Danish Krone, which created net financial expenses in the amountUS Dollars from exchange rate differences (a portion of our balance sheet assets and obligations are denominated in New Israeli Shekels as well as in Danish Krone) of US$ 451,031 thousand in 2017.2021 compared to net financial expenses of US$ 748 thousand in 2020.
In 20192022 we recorded current income tax expenses of US$ 2,3432,963 thousand and deferred income tax benefitexpenses of US$ 6991,178 thousand compared to current income tax expenses of US$ 3,2312,473 thousand and deferred income tax expenses of US$ 548 thousand in 2018.2021. The decreaseincrease in our current income tax expenses was mainly attributed to an increase in our income and the resulting taxable income. The increase in the deferred income tax expenses was mainly attributed to the following factors: (i) deferred income tax expenses relating to research and development costs, which amounted to US$ 620 thousand in 2022 compared to deferred income tax benefit in the amount of US$ 141 thousand in 2021, (ii) deferred tax expenses relating to intangible assets, which amounted to US$ 253 thousand in 2022 compared to deferred income tax expenses in the amount of US$ 25 thousand in 2021, (iii) deferred income tax expenses relating to share-based compensation provided to our employees and directors, which amounted to US$ 36 thousand in 2022 compared to deferred income tax benefit in the amount of US$ 62 thousand in 2021, offset by (iv) a decrease in income tax expenses relating to tax loss carryforwards, which amounted to US$ 0 thousand in 2022 compared to income tax expenses which amounted to US$ 66 thousand in 2021. In addition, in 2022 we recorded an income tax benefit relating to prior years in the amount of US$ 57 thousand, compared to an income tax benefit relating to prior years In the amount of US$ 157 thousand in 2021.
In 2021 we recorded current income tax expenses of US$ 2,473 thousand and deferred income tax expenses of US$ 48 thousand compared to current income tax expenses of US$ 1,766 thousand and deferred income tax benefit of US$ 61 thousand in 2020. The increase in our current income tax expenses was mainly attributed to an increase in our income and the resulting taxable income. The change in the deferred income tax benefitexpenses was mainly attributed to the following factors: (i) a deferred income tax benefit relating to research and development costs, which amounted to US$ 755141 thousand in 20192021, compared to a deferred income tax expensesbenefit in the amount of US$ 4262 thousand in 2018,2020, (ii) a decrease in deferred income tax expenses relating to intangible assets, which amounted to US$ 4025 thousand in 2019,2021, compared to a deferred income tax benefit in the amount of US$ 120134 thousand in 2018,2020, offset by (iii) a decrease in income tax expenses relating to tax loss carryforwards, which amounted to US$ 66 thousand in 2021, compared to deferred income tax expenses which amounted to US$130 thousand in 2020. (iv) a deferred income tax benefit relating to share-based compensation provided by us to our employees and directors, which amounted to US$ 2662 thousand in 2019,2021, compared to deferred income tax expenses in the amount of US$ 1359 thousand in 2018.2020. In addition, in 20192021 we recorded an income tax benefit relating to prior years in the amount of US$ 21157 thousand, compared to an income tax benefit relating to prior years in the amount of US$ 299148 thousand in 2018.
In 2018, we recorded current income tax expenses of US$ 3,231 thousand and deferred income tax expenses of US$ 5 thousand compared to current income tax expenses of US$ 3,474 thousand and deferred income tax expenses of US$ 453 thousand in 2017. The minor decrease in our current income tax expenses was mainly attributed to a decrease in the corporate income tax rate in the US Federal jurisdiction. The decrease in the deferred income tax expenses was mainly attributed to deferred income tax expenses in relation to acquired goodwill, which amounted to US$ 127 thousand in 2018, compared to US$ 465 thousand in 2017, combined with an increase in deferred income tax benefit relating to share-based compensation provided by us to our employees and directors, which amounted to US$ 135 thousand in 2018, compared to deferred income tax expenses which amounted to US$ 33 thousand in 2017. In addition, in 2018, we recorded an income tax benefit relating to prior years in the amount of US$ 299 thousand, compared to an income tax benefit relating to prior years in the amount of US$ 59 thousand in 2017.
In 20192022 we recorded net income of US$ 10,23618,306 thousand compared to net income of US$ 14,63710,541 thousand in 2018, a decrease2021, an increase of 30.1%73.7%. The decreaseincrease was mainly attributed to the increase in our lower gross profit in 2019, compared to 2018, as mentioned above.activity and sales.
In 2018,2021 we recorded net income of $14,637US$ 10,541 thousand compared to net income of $21,714US$ 5,725 thousand in 2017, a decrease2020, an increase of 32.6%84.1%. The decreaseThis increase was mainly attributed to the following factors: (i) the decreaseincrease in contingent consideration benefit which amounted to $0 in 2018, compared to a contingent consideration benefit of $4,642 thousand in 2017,our activity and (ii) to our lower gross profit in 2018 compared to 2017, as mentioned above.sales.
Impact of Inflation and Currency Fluctuations on Results of Operations, Liabilities and Assets
Since the majority of our revenues are denominated and paid in U.S. Dollars, we believe that inflation in Israel and in Denmark and fluctuations in the U.S. dollar exchange rates do not have any material effect on our revenue. Inflation in Israel or Denmark and the Israeli and Danish currency as well as U.S. dollar exchange rate fluctuations, may however, have an effect on our expenses and, as a result, on our net income/loss. The cost of our Israeli and Danish operations, as expressed in U.S. Dollars, is influenced by the extent to which any change in the rates of inflation in Israel or Denmark are not offset (or are offset on a lagging basis) by a change in valuation of the NIS or DKK in relation to the U.S. dollar.
We do not presently engage in any hedging or other transactions intended to manage the risks relating to foreign currency exchange rate or interest rate fluctuations. However, we may in the future undertake such transactions, if management determines that it is necessary to offset such risks.
B. Liquidity and Capital Resources
As of December 31, 2019,2022, we had working capital of US$ 84,115126,505 thousand and our current ratio (current assets to current liabilities) was 4.19.5.67. Cash and cash equivalents as of December 31, 2019 decreased2022 increased by US$ 10,3391,449 thousand to US$ 16,46930,734 thousand, compared to US$ 26,80829,285 thousand as of December 31, 2018.2021. Short-term bank deposits as of December 31, 2019 increasedmarketable securities decreased by US$ 13,5424,246 thousand to US$ 13,5424,020 thousand, compared to US$ 0 as of December 31, 2018. Short-term marketable securities increased by US$ 12,445 thousand to US$ 14,045 thousand, compared to US$ 1,6008,266 thousand as of December 31, 2018,2021, and long-term marketable securities increaseddecreased by US$ 9308,610 thousand to US$ 46,54215,163 thousand, compared to US$ 45,61223,773 thousand as of December 31, 2018.2021. The net increasedecrease of US$ 16,57811,407 thousand in these fourthree balance sheet items in 20192022 was mainly attributed to positive cash provided by operating activities in the amount of US$ 26,726 thousand, offset byfollowing factors: (i) purchase of treasury shares in the amount of approximately US$ 7,9713,428 thousand, (ii) payments in relation to purchase of property, plant and equipment which amounted to US$ 1,4412,089 thousand, and (iii) to investment in intangible assets which amounted to US$ 1,0182,603 thousand, as well as negative cash used in operating activities in the amount of US$ 4,090 thousand.
Trade receivables increaseddecreased to US$ 24,93627,258 thousand as of December 31, 2019,2022, compared to US$ 23,81731,120 thousand as of December 31, 2018.2021. This increasedecrease was mainly attributed to a one-time change ofshorter customer payment terms with one of our larger customers in 2018.cycles, as averaged out. Other receivables decreased to US$ 4,9643,620 thousand as of December 31, 2019,2022, compared to US$ 9,4874,693 thousand as of December 31, 2018.2021.
Trade payables decreased to US$ 15,922 thousand as of December 31, 2022, compared to US$ 29,918 thousand as of December 31, 2021. This decrease was mainly attributed to the reduction in purchasing of materials in the second half of 2022. Other payables and accrued liabilities decreased to US$ 9,641 thousand as of December 31, 2022, compared to US$ 18,582 thousand as of December 31, 2021. This decrease was mainly attributed to a decrease in advances to suppliers.
Trade payables increased to US$ 16,419 thousand as of December 31, 2019, compared to US$ 15,407 thousand as of December 31, 2018. Other payables and accrued liabilities increased to US$ 8,823 thousand as of December 31, 2019, compared to US$ 6,133 thousand as of December 31, 2018. This increase was mainly attributed to an increase in our accrued expenses.
Inventories decreasedincreased to US$ 36,49187,985 thousand as of December 31, 2019,2022, compared to US$ 42,36975,753 thousand as of December 31, 2018.2021. This decreaseincrease was mainly attributedprimarily the result of an increase in our inventory purchasing, in order to secure continuous production to support our customers' expectations of a decrease in sales.swift delivery, making the readily available inventory pivotal to our business.
Cash provided byused in operating activities in 20192022 amounted to US$ 26,7264,090 thousand compared to cash provided by operating activities in the amount of US$ 45,6781,079 thousand in 2018. The cash provided2021. This was mainly attributed to an increase in our inventory, as well as a decrease of trade accounts payable and other accounts payable and accrued expenses, offset by operating activitiesan increase in 2019 was the result of our positive operatingnet income.
Capital expenditures on property and equipment for the year ended December 31, 2019,2022 were US$ 1,6352,121 thousand, compared to US$ 1,7402,475 thousand as of December 31, 2018. This decrease was mainly attributed to a decrease in investment in equipment used for production and research and development.2021.
We have cash and cash equivalents that we believe are sufficient for our present requirements. Furthermore, our cash resources are sufficient to fund our operating needs for at least the next twelve months.
Other Long-Term Liabilities Reflected on the Company's Balance Sheet:
The liability for employees' severance benefits amounted to approximately US$ 3,425 thousand as of December 31, 2022.
The liability for employees' severance benefits is calculated on the basis of the latest monthly salary paid to each employee multiplied by the number of years of employment. The liability is covered by the amounts deposited by us into employees' managers' insurance and/or pension fund accounts in respect of severance obligations to such employees, including accumulated income thereon as well as by the unfunded provision reflected on the balance sheet.
While the timing of such obligations cannot be pre-determined (and as such were not included in the above table), such liability will be removed, either by termination of employment or retirement.
C. Research and development, patentsDevelopment, Patents and licenses,Licenses, etc.
Since we commenced operations, we have conducted extensive research, development and engineering activities. Our efforts emphasize the development of new products, cost reduction of current products, and the enhancement of existing products, generally in response to rapidly changing customer preferences, technologies and industry standards.
Because the market for our products is characterized by rapidly changing technology and evolving industry standards, our success depends upon our ability to select, develop, manufacture and market new and enhanced products in a timely manner to meet changing market needs. As such, we invest significant resources in research and new product development, enhancements to existing products, and the development of new networking and connectivity technologies, and we expect to continue to do so.
As of June 2012, we have a patent No. 8,199,523 entitled 'Server-Based Network Appliance' from the United States Patent and Trademark Office, which relates to a server-based network appliance in which a computer motherboard is mounted in a case with the bus slots of the motherboard adjacent to the rear side of the case.
On September 16, 2013, we acquired all of the intellectual property related to the unique Virtualization Off-Load Engine developed during the last two years by Net Perform Technology, Ltd., a privately held company registered in Hong Kong, China.
As of December 2014, we own or have licenses or similar rights with respect to Silicom Denmark (Fiberblaze A/S), including Silicom Denmark (Fiberblaze A/S)'s high performance OEM hardware platform for Ethernet and network interface product family, registered names and domain name.
As of October 2015, we own all intellectual property and intellectual property rights in which ADI has an ownership interest or have licenses or similar right where ADI has such licenses or rights, including with respect to custom embedded, communications and networking products based on the latest Intel® silicon, registered names and domain name.
As of January 2018, we have a patent No. 9,858,227 entitled 'Hybrid Networking Application Switch' from the United States Patent and Trademark Office, which relates to a unique solution for combining functionalities of a rack mounted networking switch and a rack mounted server into a single rack mounted enclosure comprising a hybrid networking application switch or an accelerated hybrid networking application switch.
We cannot assure you that the scope of any issued patent will adequately protect our intellectual property rights, or that patents will not be challenged, invalidated, or circumvented or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage.
For additional information regarding the risks to the Company with respect to patents and other intellectual property rights see the risk factor entitled "We may not be able to protect our intellectual proprietary rights" under Item 3.D. – "Risk Factors".Factors."
The Government of Israel encourages research and development projects oriented towards products for export or projects which will otherwise benefit the Israeli economy. In each of the three fiscal years from 1999 to 2001, we received grants from the OCS, recentlyOffice of the Chief Scientist, replaced by the IIA, for the development of systems and products. We have received from the OCSIIA up to 30% of certain research and development expenditures for particular projects. Under the terms of Israeli Government participation, as in effect prior to the R&D Amendment, a royalty usually at the rate of 2% or up to 5%3% of the net sales of products developed from a project funded by the OCSIIA must be paid, beginning with the commencement of sales of products developed with grant funds and ending when a dollar-linked amount equal to 100% of such grants without interest, for projects approved prior to December 2000, and plus interest at LIBOR or other applicable interest rate, for amounts received after that date, is repaid. The terms of Israeli Government participation as in effect prior to the R&D Amendment, also place restrictions on the location of the manufacturing of products developed with government grants, which, in general, must be performed in Israel, and on the transfer to third parties of technologies developed through projects in which the government participates. The R&D Amendment amended the core terms of the Israeli Government participation and placed substantial discretion in a new authority established to replace the OCS and provided only guidelines regarding material terms such as royalty rates and transfer of know-how developed with government grants. The OCSIIA has previously provided funding in relation to our research and development efforts. As of the date hereof, we have received funding from the OCSIIA in the aggregate amount of approximately US$ 4,388,000 and have paid the OCSIIA an aggregate amount of approximately US$ 1,428,000 in royalties in relation thereto. See "Item 4.B. – Information on the Company – Business Overview – Governmental Regulation Affecting the Company".
In August 2005, we received approval for a US$54 thousand dollarthousand-dollar grant from the Korea-Israel Industrial Research and Development Foundation, or Koril-RDF, in connection with the joint development of a certain product with a Korean company. Under the terms of this grant we are required to repay the amounts received at a rate of 2.5% per year of our gross sales of the product developed with the grant in each such year, until 100% of the grant (and any other sums received from Koril-RDF) are repaid. We received approximately 20%-30% of certain research and development expenditures for two projects in 2003 and 2004. As of January 2006, and to date, our research and development activities have been sponsored and funded by us, and we did not participate in any new encouragement programs or received any additional grants from the OCS, IIA or Koril-RDF. We have closed all of our OCSIIA funded programs, and do not anticipate having any sales of products funded by OCSIIA grants or be required to pay any royalties to the OCSIIA with respect thereto.
We expect that we will continue to commit resources to research and development in the future. As of March 31, 2020,2023, we had 113136 employees engaged primarily in research and development and design activities of which 6790 employees in Israel, 3219 in Denmark and 1427 in the U.S. In 2017, 20182020, 2021 and 2019,2022 our research and development expenses were, US$ 13,915,17,244 thousand, US$ 14,82020,091 thousand, and US$ 15,07520,563 thousand respectively, constituting approximately 11.07%, 11.08%16.06%,15.64% and 14.32%,13.66% respectively, of our sales.
The increase in our research and development expenses in 20192022 compared to 20182021 was mainly attributed to an increase in our research and development employees related costs, required for our continued investment in new product development, enhancements to existing products and the development of new networking and connectivity technologies expanding our product offering to our target markets, which contributed approximately US$ 1,169 thousand to such increase, offset by the following factors: (i) a decrease in amortization of acquired intangible assets, which amounted to US$ 0 in 2019, compared to US$ 655 thousand in 2018, (ii) capitalization of internal software development costs in the amount of US$ 1,0182,547 thousand in 2019,2022, compared to US$ 9283,562 thousand in 2018, (iii) a decrease2021, as well as an increase in the share-based compensation which amounted to approximately US$ 9001,454 thousand in 2019,2022, compared to US$ 9531,011 thousand in 2018, and to (iv) the net effect of the strengthening of the US Dollar against the Danish Krone, on the one hand,2021, offset by a weakeningstrengthening of the US Dollar against the New Israeli Shekel onand the other hand,Danish Krone (since a significant portion of our research and development expenses are incurred in New Israeli Shekels and Danish Krone), which amounted to approximately US$ 1161,018 thousand.
The increase in our research and development expenses in 2018, compared to 2017 was mainly attributed to an increase in the number of our research and development employees, to an increase in the use of consultants and subcontracted work, as well as to an increase in other related research and development expenses required for our continued investment in new product development, enhancements to existing products and the development of new networking and connectivity technologies expanding our product offering to our target markets, which contributed approximately US$ 2,308 thousand to such increase, as well as to an increase in the share-based compensation which amounted to approximately US$ 953 thousand in 2018, compared to US$ 832 thousand in 2017, all of which were offset by capitalization of internal software development costs in the amount of US$ 928 thousand, as well as a decrease in amortization of acquired intangible assets, which amounted to approximately US$ 655 thousand in 2018, compared to US$ 1,251 thousand in 2017.52
D. Trend Information
In today's network-based environment, the rate at which traffic is generated is continuously growing and as such there is a growingcontinuous demand for server-based systems. We believescalability of the networks. This demand is behind some of the trends that have a significant impact on us.
The first and obvious trend is the marketsshift to the Cloud, whether it is a public cloud or a private cloud. One of the main messages of the Cloud shift is the call for such systems are continuously growing. Exploding data and internet traffic increase the needstandardization, which is key for connectivity and bandwidth, which results in the increased need of networking throughput, connectivity, compute power and storage. Such growing demand was the basis for the emerging technologies of virtualization, Cloud, SDN, NFV and SD-WAN, all ofscalability. Standardization has created two important trends, which are targetingDisaggregation and Decoupling. Disaggregation calls for disconnecting the implementationproprietary interfaces between the various parts of a more effective model for all the above mentioned tasks.
In view of such an anticipated increase in Cloud-based data centersnetwork and edge devices utilizing virtualization, SDN and NFV,allowing various parts to be procured separately from different vendors. Decoupling is the systems in the data centers are increasingly based on generic server platforms while at the edge the trend is for "white boxes" which represent decoupling of the softwareHardware from the Software also allowing for separate procurement efforts for the Software and hardware capabilities. Boththe Hardware and also resulting in the ability to purchase from different vendors.
The Disaggregation and Decoupling trends, which started at the Cloud level, continued into the Mobile operators' and Telcos' worlds, where Mobile operators and Telcos have also moved towards buying Hardware platforms separately from the Software running on such Hardware platforms, each of which came from a different vendor. This process started with SD-WAN applications, then moved into additional applications through NFV, both of which increasingly utilize Hardware platforms for deployment. Mobile operators and Telcos have applied the same trends of Disaggregation and Decoupling to their 4G/5G infrastructure deployment. A significant indication in that direction was the adoption of O-RAN (Open RAN or Open Radio Access Networks), a process standardizing the interfaces in the mobile network, and as such, allowing both Disaggregation (not everything from one vendor) and Decoupling (obtaining the Hardware and the Software separately).
These trends are having a significant impact on us.
The basic Cloud trend is creating a gradual decrease in demand for our Server Adapters as these platforms (Data Centerare sold mostly through appliances vendors which have less need for our products. Such vendors are now forced to sell to the Cloud players, rather than to their traditional end customers, and Edge)such Cloud players are now buying from them Software only, rather than a full system comprised of Hardware and Software. Even when the Cloud is a private or On Premise, it is based on standard components with decreasing demand for specialized and customized Server Adapters.
On the other hand, having such standardization increases the demand for our Smart Cards as the standard servers, which constitute the Cloud, need enhanced connectivity as well as offload capabilitiesacceleration and offloading in order to addressincrease their performance.
Furthermore, the performance challenges realizedDisaggregation and Decoupling trends have created significant demand by the Mobile Operators, Service Providers and Telcos for CPE devices used in connection with SD-WAN, SASE, Telco dedicated Routers and NFV, and we are currently seeing the increasing demand for our CPE devices due to that trend.
As with the huge amountbasic trends, the impact of traffic,Disaggregation and Decoupling is impacting the high volumemobile 4G/5G infrastructure market through O-RAN, as Mobile operators and Telcos are not currently limited to buying all of data,their necessary parts from the needsame suppliers (for example, as sold by Nokia and Ericsson), but rather can split their networks into different components and as such, they may buy parts of their network from us. Also, the fact that the Software is decoupled from the Hardware means that they can buy from us (and from companies like us) the Hardware only (including the Software which is related to encryptthe Hardware, rather than the full solution). Since the Hardware that is required under O-RAN needs acceleration, and we have such data, the need to run in virtualized environment, which by itself is a challenge for the server CPU, and the need to include switching within the server. We anticipate that consequently the demand for add-on smart adapters (Smart Cards) and CPEs which address these challenges will grow. Power, heat and space limitations in such environments increase the need for hardwareacceleration with our time synchronization products, FEC accelerators and other innovative solutions. Such systems and networking infrastructure require essential building blocks in their own generic environment, which can be served by our products.
We address the above needs with a comprehensive suite of Smart Cards and CPEs whichFPGA cards, we are ablewell placed to either off-load CPU tasks onto a separate intelligent add-on card thereby freeing up server cycles and improving the server's Networking and Storage I/O or by providing modular CPEs which allow various levels of performance and the integration of additional off-loading and non-offloading functionalities. Ourprovide solutions are based on either Intel® silicon which includes such functionality for encryption/decryption and compression or with cards which include intelligent engines, such as FPGAs, Network Processors and with our switch fabric redirector cards which deal with load balancing between servers/CPUs/CPU cores and perform traffic filtering to increase the efficiency of the server. We believe that our Smart Cards and Stand-alone products such as CPEs, will all continue to be key driver of our growth in the coming years.
The sales cycles in the markets for our products are long. Continuing to achieveContinuous achievement of Design Wins according to the process described above and obtaining new customers is time consuming. However, each Design Win we have achieved and will continue to achieve, may represent an opportunity for sustained long-term revenues once we establish a relationship with a customer.
Although we expect our business and products to further develop in the coming years through these trends, there is no assurance that we will continue to generate significant sales in the areas in which we operate.operate and specifically the new areas as described above.
E. Off-Balance Sheet ArrangementsCritical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below.
Revenue recognition – We recognize revenue upon transfer of control of the promised goods in a contract with a customer in an amount that reflects the consideration we expect to receive in exchange for those products. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment or once delivery and risk of loss has transferred to the customer. We account for a contract with customer when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Each of our contracts includes one type of performance obligation. We evaluate each distinct performance obligation within a contract, whether it is satisfied at a point in time or over time. Most of our revenues are recognized at a point in time. Revenue is recognized over time for sales of goods manufactured to unique customer specifications, in which our performance does not create an asset with an alternative use to us and we have an enforceable right to payment for performance completed to date if the customer were to terminate the contract. Revenue recognized over time is measured by the costs incurred to date relative to the estimated total direct costs to fulfill each contract. Incurred costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, materials and overhead.
Capitalization of software development costs (mainly salary) related to programmable components incorporated into our products, are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. We have determined that technological feasibility for our software components of hardware products is reached after all high-risk development issues have been resolved through coding and testing. Amortization begins once the software is ready for its intended use, generally based on the pattern in which the economic benefits will be consumed. The amortization of these costs is included in cost of revenue over the estimated life of the products. Other costs incurred in the research and development of our products are expensed as incurred.
On July 22, 2002, our Audit Committeeaudit committee and the Board of Directors approved an Indemnification Agreement with our directors and officers. Our shareholders approved the terms of this agreement in a General and Extraordinary Meeting held on January 7, 2004. In Amendment 3 to the Companies Law, the instances in which a company may indemnify its officers and directors were broadened. In December 2007, each of our Audit Committeeaudit committee and Board of Directors approved a new form of Indemnification Agreement with our directors and officers so as to reflect this amendment. Our shareholders approved the terms of this new Indemnification Agreement in January 2008. The Indemnification Agreement provides that the directors and officers will be exempt from liability in certain circumstances. The Indemnification Agreement also provides for the indemnification by us for certain obligations and expenses imposed on the officer in connection with an act performed in his or her capacity as an officer of the Company. This right to indemnification is limited, and does not cover, among other things, a breach of an officer's duty of loyalty, a willful breach of an officer's duty of care, or a reckless disregard for the circumstances or consequences of a breach of duty of care. The right to indemnification also does not cover acts that are taken intentionally to unlawfully realize personal gain. The maximum amount of our liability under these Indemnification Agreements for any monetary obligation imposed on an officer or a director in favor of another person by a judgment is currently US$ 3,000,000 for each instance of a covered scenario. In addition, we would be liable to indemnify the officer or director for all reasonable litigation expenses with respect to certain proceedings. We are not aware of any material pending action that may result in anyone claiming such indemnification.
An amendment in 2011 to the Israeli Securities Law, 5728-1968 (the "Israeli"Israeli Securities Law"Law"), and a corresponding amendment to the Companies Law, authorized the Israel Securities Authority (the "ISA" "ISA") to impose administrative sanctions against Israeli public companies and their office holders for certain violations of the Israeli Securities Law or the Companies Law. These sanctions include monetary sanctions and certain restrictions on serving as a director or senior officer of a public company for certain periods of time. The Israeli Securities Law and the Companies Law provide that only certain types of such liabilities may be reimbursed by indemnification and insurance. Specifically, legal expenses (including attorneys' fees) incurred by an individual in the applicable administrative enforcement proceeding and certain compensation payable to injured parties for damages suffered by them are permitted to be reimbursed via indemnification or insurance, provided that such indemnification and insurance are authorized by the company's articles of association, and receive the requisite corporate approvals. In January 2012 each of our Audit Committeeaudit committee and Board of Directors approved a new form of Indemnification Agreement with our directors and officers serving in such capacities from time to time so as to reflect this amendment, and at the Annual General Meeting of the Shareholders held on April 11, 2012 our shareholders approved these amendments to the Company's Articles of Association (the "Articles""Articles of Association") and a revised form of Indemnification Agreement for directors serving in such capacity from time to time.
As per Amendment 20 to the Companies Law ("Amendment 20"), it was decided on July 31, 2013, at the Extraordinary General Meeting of the Shareholders to adopt the Executive Compensation Policy of the Company, which was recommended by our Compensation Committee and approved by our Board of Directors. The Executive Compensation Policy included the above referenced form of Indemnification Agreement to be entered into by the Company with our directors and officers serving in such capacities from time to time. The Executive Compensation Policy also noted that going forward, any change to the Indemnification Agreement, including any changes which materially depart from the key terms of the current agreement (provided that such changes apply equally to all executives of the Company, including directors) will be submitted to the Company's Compensation Committee and the Board of Directors for their approval but shall not, unless required by law or the Company's Articles, be presented at a General Meeting of the shareholders. As set forth in the Companies Law, an Executive Compensation Policy for a period exceeding three years has to be re-approved once every three years. Accordingly, our Amended Executive Compensation Policy was brought for shareholders' re-approval at the annual general meeting of our shareholders in 2019. At the Annual General Meeting, held on June 7, 2022, an Amended Executive Compensation Policy was rejected by our shareholders but following the Meeting it was approved by our compensation committee and the Board of Directors on June 12, 2022, in accordance with the Companies Law in Israel and after determining that the approval of the Amended Compensation Policy was for the benefit of the Company.
We are not a party to any other material off-balance sheet arrangements or contingent obligations.
F. Tabular disclosure of contractual obligations
The following table shows our outstanding contractual obligations by category and by payments due as of December 31, 2019:
| | Payments due by period | |
Contractual Obligations | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | |
Operating Leases | | | 4,533 | | | | 1,482 | | | | 1,684 | | | | 1,161 | | | | 206 | |
Purchase Obligations | | | 15,043 | | | | 15,042 | | | | 1 | | | | | | | | | |
Total | | | 19,576 | | | | 16,524 | | | | 1,685 | | | | 1,161 | | | | 206 | |
Our total outstanding contingencies in respect of OCS or IIA royalty-bearing participations received or accrued, net of royalties paid or accrued before interest, amounted to approximately US$ 2,960 thousand as of December 31, 2019, which are attributable to sales of certain discontinued products. As of the date of this annual report, all of our OCS programs have been closed per our request. We are not anticipating any sales of our products developed with OCS funding and accordingly don't expect to be required to pay any royalties to the OCS. In the unlikely event we do sell products developed using OCS funding, we will be required to pay royalties to the IIA as set forth in the R&D Law.
Other Long-Term Liabilities Reflected on the Company's Balance Sheet:
The liability for employees' severance benefits amounted to approximately US $2,910 thousand as of December 31, 2019.
The liability for employees' severance benefits is calculated on the basis of the latest monthly salary paid to each employee multiplied by the number of years of employment. The liability is covered by the amounts deposited by us into employees' managers' insurance and/or pension fund accounts in respect of severance obligations to such employees, including accumulated income thereon as well as by the unfunded provision reflected on the balance sheet.
While the timing of such obligations cannot be pre-determined (and as such were not included in the above table), such liability will be removed, either by termination of employment or retirement.
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEESItem 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
A. Directors and Senior Management
The following table and notes thereto set forth information regarding our directors and senior management as of March 31, 2020:2022:
Name | Age | Position with Company |
| | |
Avi Eizenman(1) | 6265 | Active Chairman of the Board |
| | |
Shaike Orbach(2) | 6871 | President, Chief Executive Officer, DirectorVice Chairman of the Board |
| | |
Ayelet Aya Hayak(3) | 5053 | External Director |
| | |
Ilan Erez(3) | 5255 | External Director |
| | |
Eli Doron(4) | 6770 | Director |
| | |
Liron Eizenman(5) | 37 | President, Chief Executive Officer |
| | |
Eran Gilad | 5255 | Chief Financial Officer and Company Secretary |
(1) | Was re-elected forServing an additional two-year term, commencing as of June 7, 2022.
|
(2) | Serving an additional three-year term, commencing as of June 5, 2019.8, 2020. |
(2)(3) | Was re-elected forServing an additional three-year term, commencing as of June 5, 2017.7, 2022.
|
(3) | Was re-elected for an additional three-year term, commencing as of July 1, 2019.
|
(4) | Was re-elected forServing an additional three-year term, commencing as of June 12, 2018.3, 2021.
|
(5) | Liron Eizenman, who is the son of the active chairman of our board, Avi Eizenman, commenced serving as our President and Chief Executive Officer, on July 1, 2022. |
Avi Eizenman co-founded the Company in 1987 and has served as a Director since its inception. Mr. Eizenman also served as our President and Chief Executive Officer from the Company's inception until April 1, 2001, and on such date, he resigned from his positions as President and Chief Executive Officer and was appointed Active Chairman of the Board of Directors. Mr. Eizenman served as headBefore the incorporation of the ASIC department at Scitex Ltd. in 1986. From 1979 until 1985,Silicom, Mr. Eizenman held various engineering and management positions including project manager, ASIC specialistat Scitex Ltd. and engineer, withat the Electronic Research & Development Department of the Israeli Ministry of Defense. Mr. Eizenman holds a B.Sc. degree, with honors, in Electrical Engineering from the Technion, and an M.B.A. from Tel Aviv University.
Shaike Orbach has been was our President and Chief Executive Officer from April 2001 until June 30, 2022, and has been a director on our Board since AprilDecember 2001. In December 2001,On July 1, 2022, Mr. Orbach was named a Director, replacing Zohar Zisapel, who resigned fromappointed Executive Vice Chairman of the Board of Directors.Board. Prior to that, for a period of four and a half years,joining our Company, Mr. Orbach was President and CEO of Opgal Ltd., a high-tech subsidiary of Israel's Rafael and El-Op corporations.corporations, for a period of four and a half years. Previously, he was General Manager of Edusoft, an Israeli company the shares of which were traded on the NASDAQ National Market (now, the NASDAQ Global Market), and Managing Director of Tecsys Ltd. He holds a B.Sc degree in Mechanical Engineering from the Technion.
Ayelet Aya Hayak was elected by the shareholders has served as an externala director for an initial three-year term commencingsince July 1, 2013 and re-elected for a third three-year term at the 2019 annual general meeting of our shareholders.2013. Ms. Hayak provides financial consulting services to corporations. Hayak Ayelet was the CEO of an Automation company, and also serves as a director in several companies. Ms. Hayek holds a BA degree in accounting and business administration from the Tel Aviv College of Management and is also a Certified Public Accountant.
Ilan Erez serves has served as an externala director since July 2010, when he was elected by our shareholders for an initial three-year term commencing July 2010 and was elected by the shareholders for a fourth three-year term commencing June 2019.2010. Mr. Erez has been CFO and General Manager of AlgoSec Inc. since October 2019. AlgoSecAlgosec is a leading provider of business-driven security management software.global leader in securing application connectivity anywhere. Its software platform enables the world's most complex organizations to gain visibility, reduce risk and process changes at zero-touch across the hybrid network. Prior to that, Mr. Erez had been General Manager of 3D Systems Corporation's (NYSE: DDD) Software Business Unit from September 2016 to March 2019 and co-managed that business unit from May 2015 to September 2016. 3D Systems provides comprehensive 3D products and services, including 3D printers, print materials, on-demand manufacturing services and digital design and manufacturing tools. From 2005 to 2015, Mr. Erez served as Chief Financial Officer of Cimatron Ltd. (NASDAQ: CIMT) engaged in the design and sale of CAD/CAM software for the tool-making and discrete manufacturing industries. From 1998 to 2005 Mr. Erez served as the Chief Financial Officer of the Company. He also served as VP Operations of the Company from May 2001 to 2005. From 1996 to 1998 Mr. Erez served as Controller and Assistant to the Chief Executive Officer of Bio-Dar Ltd. From 1994 to 1996 Mr. Erez served as an auditor at Kesselman & Kesselman, a PWC member firm. Mr. Erez is a Certified Public Accountant in Israel and holds a B.A in Accounting and Economics from the Hebrew University and an LL.M. in Business Law from Bar-Ilan University.
Eli Doron is the Co-founder and CTO of Carteav, that develops and manufactures an autonomous low speed vehicle. Eli Doron is also the founder of Connesta Ltd. ("Connesta"), an Israeli high-tech company engaged in developing and providing SaaS virtual control room solutions, founded in 2011. From inception, Mr. Doron serves as the Chief Executive Officer of Connesta. Prior thereto and during 2010, Mr. Doron was the Chief Executive Officer of Computerized Electricity Systems ("CES"). Prior to joining CES, Mr. Doron was the co-founder of Radvision Ltd. (formerly NASDAQ: RVSN. Acquired by Avaya Ltd. in 2011; "Radvision"). From 1992 and until 2009 Mr. Doron served as the Chief Technology Officer of Radvision, and from 2006 and until 2009 he served as President of Radvision. Prior to founding Radvision and from 1983, Mr. Doron served at SIMTECH Advanced Training and Simulation Systems Ltd., initially as hardware manager and from 1988 as Chief Technology Officer. Prior thereto and from 1977, Mr. Doron served as an electronic engineer at MBT Israel Aircraft Industries Ltd. Mr. Doron holds a B.Sc degree in electronics and computer science from Ben-Gurion University and an M.B.A. degree from the University of Bradford in the United Kingdom.
Liron Eizenman joined the company in 2015 as Chief Executive Officer of Silicom’s North American subsidiary and led the Edge Networking Solutions strategy to its leadership position in the SD-WAN/Edge platforms market. In July 2022, Mr. Eizenman was named President and Chief Executive Officer, after spending two and a half years as the Company's Chief Operating Officer. Prior to joining Silicom, Mr. Eizenman held engineering and management roles at Microsoft and two early-stage startups. Mr. Eizenman holds a B.Sc. degree in Computer Science from the Academic College of Tel Aviv.
Eran Gilad is has served as our Chief Financial Officer from May 2005 and the Secretary of the Company from 2012. From 1995 to 2005, Mr. Gilad held senior financial and operational positions in various public and private companies operating in the high-tech field. He is a Certified Public Accountant in Israel and holds an M.A in Economics from Tel-Aviv University and a B.A in Accounting and Economics from Tel-Aviv University.
B. Compensation
In accordance with the Companies Law, the following table presents information regarding compensation actually received by our five most highly paid office holders during the year ended December 31, 2019.2022. All amounts are in USD.USD, based on the following components:
Name and Position | | Salary and Benefits(1) | | | Cash Bonus(2) | | | Equity-based Compensation(3) | | | Total | |
Avi Eizenman – Active Chairman | | | 595,803 | | | | 129,798 | | | | 369,257 | | | | 1,094,858 | |
Yeshayahu ('Shaike') Orbach – CEO and President | | | 403,137 | | | | 129,798 | | | | 369,257 | | | | 902,192 | |
Elad Blatt – Chief Strategy and Business Development Officer | | | 281,310 | | | | 48,689 | | | | 77,855 | | | | 407,854 | |
David Hendel – VP Research and Development | | | 241,555 | | | | 26,174 | | | | 77,855 | | | | 345,584 | |
Eran Gilad – CFO and Company Secretary | | | 237,804 | | | | 26,174 | | | | 77,855 | | | | 341,833 | |
(1) | "Salary and Benefits" include annual salary or service fees paid, payments to the National Insurance Institute, manager's“Salary and Benefits” include annual salary or service fees paid, payments to the National Insurance Institute, manager’s insurance and pension funds, severance, advanced education funds, basic health insurance, vacation pay, recuperation pay, tax gross-up payments, automobile-related expenses, telephone expenses and benefits and perquisites as mandated by Israeli or applicable law.
|
(2) | "Cash Bonus" includes bonus payments as recorded in our financial statements for the year ended December 31, 2019.
|
“Cash Bonus” includes bonus payments as recorded in our financial statements for the year ended December 31, 2022.
(3) | "Equity-based Compensation" includes the expense recorded in our financial statements for the year ended December 31, 2019“Equity-based Compensation” includes the expense recorded in our financial statements for the year ended December 31, 2022, with respect to equity-based compensation granted to the executive officers detailed above.
|
Avi Eizenman – Active Chairman.Salary and Benefits $518,856; Cash Bonus $308,115; Equity-based Compensation $457,933.
Yeshayahu (‘Shaike’) Orbach – Executive Vice Chairman (*). Salary and Benefits $528,465; Cash Bonus $154,058; Equity-based Compensation $457,933.
Liron Eizenman – President and CEO (*). Salary and Benefits $322,932; Cash Bonus $174,775; Equity-based Compensation $287,699.
Eran Gilad – CFO and Company Secretary. Salary and Benefits $270,172; Cash Bonus $35,123; Equity-based Compensation $103,360.
David Castiel – VP Engineering. Salary and Benefits $270,020; Cash Bonus $35,123; Equity-based Compensation $103,360.
(*)
| Yeshayahu ('Shaike') Orbach served as CEO and President until June 30, 2022, and Liron Eizenman has served as our CEO and President since July 1, 2022. |
The aggregate direct remuneration paid to all persons as a group who served in the capacity of director or office holder during the year ended December 31, 2019,2022, was 2,539US$ 3,693 thousand. The aggregate amount accrued to provide for severance payments to all persons as a group who served in the capacity of director or executive officer as of the year ended December 31, 2019,2022, was US$ 1,3631,785 thousand. The severance terms of our Chief Executive Officer and Chairman of the Board, as previously approved by the audit committee, board of directors and shareholders of the Company, and in accordance with the Amended Executive Compensation Policy of the Company, which was approved and re-approved by the shareholders, may entitle them, in certain circumstances, to additional payments. We pay cash compensation toof the
Mr. Liron Eizenman, Mr. Avi Eizenman who is an active Chairman of the Board, and to Shaike Orbach, who is the President and Chief Executive Officer.
Avi Eizenman andMr. Shaike Orbach may also be entitled to cash bonuses by meeting some pre-determined thresholds, and as calculated based on a pre-determined formula set by our Board of Directors, as approved by the annual general meeting of our shareholders for the years commencing in 2017 on June 8, 2016. Mr. Liron Eizenman, Mr. Avi Eizenman and Mr. Orbach'sOrbach’s annual cash bonuses may not exceed the value of 18 times their monthly salaries, respectively. Mr. Liron Eizenman, Mr. Avi Eizenman and Mr. Orbach'sOrbach’s annual cash bonus formulas were based on achieving one or more of the following thresholds: (i) the Company'sCompany’s actual annual revenue for each applicable year is 80% or more of the pre-determined budget target for the relevant year; and (ii) the Company'sCompany’s actual annual operating profit for each applicable year is 65% or more of the pre-determined budget target for the relevant year. The Compensation Committee may, in its sole discretion, raise or lower such annual cash bonuses by up to 30%. Furthermore, in accordance with the Company'sCompany’s recoupment policy, Mr. Liron Eizenman, Mr. Avi Eizenman and Mr. Orbach may be required to reimburse the Company for the cash bonuses (or any part thereof) paid in the previous 3 years, in the event such cash bonuses were based on financial data included in the Company'sCompany’s financial statements that were found to be inaccurate and were subsequently restated.
Non-employee directors, including External Directors within the meaning of the Companies Law, are entitled to be paid cash compensation for board and any committee member services, as applicable, in accordance with the amounts which are permitted under the Companies Regulations (Rules Regarding Compensation and Expenses of External Directors) -– 2000 enacted pursuant to the Companies Law. Office holders, including External Directors or Independent Directors, may waive their entitlement to their compensation, subject to applicable law.
Alllaw.All our office holders other than Mr. Eli Doron and the externalour independent directors are employed by us. We do not currently grant any variable bonus or equity-based compensation, nor any separation payments to our non-employee directors. Certain of the compensation previously paid to our directors was paid in the form of options which were granted under share option plans which have expired (including under the Share Option Plan (2004)), or options and RSU'sRSU’s which were and may be granted under the Silicom Ltd. -– Global Share Incentive Plan (2013), as described below.
On December 30, 2004, our shareholders adopted our Share Option Plan (2004), which expired at the end of 2014. As of March 31, 2019, there were no outstanding options under the Share Option Plan (2004) which were granted to directors and office holders.
On October 21, 2013, our board of directors adopted our Global Share Incentive Plan (2013). On April 30, 2014, the annual general meeting of our shareholders approved the Global Share Incentive Plan (2013) to qualify for incentive stock options for U.S. tax purposes. The Global Share Incentive Plan (2013) is administered by the board of directors, which determines the number of our ordinary shares available for issuance under the plan, designates the award recipients and types of awards, dates of grant, vesting periods and the exercise price of awards. Under the Global Share Incentive Plan (2013) the Company may grant awards of options, restricted shares, restricted share units ("RSUs"(“RSUs”) or other equity-based awards. The board of directors has determined that initially up to a maximum of 500,000 of our ordinary shares are reserved for issuance, subject to certain adjustments, upon the exercise of equity-based awards granted to employees, directors, office holders, consultants and service providers. On January 29, 2018, our board of directors increased the number of our ordinary shares available for issuance under the Global Share Incentive Plan (2013) by 600,000 Ordinary Shares, and on January 27, 2022, our board of directors increased the number of our ordinary shares.shares available for issuance by an additional 750,000 Ordinary. The awards are non-assignable except by the laws of descent. Certain tax advantages apply to certain of our directors, office holders and employees with respect to equity-based awards granted to them under Global Share Incentive Plan (2013).
As of December 31, 2016, our compensation committee and board of directors, respectively, have approved the grant of a total of 82,000 RSUs and 209,963 options under the Global Share Incentive Plan (2013), of which the following were granted to directors and office holders: (a) in 2014 a total of 54,000 RSUs were granted, (b) in 2015 a total of 29,999 options were granted with an exercise price of US$ 26.91, and with an expiration date upon the earlier to occur of: (i) July 28, 2023; and (ii) the closing price of the shares falling below US$ 13.46 at any time after the date of grant, (c) in 2016 a total of 29,999 options were granted with an exercise price of US$ 28.38, and with an expiration date upon the earlier to occur of: (i) June 8, 2024, or (ii) the closing price of the shares falling below US$ 14.19 at any time after the date of grant.
In January 2017, our compensation committee and board of directors, respectively, approved a grant under the Global Share Incentive Plan (2013) of a total of (a) 119,925 options of which a total of 29,999 options were granted to directors and office holders with an exercise price of US$ 39.62,, and an expiration date upon the earlier to occur of: (i) January 30, 2025, or (ii) the closing price of the shares falling below US$ 19.81 at any time after the date of grant, and (b) 78,000 RSUs were granted, of which 54,000 RSUs were granted to directors and office holders. The annual general meeting of our shareholders gave effect toapproved such grants of options and of RSUs granted to directors in their meeting on June 5, 2017.
In April, 2018, our compensation committee and board of directors, respectively, approved the grant under the Global Share Incentive Plan (2013) of a total of 137,010 options under the Global Share Incentive Plan (2013), of which 29,999 options were granted to directors and office holders. The exercise price for the options (per ordinary share) is US$ 36.11. Such options shall expire, by their terms, on the earlier to occur of: (a) April 30, 2026, orand (b) the closing price of the shares falling below US$ 18.06 at any time after the date of grant. The annual general meeting of our shareholders gave effect toapproved such grants of options to directors in their meeting on June 12, 2018.
In January 2019, our compensation committee and board of directors, respectively, approved the grant under the Global Share Incentive Plan (2013) of a total of 141,928 options under the Global Share Incentive Plan (2013), of which 29,999 options were granted to directors and office holders. The exercise price for the options (per ordinary share) is US$ 33.83. Such options shall expire, by their terms, on the earlier to occur of: (a) January 31, 2027, orand (b) the closing price of the shares falling below US$ 16.92 at any time after the date of grant. The annual general meeting of our shareholders gave effect toapproved such grants of options and of RSUs granted to directors in their meeting on June 5, 2019.
In January 2020, our compensation committee and board of directors, respectively, approved the grant of a total of 148,426 options and a total of 86,000 RSUs under the Global Share Incentive Plan (2013), of which 29,999 options and 54,000 RSUs were granted to directors and office holders. The exercise price for the options (per ordinary share) is US$ 32.54. Such options shall expire, by their terms, on the earlier to occur of: (a) June 8, 2028, and (b) the closing price of the shares falling below US$ 16.27 at any time after the date of grant. The annual general meeting of our shareholders approved such grants of options and of RSUs granted to directors in their meeting on June 8, 2020.
In January 2021, our compensation committee and board of directors, respectively, approved the grant of a total of 137,759 options under the Global Share Incentive Plan (2013), of which 29,999 options were granted to directors and office holders. The exercise price for the options (per ordinary share) is US$ 41.84. Such options shall expire, by their terms, on the earlier to occur of: (a) June 3, 2029, and (b) the closing price of the shares falling below US$ 20.92 at any time after the date of grant. The annual general meeting of our shareholders approved such grants of options granted to directors in their meeting on June 3, 2021.
In January 2022, our compensation committee and board of directors, respectively, approved the grant of a total of 121,508 options and 16,000 RSUs under the Global Share Incentive Plan (2013), of which 3,333 options were granted to an office holder. The exercise price for the options (per ordinary share) is US$ 47.98. Such options shall expire, by their terms, on the earlier to occur of: (a) January 27, 2030, and (b) the closing price of the shares falling below US$ 23.99 at any time after the date of grant and remains at such price or at a lower price for a period of at least 30 days.
In March 2022, our compensation committee and board of directors, respectively, approved the grant of a total of 26,666 options under the Global Share Incentive Plan (2013), of which 26,666 options were granted to directors and office holders. The exercise price for the options (per ordinary share) is US$ 35.69. Such options shall expire, by their terms, on the earlier to occur of: (a) June 7, 2030, and (b) the closing price of the shares falling below US$ 17.85 at any time after the date of grant and remains in such price or at a lower price for a period of at least 30 days. The Annual General Meeting of our shareholders approved such grants of options granted to directors in their meeting on June 7, 2022.
In April 2022, our compensation committee and board of directors, respectively, approved the grant of a total of 50,000 options under the Global Share Incentive Plan (2013), of which 50,000 options were granted to an office holder. The exercise price for the options (per ordinary share) is US$ 34.90. Such options shall expire, by their terms, on the earlier to occur of: (a) July 1, 2030, and (b) the closing price of the shares falling below US$ 17.45 at any time after the date of grant and remains at such price or at a lower price for a period of at least 30 days. The Annual General Meeting of our shareholders approved such grant of options in their meeting on June 7, 2022.
In March 2023, our compensation committee and board of directors, respectively, approved the grant of a total of 137,911 options and 86,000 RSUs under the Global Share Incentive Plan (2013), of which 29,999 options and 54,000 RSUs will be granted to directors and office holders,holders. The grants are subject to the approval of our 20202023 Annual General Meeting, which is likely towill convene inon June 2020.14, 2023.
As of March 31, 2020,2023, a total of 72,181143,699 of the options granted under the Global Share Incentive Plan (2013) were returned to the company after not being exercised following the cessation of employment of certain employees, as set forth in the terms of grant of such options.
C. Board Practices
Avi Eizenman was re-elected to the Board of Directors most recently on June 5, 2019,7, 2022, to serve until the Annual General Meeting to be held in the year 2022,2024, and until his successor has been duly elected, subject to the Companies Law and our Articles. Avi Eizenman is a founder of the Company and has served as a Directordirector since our inception in 1987. Shaike Orbach was re-elected to hold office as a director most recently on June 5, 2017,8, 2020, to serve until the Annual General Meeting which will take place in 2020.2023. Eli Doron was re-elected to the board of directors most recently onin June 12, 2018,3, 2021, to serve until the Annual General Meeting to be held in 2021.2024. On July 1, 2010, Mr. Ilan Erez was elected as an External Director for an initial term of three years in accordance with Section 245(a) of the Companies Law, with such term ending as of July 1, 2013. At the Annual General Meeting of our shareholders held on April 14, 2013, the shareholders re-elected Mr. Ilan Erez as an External Director for a second three-year term, and elected Ms. Ayelet Aya Hayak as an External Director for an initial three-year term, with such terms of office for the external directors commencing as of July 1, 2013. Mr. Ilan Erez and Ms. Ayelet Aya Hayak were re-elected as External Directors for a fourth three-year term and third three-year term, respectively, at the Annual General Meeting of our shareholders, which took place on June 5, 2019. Mr. Ilan Erez and Ms. Ayelet Aya Hayak were elected as directors to the board of directors on June 7, 2022, to serve until the Annual General Meeting to be held in 2025.
None of the members of the Board of Directors is entitled to receive any severance or similar benefits upon termination of his or her service with the Board of Directors, except for Avi Eizenman, who also functionsserves as the active Chairman of the Board, and Shaike Orbach, who also functionsuntil the last Annual General Meeting held on June 7, 2022 served as President and Chief Executive Officer (and currently serves as the Executive Vice Chairman of our Board), and Liron Eizenman, who serves as our President and Chief Executive Officer (See "Item“Item 6.B. – Directors and Senior Management – Compensation"Compensation” above).
In December 2007, our Audit Committee and Board of Directors approved severance arrangements for each of Mr. Avi Eizenman and Mr. Shaike Orbach, which provide for extended notice provisions and severance payments in the event of termination. The arrangements were approved by our shareholders in January 2008, and include the following main terms and conditions (identical with respect to each of Mr. Avi Eizenman and Mr. Shaike Orbach):
Notice of Termination
In December 2007, our audit committee and Board of Directors approved severance arrangements for each of Mr. Avi Eizenman and Mr. Yeshayahu ('Shaike') Orbach, which provide for extended notice provisions and severance payments in the event of termination. The arrangements were approved by our shareholders in January 2008. On April 28, 2022, Our Compensation Committee and Board of Directors approved severance arrangements for Mr. Liron Eizenman. Mr. Liron Eizenman's severance arrangements were then approved by our shareholders at the most recent Annual General Meeting, held on June 7, 2022. The severance arrangements include the following main terms and conditions (identical with respect to each of Mr. Avi Eizenman, Mr. Shaike Orbach and Mr. Liron Eizenman):
The termination of employment of Mr. Avi Eizenman, or Mr. Shaike Orbach or Mr. Liron Eizenman by him or by us, for any reason other than cause (which is generally defined as willful conduct or omission materially injurious to the company), death or disability, shall require 12 months advance written notice. If, however, following a change of control transaction, either: (i) he shall give notice of termination of his employment for good reason (which is generally defined as an adverse change to the status, responsibilities, salary or other material terms of his employment); or (ii) we shall give notice of termination of his employment for any reason other than cause or disability, 18 months advance written notice shall be required. A change of control transaction includes transactions such as sale of all or substantially all of the company'scompany’s shares or assets, or a merger, acquisition, or other reorganization in which control of our company changes following such transaction.
Severance Payments
If the employment of Mr. Avi Eizenman, or Mr. Shaike Orbach or Mr. Liron Eizenman shall be terminated for any reason other than cause, he shall be entitled to receive his last full monthly salary multiplied by the number of years (or portions thereof) that he was employed by us (i.e. the severance amount he would be entitled to receive under the Israeli law, had we terminated his employment for any reason other than cause) (the "Severance“Severance Law Amount"Amount”). If, however, his employment shall be terminated: (i) by the company for any reason other than cause or disability; or (ii) by him for a good reason following a change of control, he shall be entitled to receive one and half times the Severance Law Amount. If his employment under the arrangement is terminated by reason of death or disability, then, in addition to the above, he shall be entitled to receive a lump sum severance payment equal to his last full monthly salary multiplied by twelve 12 months.
As per Amendment 20, it was decided at the Extraordinary General Meeting of the Shareholders on July 31, 2013, to adopt the Executive Compensation Policy of the Company, which included the above referenced extended notice provisions, and severance payments in the event of termination, with respect to each of Mr. Avi Eizenman and Mr. Shaike Orbach. The Amended Executive Compensation Policy was approved by our Annual General Meeting convened in June 2019. At the Annual General Meeting, held on June 7, 2022, an Amended Executive Compensation Policy was rejected by our shareholders but following the Meeting it was approved by our compensation committee and the Board of Directors on June 12, 2022, in accordance with the Companies Law in Israel and after determining that the approval of the Amended Compensation Policy was for the benefit of the Company.
Board of Directors
Our Articles provide for a Board of Directors of not less than two and not more than eight members. At the Annual General Meeting of the Shareholders on June 8, 2016, it was decided to adopt a new Directors Voting Mechanism, and to amend the Articles accordingly. Under the new Directors Voting Mechanism, Directors are divided into three groups, Group A, Group B and Group C. Each group is brought for re-election once every three years, on a rotating basis, such that at each Annual General Meeting of the shareholders a given group of Directors is brought for election, to serve on a continuous basis for a three-year term, until the Annual General Meeting in three years'years’ time and until their respective successors are duly elected, at which point their term in office shall expire. At each Annual General Meeting, the Annual General Meeting shall be entitled to elect Directors to replace the Directors whose three-year term in office has expired, and so on ad infinitum, so that each year, the term in office of one group of directors shall expire. Other office holders serve at the discretion of the Board of Directors. The Amendedamended and Restatedrestated Articles of Association of the Company provide that any director may, subject to the provisions of the Companies Law and the approval by the Board of Directors, appoint another person to serve as an Alternate Director and may cancel such appointment. Under the Companies Law, a person who is already serving as a Directordirector will not be permitted to act as an Alternate Director. Additionally, the Companies Law prohibits a person from serving as an Alternate Director for more than one Director. Appointment of an Alternate Director for a member of a board committee is only permitted if the alternate is a member of the Board of Directors and does not already serve as a member of such committee. If the committee member being substituted is an External Director, the alternate may only be another External Director who possesses the same expertise as the External Director being substituted. The term of appointment of an Alternate Director may be for one meeting of the Board of Directors or for a specified period or until notice is given of the cancellation of the appointment. To our knowledge, no Director currently intends to appoint any other person as an Alternate Director, except if the Director is unable to attend a meeting of the Board of Directors.
External Directors
Under the Companies Law, companies registered under the laws of Israel, the shares of which have been offered to the public in or outside of Israel, are required to appoint no less than two external directors. No person may be appointed as an external director if such person is a relative (as defined in the Companies Law) of a "controlling shareholder"“controlling shareholder” or if such person, or the person'sperson’s relative, partner, employer or any entity under the person'sperson’s control, has or had, on or within the two years preceding the date of the person'sperson’s appointment to serve as External Director, any affiliation with any of either the company, any entity or person controlling, controlled by or under common control with the company,company” or relatives of such person. The term "affiliation"“affiliation” includes:
An employment relationship;
A business or professional relationship maintained on a regular basis;
Service as an office holder.
The Israeli Minister of Justice, in consultation with the ISA, may determine that certain matters will not constitute an affiliation, and has issued certain regulations with respect thereof.
If the company does not have a "controlling shareholder"“controlling shareholder” or a shareholder who holds company shares entitling him to vote at least 25% of the votes in a shareholders meeting, then the company may not appoint as an external director any person or such person'sperson’s relative, partner, employer or any entity under the person'sperson’s control, who has or had, on or within the two years preceding the date of the person'sperson’s appointment to serve as external director, any affiliation with the Chairman of the Board, Chief Executive Officer, a substantial shareholder who holds at least 5% of the issued and outstanding shares of the company or voting rights which entitle him to vote at least 5% of the votes in a shareholders meeting, or the Chief Financial Officer.
A person shall be qualified to serve as an external director only if he or she possesses "expertise“expertise in finance and accounting"accounting” or "professional qualifications".“professional qualifications.” At least one external director must possess "expertise“expertise in finance and accounting".accounting.”
A director can satisfy the requirements of having "expertise“expertise in finance and accounting"accounting” if due to his or her education, experience and qualifications he or she has acquired expertise and understanding in business and accounting matters and financial statements, in a manner that allows him or her to understand, in depth, the company'scompany’s financial statements and to spur a discussion regarding the manner in which the financial data is presented.
A public company'scompany’s board of directors must evaluate the proposed external director's "expertisedirector’s “expertise in finance and accounting"accounting”, by considering, among other things, such candidate'scandidate’s education, experience and knowledge in the following: (i) accounting and auditing issues typical to the field in which the company operates and to companies of a size and complexity similar to such company; (ii) the company'scompany’s independent public accountant'saccountant’s duties and obligations; (iii) preparation of the company'scompany’s consolidated financial statements and their approval in accordance with the Companies Law and the Israeli Securities Law.
A director is deemed to be "professionally qualified"”professionally qualified” if he or she meets any of the following criteria: (i) has an academic degree in any of the following professions: economics, business administration, accounting, law or public administration; (ii) has a different academic degree or has completed higher education in a field that is the company'scompany’s main field of operations, or a field relevant to his or her position; or (iii) has at least five years'years’ experience in any of the following, or has at least a cumulative total of at least five years'years’ experience in any two of the following: (A) a senior position in the business management of a corporation with a significant extent of business, (B) a senior public position or a senior position in public service, or (C) a senior position in the company'scompany’s main field of operations. As with a candidate's "expertisecandidate’s “expertise in finance and accounting"accounting”, the board of directors here too must evaluate the proposed external director's "professional qualification"director’s “professional qualification” in accordance with the criteria set forth above.
The declaration required by law to be signed by a candidate to serve as an external director must include a statement by such candidate concerning his or her education and experience, if relevant, in order that the board of directors may properly evaluate whether such candidate meets the requirements of having "expertise“expertise in finance and accounting"accounting” or being "professionally qualified"“professionally qualified” as set forth in the regulations. Additionally, the candidate should submit documents and certificates that support the statements set forth in the declaration.
No person may serve as an external director if the person'sperson’s position or other business activities create, or may create, a conflict of interest with the person'sperson’s responsibilities as an external director or may otherwise interfere with the person'sperson’s ability to serve as an external director. Additionally, no person may serve as an external director if the person, the person'sperson’s relative, spouse, employer or any entity controlling or controlled by the person, has a business or professional relationship with someone with whom affiliation is prohibited, even if such relationship is not maintained on a regular basis, excepting negligible relationships, or if such person received from the company any compensation as an external director in excess of what is permitted by the Companies Law. Pursuant to the recently enacted amendment to the Companies Regulations (Matters Which do not Constitute Affiliation), 2006, effective as of April 3, 2016 (the "Amendment“Amendment to the Affiliation Regulations"Regulations”), business or professional relationship maintained on a regular basis between the company and the external director will not constitute affiliation if the relationship commenced after the appointment of the external director for office, the company and the external director consider the relationship to be negligible and the audit committee approved, based on information presented to it, that the relationship is negligible, and the external director declared that he or she did not know and could not have reasonably know about the formation of the relationship and has no control over its existence or termination. If, at the time external directors are to be appointed, all current members of the board of directors who are not controlling shareholders or relatives of such shareholders are of the same gender, then at least one external director must be of the other gender.
External directors are to be elected for a term of three years by a majority vote at a shareholders'shareholders’ meeting, provided that either:
the majority includes at least a majority of the shares held by non-controlling and disinterested shareholders who are present and voting at the meeting; or
the total number of shares held by non-controlling and disinterested shareholders that voted against the election of the director does not exceed two percent of the aggregate voting rights in the company.
External directors may be re-elected for two additional terms of three years each, provided that with respect to the appointment for each such additional three-year term, one of the following has occurred: (i) the reappointment of the external director has been proposed by one or more shareholders holding together 1% or more of the aggregate voting rights in the company and the appointment was approved at the general meeting of the shareholders by the requisite majority, provided that: (1) in calculating the majority, votes of controlling shareholders or shareholders having a personal interest in the appointment as a result of an affiliation with a "controlling shareholder"controlling shareholder and abstentions are disregarded, (2) the total number of shares of shareholders who do not have a personal interest in the appointment as a result of an affiliation with a "controlling shareholder"controlling shareholder and/or who are not controlling shareholders, present and voting in favor of the appointment exceed 2% of the aggregate voting rights in the company, and (3) the external director who has been nominated in such fashion is not a "linked“linked or competing shareholder"shareholder”, and does not have or has not had, on or within the two years preceding the date of such person'sperson’s appointment to serve for another term as external director, any affiliation with a linked or competing shareholder. The term "linked“linked or competing shareholder"shareholder” means the shareholder(s) who nominated the external director for reappointment or a material shareholder of the company holding more than 5% of the shares in the company, provided that at the time of the reappointment, such shareholder(s) of the company, the "controlling shareholder"controlling shareholder of such shareholder(s) of the company, or a company under such shareholder(s) of the company'scompany’s control, has a business relationship with the company or are competitors of the company; the Israeli Minister of Justice, in consultation with the ISA, may determine that certain matters will not constitute a business relationship or competition with the company; (ii) the reappointment of the external director has been proposed by the board of directors and the appointment was approved by the majority of shareholders required for the initial appointment of an external director; or (iii) the external director has proposed himself for reappointment and the reappointment was approved in accordance with Sub-section (i) above.
However, under regulations promulgated pursuant to the Companies Law, companies whose shares are listed for trading on specified exchanges outside of Israel, including the NASDAQ Global Select, Global and Capital Markets, may elect external directors for additional terms that do not exceed three years each, beyond the three three-year terms generally applicable, provided that, if an external director is being re-elected for an additional term or terms beyond three three-year terms: (i) the audit committee and board of directors must determine that, in light of the external director'sdirector’s expertise and special contribution to the board of directors and its committees, the re-election for an additional term is to the company'scompany’s benefit; (ii) the external director must be re-elected by the required majority of shareholders and subject to the terms specified in the Companies Law; and (iii) the term during which the nominee has served as an external director and the reasons given by the audit committee and board of directors for extending his or her term of office must be presented to the shareholders prior to their approval.
Further to these regulations, a recentan amendment to the Companies Regulations (Relief for Companies Whose Shares are Registered for Trading Outside of Israel) – 2000, (the "Amendment“Amendment to the Relief Regulations"Regulations”), provides additional exemptions for such companies whose shares are listed for trading on specified exchanges outside of Israel, including the NASDAQ Global Select, Global and Capital Markets, provided that: (i) such company does not have a "controlling shareholder";controlling shareholder; and (ii) the company complies with the requirements of the foreign securities laws and stock exchange regulations applicable to companies which are incorporated under the laws of such foreign countries with regard to appointing independent directors and composition of the compensation and audit committees. Any company that satisfies the above criteria and elects to comply with the applicable foreign securities laws and stock exchange regulations, shall be exempt from the following rules under the Companies Law: (i) to have at least 2 external directors appointed to serve in a public company; (ii) at least one of the external directors is required to have financial and accounting expertise and the rest are required to have professional expertise; (iii) the external directors shall be appointed by the general meeting and subject to certain voting thresholds; (iv) if all of the board members who are not controlling shareholders are of one sex, the appointed external director shall be of the other sex; (v) all of the board committees which are empowered and authorized to exercise any of the board'sboard’s authorities must consist of at least one external director. The exemption from these rules under Amendment 1 requires that the board be composed of both male and female directors.
External directors may be removed only by the same percentage of shareholders as is required for their election, or by a court, and then only if the external directors cease to meet the statutory qualifications for their appointment, violate their duty of loyalty to the company or are found by a court to be unable to perform their duties on a full timefull-time basis. External directors may also be removed by an Israeli court if they are found guilty of bribery, fraud, administrative offenses in a company or use of inside information. Each committee of a company'scompany’s board of directors which has been granted any authority normally reserved for the board of directors must include at least one external director; provided, however, that the audit committee and compensation committee must each include all external directors then serving on the board of directors.
Following termination of service as an external director, a public company, a "controlling shareholder"controlling shareholder thereof and any entity controlled by a "controlling shareholder",controlling shareholder, may not grant any benefit, directly or indirectly, to any person who served as an external director of such public company, or to his or her spouse or child, including, not appointing such person, or his or her spouse or child, as an office holder of such public company or of any entity controlled by a "controlling shareholder"controlling shareholder of such public company, not employing such person or his or her spouse or child and not receiving professional services for pay from such person, either directly or indirectly, including through a corporation controlled by such person, all until the lapse of two years from termination of office with respect to the external director, his or her spouse or child; and with respect to other relatives of the former external director -– until the lapse of one year from termination of office.
An external director is entitled to compensation as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with service provided as an external director. At
In accordance with the Annual Shareholders MeetingAmendment to the Relief Regulations and in compliance with the terms described above in connection therewith, in July 2020, the Company elected to take advantage of the Company held on June 5, 2019, the shareholdersaforementioned exception and has chosen to opt out of the requirement to appoint external directors and regarding the composition of the audit committee and compensation committee, subject to the following conditions: (i) none of the Company's shareholders is a controlling shareholder; (ii) the Company re-electedcomplies with NASDAQ rules and regulations with respect to the composition of the Company’s audit and compensation committees; (iii) the Company complies with NASDAQ rules and regulations with respect to the requirements of independent directors. For so long as the Company meets the requisite requirements, the Company intends to apply the exemption from appointing at least two external directors under the Companies Law. Accordingly, Mr. Ilan Erez as an external director for a fourth three-year term and re-elected Ms. Ayelet Aya Hayak who were originally elected by our shareholders as an external director for a third three-year term.directors under the Companies Law, are no longer classified as external directors, but have continued to serve on the Company’s board of directors as independent directors under the NASDAQ rules.
Audit Committee
The Companies Law requires public companies to appoint an audit committee. The responsibilities of the audit committee pursuant to the Companies Law include identifying irregularities in the management of our business and approving related party transactions as required by law, classifying company transactions as extraordinary transactions or non-extraordinary transactions and as material or non-material transactions in which an office holder has an interest (which will have the effect of determining the kind of corporate approvals required for such transaction), assessing the proper function of the company'scompany’s internal audit regime and determining whether its internal auditor has the requisite tools and resources required to perform his or her role and to regulate the company'scompany’s rules on employee complaints, reviewing the scope of work of the company'scompany’s independent accountants and their fees, and implementing a whistleblower protection plan with respect to employee complaints of business irregularities. In addition, the responsibilities of the audit committee under the Companies Law also include the following matters: (i) to establish procedures to be followed in respect of related party transactions with a "controlling shareholder"controlling shareholder (where such are not extraordinary transactions), which may include, where applicable, the establishment of a competitive process for such transaction, under the supervision of the audit committee, or individual, or other committee or body selected by the audit committee, in accordance with criteria determined by the audit committee; and (ii) to determine procedures for approving certain related party transactions with a "controlling shareholder",controlling shareholder, which were determined by the audit committee not to be extraordinary transactions, but which were also determined by the audit committee not to be negligible transactions.
Under the Companies Law, an audit committee must consist of at least three directors, including all the external directors of the company, and a majority of the members of the audit committee must be independent or external directors. The Companies Law defines independent directors as either external directors or directors who: (1) meet the requirements of an external director, other than the requirement to possess accounting and financial expertise or "professional qualifications"“professional qualifications”, with Audit Committeeaudit committee confirmation of such; (2) have been directors in the company for an uninterrupted duration of less than 9 years (and any interim period during which such person was not a director which is less than 2 years shall not be deemed to interrupt the duration); and, (3) were classified as such by the company.
The following persons may not be a member of the audit committee:
The chairman of the board of directors;
Any director employed by or otherwise providing services to the company or to the "controlling shareholder"controlling shareholder or entity under such controlling shareholder'sshareholder’s control;
Any director who derives his salary primarily from a controlling shareholder;
A controlling shareholder; or
A "controlling shareholder"; or
Any relative of a "controlling shareholder".
controlling shareholder.
According to the Companies Law, (1) the chairman of the audit committee must be an external director, (2) the required quorum for audit committee meetings and decisions is a majority of the committee members, of which the majority of members present must be independent and external directors, and (3) any person who is not eligible to serve on the audit committee is further restricted from participating in its meetings and votes, unless the chairman of the audit committee determines that such person'sperson’s presence is necessary in order to present a certain matter, provided however, that company employees who are not controlling shareholders or relatives of such shareholders may be present in the meetings but not for the actual votes, and likewise, company counsel and company secretary who are not controlling shareholders or relatives of such shareholders may be present in the meetings and for the decisions if such presence is requested by the audit committee.
Pursuant to the Amendment to the Relief Regulations, companies whose shares are listed for trading on specified exchanges outside of Israel, including the NASDAQ Global Select, Global and Capital Markets, and which satisfy the criteria detailed above, are exempt from the following rules regarding the Audit Committeeaudit committee under the Companies Law: (i) the committee shall be comprised of at least 3 members, who shall include all of the external directors, and the majority of the members shall be independent; (ii) the audit committee may not include the chairman of the board, or any director employed by the Company, by a controlling shareholder or by any entity controlled by a controlling shareholder, or any director providing services to us, to a controlling shareholder or to any entity controlled by a controlling shareholder on a regular basis, or any director whose income is primarily dependent on a controlling shareholder, and may not include a controlling shareholder or any relatives of a controlling shareholder; (iii) the controlling shareholder or his relatives shall not be members of the audit committee; (iv) the chairman of the audit committee shall be an external director; (v) a person who is prohibited from being a member of the audit committee shall not be present at the committee'scommittee’s meetings; (vi) if the committee also serves as a financials committee, the rules applicable to the financials committee shall apply; (vii) the legal quorum shall be the majority of the committee members, provided that the majority of directors present are independent, at least one of whom is an external director.
Currently, Ms. Ayelet Aya Hayak, Mr. Ilan Erez and Mr. Eli Doron serve as members of our audit committee, and Mr. Ilan Erez serves as the chairperson.
Compensation Committee
Pursuant to the Companies Law, the Board of Directors of Israeli publicly traded companies are required to appoint a compensation committee comprised of at least three members, including all external directors, who must also comprise a majority of the members of the compensation committee. In addition, the chairman of the compensation committee must be an external director. Following the compensation committee'scommittee’s recommendations, the Board of Directors is required to establish a compensation policy, which includes a framework for establishing the terms of office and employment of the office holders and guidelines with respect to the structure of the variable pay of office holders. Such guidelines are the basis for adequate balance between the components of compensation, which exists when a linkage is maintained between compensation and performance and the creation of value for shareholders in the Company, while maintaining the Company'sCompany’s ability to recruit and maintain talented officeholders and incentivizing them to pursue the Company'sCompany’s objectives. In particular, an appropriate balance between the fixed component (base salary and additional benefits) and the variable component and capital compensation avoids placing an exaggerated emphasis on one component.
The following persons may not be a member of the compensation committee:
The chairman of the board of directors;
Any director employed by or otherwise providing services to the company or to the controlling shareholder or entity under such controlling shareholder'sshareholder’s control;
Any director who derives his salary primarily from a "controllingcontrolling shareholder;"
A "controlling shareholder";controlling shareholder; or
Any relative of a "controlling shareholder".
controlling shareholder.
The responsibilities of the compensation committee include the following:
1. | To recommend to the Board of Directors as to a compensation policy for office holders of the company, as well as to recommend, once every three years to extend the compensation policy subject to receipt of the required corporate approvals; |
2. | To recommend to the Board of Directors as to any updates to the compensation policy which may be required; |
3. | To review the implementation of the compensation policy by the company; |
4. | To approve transactions relating to terms of office and employment of certain company office holders, which require the approval of the compensation committee pursuant to the Companies Law; and |
5. | To exempt, under certain circumstances, a transaction relating to terms of office and employment from the requirement of approval of the shareholders meeting. |
In December 2012, our Board of Directors changed the composition of the members of our compensation committee by removing Mr. Avi Eizenman from the compensation committee, and appointing the Company'sCompany’s two external directors, Mr. Ilan Erez and Ms. Einat Domb-Har to our compensation committee, and appointing Mr. Ilan Erez as chairman of our compensation committee. On July 1, 2013, following the election of Ms. Ayelet Aya Hayak as an external director instead of Ms. Einat Domb-Har, Ms. Aya Hayak replaced Ms. Domb-Har on our compensation committee. Following the election of Mr. Eli Doron as a member of our board of directors, Mr. Eli Doron replaced Mr. Zohar Zisapel on our compensation committee. Our compensation committee has been nominated and empowered by the Board of Directors to act in accordance with the powers and prerogatives delegated to it by the Companies Law and take any decisions and make any recommendations to the Board all as set forth in the Companies Law.
Pursuant to Amendment 27 to the Companies Law, effective as of April 3, 2016 ("(“Amendment 27"27”), the audit committee may serve as the company'scompany’s compensation committee, provided that it meets the composition requirements of the compensation committee.
Pursuant to the Amendment to the Relief Regulations, companies whose shares are listed for trading on specified exchanges outside of Israel, including the NASDAQ Global Select, Global and Capital Markets, and satisfying the criteria detailed above, are exempt from the following rules regarding the Compensation Committee under the Companies Law: (i) the board of a public company is required to appoint a compensation committee; (ii) the compensation committee shall be comprised of at least 3 members, all of the external directors shall be members and shall constitute the majority of its members and the rest of the members shall be members whose terms of service are as required under the Companies Law.
Under Section 267B(a) and Parts A and B of Annex 1A of the Companies Law, which were legislated as part of Amendment 20, a company'scompany’s compensation policy shall be determined based on, and take into account, the following parameters:
a. | Advancement of the goals of the company, its working plan and its long term policy; |
b. | The creation of proper incentives for the office holders while taking into consideration, inter alia, the company'scompany’s risk management policies; |
c. | The company'scompany’s size and nature of its operations; |
d. | The contributions of the relevant office holders in achieving the goals of the company and profit in the long term in light of their positions; |
e. | The education, skills, expertise and achievements of the relevant office holders; |
f. | The role of the office holders, areas of their responsibilities and previous agreements with them; |
g. | The correlation of the proposed compensation with the compensation of other employees of the company, and the effect of such differences in compensation on the employment relations in the company; and |
h. | The long term performance of the office holder. |
In addition, the compensation policy should take into account that in the event the compensation paid to office holders shall include variable components – it should address the ability of the board of directors to reduce the value of the variable component from time to time or to set a cap on the exercise value of convertible securities components that are not paid out in cash. Additionally, in the event that the terms of office and employment include grants or payments made upon termination – such grants should take into consideration the length of the term of office or period of employment, the terms of employment of the office holder during such period, the company'scompany’s success during said period and the office holder'sholder’s contribution to obtaining the company'scompany’s goals and maximizing its profits as well as the circumstances and context of the termination.
In addition, the compensation policy must set forth standards and rules on the following issues: (a) with respect to variable components of compensation -– basing the compensation on long term performance and measurable criteria (though a non-material portion of the variable components can be discretionary awards taking into account the contribution of the office holder to the company. Pursuant to Amendment 27, variable components in the amount of up to a three month salary of the relevant office holder, on an annual basis, shall be considered a non-material portion of the variable components); (b) establishing the appropriate ratio between variable components and fixed components and placing a cap on such variable components (including a cap on the grant date value of convertible securities components that are not paid out in cash); (c) setting forth a rule requiring an office holder to return amounts paid, in the event that it is later revealed that such amounts were paid on the basis of data which prove to be erroneous and resulted in an amendment and restatement of the company'scompany‘s financial statements; (d) determining minimum holding or vesting periods for equity based variable components of compensation, while taking into consideration appropriate long term incentives; and (e) setting a cap on grants or benefits paid upon termination.
The board of directors of a company is obligated to adopt a compensation policy after considering the recommendations of the compensation committee. The final adoption of the compensation committee is subject to the approval of the shareholders of the company, which such approval is subject to certain special majority requirements, as set forth in the Companies Law, pursuant to which one of the following must be met:
(i) | the majority of the votes includes at least a majority of all the votes of shareholders who are not controlling shareholders of the company or who do not have a personal interest in the compensation policy and participating in the vote; abstentions shall not be included in the total of the votes of the aforesaid shareholders; or |
(ii) | the total of opposing votes from among the shareholders described in Sub-section (i) above does not exceed 2% of all the voting rights in the company. company. |
Nonetheless, even if the shareholders of the company do not approve the compensation policy, the board of directors of a company may approve the compensation policy, provided that the compensation committee and, thereafter, the board of directors determined, based on detailed, documented, reasons and after a second review of the compensation policy, that the approval of the compensation policy is for the benefit of the company.
Executive Compensation Policy
On July 31, 2013, an Extraordinary General Meeting of the Shareholders of the Company took place, approving the Executive Compensation Policy as later amended at the Annual General Meeting of the Shareholders held on June 5, 2019 (the "Policy"“Policy”), which had been recommended by the Compensation Committee and approved by the Board of Directors, for the Company's directors and office holders, in accordance with the requirements of the Companies Law. The Policy was approved by our shareholders at the Annual General Meeting of our shareholders, which took place on June 5, 2019. At the Annual General Meeting, held on June 7, 2022, an Amended Executive Compensation Policy was rejected by our shareholders but following the Meeting it was approved by our compensation committee and the Board of Directors on June 12, 2022, in accordance with the Companies Law in Israel and after determining that the approval of the Amended Compensation Policy was for the benefit of the Company.
The Policy includes, among other issues prescribed by the Companies Law, a framework for establishing the terms of office and employment of the office holders, a recoupment policy, and guidelines with respect to the structure of the variable pay of office holders.
Each of our compensation committee and board of directors may engage compensation advisors and other professionals to assist in formulating compensation packages in line with the Policy, including, without limitation, to assist in collecting relevant data, framing the appropriate factors to be considered and evaluating the different factors being considered.
All compensation arrangements of office holders are to be approved in the manner prescribed by applicable law. Our office holders, including External Directors or Independent Directors, may waive their entitlement to their compensation, subject to applicable law.
Our recoupment policy relating to office holder compensation allows for the recovery of all or a portion of any compensation paid to our office holders paid during the previous three years on the basis of financial data included in our financial statements in any fiscal year that were found to be inaccurate and were subsequently restated. In such event, we will seek reimbursement from the office holders to the extent such office holders would not have been entitled to all or a portion of such compensation, based on the financial data included in the restated financial statements. Our compensation committee will be responsible for approving the amounts to be recouped and for setting terms for such recoupment from time to time. Notwithstanding the aforesaid, the recoupment policy will not be triggered in the event of a financial restatement due to changes in the applicable reporting or accounting standards. The above noted recoupment policy does not derogate from any relevant recoupment or claw-back provisions under any applicable law or regulatory rules which apply to us.
All of our office holders (other than non-employee directors) may be incentivized through cash bonuses and long-term equity-based incentives to provide the office holder with a stake in our success – thus linking the office holder's long-term financial interests with the interests of our shareholders. In accordance with the Policy, the incentives are developed through a program that sets performance targets based on each office holder's role and scope. Actual payments are driven by the business and individual performance vis-à-vis the performance targets set at the beginning of the year. The formula for the performance targets and the maximum variable components payable to each office holder (other than directors) shall be presented and recommended by our Chief Executive Officer and reviewed and approved by our compensation committee and our board of directors. The formula for the performance targets and the maximum variable components payable to any employee office holders who are also directors shall be presented and recommended by our compensation committee and reviewed and approved by our board of directors and our shareholders. The maximum value of the variable compensation components for an office holder at the Company shall not exceed eighty percent of such office holder's total compensation package on an annual basis. The maximum annual value of the equity-based long-term compensation components and cash bonuses of all of our office holders shall not exceed two percent of our market cap.
Unless otherwise specified in the terms of the variable compensation of an office holder, our Policy dictates that the board of directors shall not have discretion to unilaterally reduce such office holder's variable compensation. Equity based compensation may be granted in any form permitted under our equity incentive plans, as in effect from time to time (collectively, the "Equity Incentive Plans"), including stock options, restricted share units and restricted stock. Equity grants to office holders shall be made in accordance with the terms of the Equity Incentive Plans. All equity-based incentives granted to our office holders shall be subject to vesting periods in order to promote long-term retention of the awarded office holders. Unless determined otherwise in a specific award agreement approved by the compensation committee and the board of directors, grants to our office holders other than directors shall vest gradually over a period of between two to four years. We do not have any equity ownership guidelines that require any of our office holders to hold a stated number or fixed percentage of our ordinary shares, nor do they have to continue to hold for any period of time shares in the Company which they acquired as a result of the exercise of fully vested equity grants. The value of the equity-based compensation shall be calculated on the grant date, according to acceptable valuation practices at the time of grant. The board of directors shall not have discretion to limit the value of the equity-based compensation at the time of exercise. The board of directors may, following approval by our compensation committee, extend the period of time for which an award to an office holder is to remain exercisable, or make provisions with respect to the acceleration of the vesting period of any office holder's awards, including, without limitation, in connection with a corporate transaction involving a change of control.
Our compensation committee will periodically review the Policy and monitor its implementation, and recommend to our board of directors and shareholders to amend the Policy as it deems necessary from time to time. The term of the Policy shall be three years as of the date of its re-adoption on June 8, 2016,12, 2022, during which, the Board of Directors is required to examine the Policy and revise it from time to time, if the circumstances under which it had been adopted have materially changed.
Following such three-year term, the Policy, including any revisions recommended by our compensation committee and approved by our board of directors, as applicable, will be brought once again to the shareholders for approval.
Internal Auditor
Under the Companies Law, the board of directors of a public company must appoint an internal auditor, who is nominated by the audit committee. The role of the internal auditor is to examine, among other matters, whether our actions comply with the law and orderly business procedure. Under the Companies Law, the internal auditor may be an employee of the company but not an office holder (as defined in Item 10 below), nor an affiliate, nor a relative of an office holder or affiliate, and he or she may not be our independent accountant or its representative. Yisrael Gewirtz of Fahn Kaneh Control Management Ltd. (a subsidiary of Fahn Kanne & Co. - Grant Thornton Israel) serves as our internal auditor.
D. Employees
The number of employees over the last three financial years is set forth in the table below.
As of December 31, | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | 2022 | |
Total Employees | | 255 | | | 270 | | | 260 | | | | 289 | | | | 315 | | | | 306 | |
Marketing, Sales, Customer Services | | 23 | | | 24 | | | 25 | | | | 24 | | | | 25 | | | | 27 | |
Research & Development | | 93 | | | 106 | | | 106 | | | | 123 | | | | 135 | | | | 134 | |
Manufacturing | | 123 | | | 125 | | | 110 | | | | 124 | | | | 138 | | | | 127 | |
Corporate Operations and Administration | | 16 | | | 15 | | | 19 | | | | 18 | | | | 17 | | | | 18 | |
As of March 31, 2020,2023, we had 268309 employees, including 2327 in marketing, sales and customer services, 113136 in research and development, 114129 in manufacturing, and 1817 in corporate operations and administration. All such employees, except for 2125 employees of our subsidiariessubsidiary in the United States and 4338 employees of our subsidiary in Denmark, are based in Israel. We consider our relations with our employees excellent and have never experienced a labor dispute, strike or work stoppage. None of our employees are represented by a labor union. We do not employ a significant number of temporary employees, but we do use temporary employees from time to time, as necessary.
In Israel we are subject to certain labor statutes and national labor court precedent rulings, as well as to certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations including the Industrialists' Associations. These provisions of collective bargaining agreements are applicable to our Israeli employees by virtue of expansion orders issued in accordance with relevant labor laws by the Israeli Ministry of Labor and Welfare, and which apply such agreement provisions to our employees even though they are not directly part of a union that has signed a collective bargaining agreement. The laws and labor court rulings that apply to our employees principally concern the minimum wage laws, procedures for dismissing employees, determination of severance pay, leaves of absence (such as annual vacation or maternity leave), sick pay and other conditions for employment. The expansion orders which apply to our employees principally concern the requirement for length of the work day and workweek, mandatory contributions to a pension fund, annual recreation allowance, travel expenses payment and other conditions of employment. We generally provide our employees with benefits and working conditions beyond the required minimums.
Israeli law generally requires severance pay, which may be funded by managers' insurance and/or a pension fund described below, upon the retirement or death of an employee or termination of employment without cause (as defined in the law). The payments to the managers' insurance and/or pension fund in respect of severance pay amount to approximately 8.33% of an employee's wages, in the aggregate. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the United States Social Security Administration. Such amounts also include payments for national health insurance. The payments to the National Insurance Institute (including payments for healthcare insurance) are paid on a differential basis, such that with respect to the part of the employer's wage which is equal to up to 60% of the average wage in Israel, the employer is required to pay an amount equal to 3.45% of such part of the employee's wage and the employee is required to pay an amount equal to 3.50% of such part of the employee's wage, and for the remainder of the employee's wage, the employer is required to pay an amount equal to 7.50% of such part of the employee's wage and the employee is required to pay an amount equal to 12% of such part of the employee's wage.
As required by applicable law, we contribute to either a fund known as managers' insurance or to a pension fund, or to a combination of both. Such practice was further reinforced in July 1, 2008, when we entered into agreements with a majority of our employees in order to implement Section 14 to the Severance Pay Law ("Section 14"), according to which the payment of monthly deposits by us into managers' insurance and/or pension fund are in respect of severance obligation to such employees. See Note 11 of our consolidated financial statements. These funds provide a combination of savings plan, insurance and severance pay benefits to the employee, giving the employee a lump sum payment upon retirement and securing the severance pay or part of it, if legally entitled, upon termination of employment. Each employee contributes an aggregate amount equal to 6% of his or her base salary to such funds, and we contribute, in the aggregate, an additional 14.83% to 15.83% of the employee's base salary, with such amount including the 8.33% which is contributed as severance pay as noted above. The monthly contributions as mentioned above constitute a majority of the required payment for severance pay.For employees without a Section 14 arrangement as of their commencement date, the Company designates a separate portion of its funds and attributes them to its severance payment obligations. Additionally, the Company makes provisions in its books concerning any additional severance payments liability.
E. Share Ownership
The following table sets forth, as of March 31, 2020,April 15, 2023, the number of shares owned by our office holders, directors and senior management. The percentages shown are based on 7,231,9076,756,289 ordinary shares outstanding as of March 31, 2020:2023:
Name | | Number of Shares and Options Owned1 | | | Percent of Outstanding Shares | | | Number of Shares and Options Owned1 | | | Percent of Outstanding Shares | |
Avi Eizenmann | | 305,750 | | | 4.13 | % | |
Avi Eizenman | | | | 344,916 | | | | 4.96 | % |
Shaike Orbach | | * | | | * | | | | * | | | | * | |
Eli Doron | | * | | | * | | | | * | | | | * | |
Ayelet Aya Hayak | | * | | | * | | | | * | | | | * | |
Ilan Erez | | * | | | * | | | | * | | | | * | |
Liron Eizenman | | | | * | | | | * | |
Eran Gilad | | * | | | * | | | | * | | | | * | |
All directors and office holders as a group | | 372,248 | | | 5.03 | % | | | 376,915 | | | | 5.42 | % |
* | Denotes ownership of less than 1% of the outstanding shares. |
(1) | The table above includes the number of shares and options that are exercisable within 60 days of March 31, 2020.April 15, 2023. Ordinary shares subject to these options are deemed beneficially owned for the purpose of computing the ownership percentage of the person or group holding these options, but are not deemed outstanding for purposes of computing the ownership percentage of any other person. Except where otherwise indicated, and subject to applicable community property laws, based on information furnished to us by such owners or otherwise disclosed in any public filings, to our knowledge, the persons and entities named in the table have sole voting and dispositive power with respect to all shares shown as beneficially owned by them. |
See also "Item 6 – Directors and Senior Management – Compensation".Compensation."
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONSItem 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
A. Major Shareholders
The shareholdersfollowing table sets forth, as of the Company who beneficially own over 5% or more of each class of shares, as well asMarch 31, 2023, the number of shares ownedOrdinary Shares, including options and the percentage of outstanding shareswarrants to purchase Ordinary Shares exercisable within 60 days, owned by each,(i) all shareholders known to the Company to own more than five percent (5%) of the Company's Ordinary Shares and additional information, is set forth below. The(ii) all directors and officers as a group (based on 6,756,289 Ordinary Shares outstanding on that date). Each of our shareholders has identical voting rights of our major shareholders do not differ from the voting rights of other holders of our ordinarywith respect to its shares. All of the information with respect to beneficial ownership of the Ordinary Shares is given to the best of our knowledge. Except where otherwise indicated, and subject to applicable community property laws, we believe, based on information furnished to us by such owners or otherwise disclosed in any public filings, that the beneficial owners of the Ordinary Shares listed below have sole dispositive and voting power with respect to such Ordinary Shares.
Name of Shareholder | Number of Shares and Options Owned(1) | Percentage of Outstanding Shares |
Wellington Management Group LLP(2) | 618,848 | 9.16% |
Systemic Financial Management, LP(3) | 591,091 | 8.75% |
First Wilshire Securities Management, Inc. (4) | 558,510 | 8.28% |
| | Number of Shares and Options Owned(1) | | | Percentage of Outstanding Shares | |
Wellington Management Group LLP(2) | | | 1,003,394 | | | | 13.87 | % |
Wellington Trust Company, NA(3) | | | 930,035 | | | | 12.86 | % |
Wellington Trust Company, National Association Multiple Common Trust Funds Trust, Micro Cap Equity Portfolio(4) | | | 425,033 | | | | 5.88 | % |
Zohar Zisapel(5) | | | 723,706 | | | | 10.01 | % |
Ibex Investors LLC/ Justin B. Borus, Ibex Israel Fund LLLP/Ibex GP LLC/Ibex Investment Holdings LLC/Ibex Investment Holdings II LLC (6) | | | 530,700 | | | | 7.34 | % |
Dov Yelin/Yair Lapidot/Yelin Lapidot Holdings Management Ltd./ Yelin Lapidot Mutual Funds Management Ltd. (7) | | | 470,091 | | | | 6.50 | % |
| (1) | The table above includes the number of shares and options that are exercisable within 60 days of March 31, 2020.2023. Ordinary shares subject to these options are deemed beneficially owned for the purpose of computing the ownership percentage of the person or group holding these options, but are not deemed outstanding for purposes of computing the ownership percentage of any other person. Except where otherwise indicated, and subject to applicable community property laws, based on information furnished to us by such owners or otherwise disclosed in any public filings, to our knowledge, the persons and entities named in the table have sole voting and dispositive power with respect to all shares shown as beneficially owned by them. All the information detailed in this table is as set forth in major shareholders' public filings, unless stated otherwise. |
| (2) | As reported on the Schedule 13G/A filed by Wellington Management Group LLP, Wellington Group Holdings LLP, Wellington Investment Advisors Holdings LLP and Wellington Management Company LLP with the SEC on January 28, 2020.February 6, 2023. The securities as to which the Schedule was filed are owned of record by clients of one or more investment advisers, which are directly or indirectly owned by Wellington Management Group LLP.LLP, the identities of which are set forth in Exhibit A of such Schedule 13G/A. |
Those clients have the right to receive, or the power to direct the receipt of, dividends from, or the proceeds from the sale of, such securities. No such client is known to have such right or power with respect to more than 5% of this class of securities, except for: Wellington Trust Company, NA and Wellington Trust Company, National Association Multiple Common Trust Funds Trust, Micro Cap Equity Portfolio.(“Wellington”).
The relevant entities that beneficially own shares of the security class that wereAs reported on Schedule 13G filed by Wellington with the Schedule are: Wellington Group Holdings LLP, Wellington Investment Advisors LLP, Wellington Management Global Holdings, Ltd., one or more of the following investment advisers (the "Wellington Investment Advisers"): Wellington Management Company LLP, Wellington Management Canada LLC, Wellington Management Singapore Pte Ltd., Wellington Management Hong Kong Ltd., Wellington Management International Ltd., Wellington Management Japan Pte Ltd., Wellington Management Australia Pty Ltd.
TheSEC on February 6, 2023, those securities as to which the Schedule was filed by Wellington, Management Group LLP,in its capacity as parent holding company of certain holding companies and the Wellington Investment Advisers,investment adviser, are owned of record by its clients. Those clients have the right to receive, or the power to direct the receipt of, dividends from, or the Wellington Investment Advisers. Wellington Investment Advisors Holdings LLP controls directly,proceeds from the sale of, such securities. No such client is known to have such right or indirectly through Wellington Management Global Holdings, Ltd., the Wellington Investment Advisers. Wellington Investment Advisors Holdings LLP is owned by Wellington Group Holdings LLP. Wellington Group Holdings LLP is owned by Wellington Management Group LLP.power with respect to more than five percent of this class of securities.
| (3) | As reported on Schedule 13G filed by Wellington Trust Company, NASystemic Financial Management, LP with the SEC on January 29, 2020. The securities as to which the Schedule was filed by Wellington Trust Company, NA, in its capacity as investment adviser, are owned of record by clients of Wellington Trust Company, NA. Those clients have the right to receive, or the power to direct the receipt of, dividends from, or the proceeds from the sale of, such securities. No such client is known to have such right or power with respect to more than five percent of this class of securities.February 13, 2023. |
| (4) | As reported on Schedule 13GSchedules 13G/A filed by Wellington Trust Company, National Association Multiple Common Trust Funds Trust, Micro Cap Equity PortfolioFirst Wilshire Securities Management, Inc. with the SEC on January 30, 2020.February 15, 2023. |
| (5) | As reported on Schedule 13D/A filed by Zohar Zisapel with the SEC on January 16, 2019.
|
| (6) | As reported on Schedule 13G filed by Ibex Investors LLC (the "Investment Manager"), Justin B. Borus, Ibex Israel Fund LLLP (the "Fund"), Ibex GP LLC (the "General Partner"), Ibex Investment Holdings LLC ("IM Holdings") and Ibex Investment Holdings II LLC ("GP Holdings") with the SEC on January 24, 2020, the Fund is a private investment vehicle. The Fund directly beneficially owns the Company's ordinary shares detailed in the Schedule. The Investment Manager is the investment manager of the Fund. IM Holdings is the sole member of the Investment Manager. The General Partner is the general partner of the Fund. GP Holdings is the sole member of the General Partner. Justin B. Borus is the manager of the Investment Manager, IM Holdings, the General Partner and GP Holdings. Justin B. Borus, the Investment Manager, IM Holdings, the General Partner and GP Holdings may be deemed to beneficially own the Company's ordinary shares reported in the Schedule, directly beneficially owned by the Fund. Each of the reporting person detailed in the Schedule disclaimed beneficial ownership with respect to any shares other than the shares directly beneficially owned by such reporting person.
|
| (7) | As reported on the Schedules 13G/A filed by each of Dov Yelin ("Yelin"), Yair Lapidot ("Lapidot"), Yelin Lapidot Holdings Management Ltd. ("Yelin Lapidot Holdings"), and Yelin Lapidot Mutual Funds Management Ltd. (collectively, "Yelin Lapidot") with the SEC on January 27, 2019, all ordinary shares of the Company are beneficially owned by provident funds managed by Yelin Lapidot Provident Funds Management Ltd. and/or mutual funds managed by Yelin Lapidot Mutual Funds Management Ltd. (the "Subsidiaries"), each a wholly-owned subsidiary of Yelin Lapidot Holdings. Messrs. Yelin and Lapidot each own 24.38% of the share capital and 25.004% of the voting rights of Yelin Lapidot Holdings, and are responsible for the day-to-day management of Yelin Lapidot Holdings. The Subsidiaries operate under independent management and make their own independent voting and investment decisions. Any economic interest or beneficial ownership in any of the securities covered by the Schedule is held for the benefit of the members of the provident funds or mutual funds, as the case may be. According to the Schedule, the Schedule shall not be construed as an admission by Messrs. Yelin and Lapidot, Yelin Lapidot Holdings or the Subsidiaries that he or it is the beneficial owner of any of the securities covered by the Schedule, and each of Messrs. Yelin and Lapidot, Yelin Lapidot Holdings, and the Subsidiaries disclaims beneficial ownership of any such securities.
|
The Company's major shareholders do not have different voting rights.
As of March 31, 2020,2023, there were approximately 5five record holders of ordinary shares, including approximately 2three record holders in the United States. Collectively, these 2three record holders in the United States held less than 1% of the outstanding ordinary shares.
B. Related Party Transactions
All related party transactions and arrangements (or modifications of existing ones) with our related parties, transactions in which office holders of the Company have a personal interest, or transactions which raise issues of such office holders' fiduciary duties, are subject to the applicable corporate approvals under the Companies Law. Without giving effect to the buyback purchases described at Item 16E, the following transactions are considered "related party transactions" for this Item 7B:
On July 22, 2002, our audit committee and the Board of Directors approved an Indemnification Agreement with our directors and office holders. Our shareholders approved the terms of this agreement in a General and Extraordinary Meeting held on January 7, 2004. In Amendment 3 to the Companies Law, effective as of 2005, the instances in which a company may indemnify its office holders and directors were broadened. In December 2007, each of our Audit Committeeaudit committee and Board of Directors approved a new form of Indemnification Agreement with our directors and office holders so as to reflect this amendment. Our shareholders approved the terms of this new Indemnification Agreement in January 2008. According to Amendment 16 to the Israeli Securities Law, and to a corresponding amendment to the Companies Law, both effective as of 2011, the ISA is authorized to impose administrative sanctions against companies like ours and their office holders for certain violations of the Israeli Securities Law or the Companies Law. These sanctions include monetary sanctions and certain restrictions on serving as a director or senior office holder of a public company for certain periods of time. The Israeli Securities Law and the Companies Law provide that only certain types of such liabilities may be reimbursed by indemnification and insurance. Specifically, legal expenses (including attorneys' fees) incurred by an individual in the applicable administrative enforcement proceeding and certain compensation payable to injured parties for damages suffered by them are permitted to be reimbursed via indemnification or insurance, provided that such indemnification and insurance are authorized by the company's articlesCompany's Articles of association,Association, and receive the requisite corporate approvals. In January 2012, each of our audit committee and Board of Directors approved a new form of Indemnification Agreement with our directors and office holders so as to reflect this amendment, and our shareholders approved these amendments to the Articles of Association and a revised form of Indemnification Agreement for directors at the Annual General Meeting of the Shareholders held on April 11, 2012.
The Indemnification Agreement provides that our directors and office holders will be exempt from liability in certain circumstances. The Indemnification Agreement also provides for the indemnification by the Company for certain obligations and expenses imposed on the office holder in connection with actacts performed in his or her capacity as an office holder of the Company. This right to indemnification is limited, and does not cover, among other things, a breach of an office holder's duty of loyalty, a willful breach of an office holder's duty of care, or a reckless disregard for the circumstances or consequences of a breach of a duty of care. The right to indemnification also does not cover acts that are taken intentionally to unlawfully realize personal gain. The maximum amount of our liability under these Indemnification Agreements for any monetary obligation imposed on an office holder or a director in favor of another person by a judgment is currently US$ 3,000,000 for each instance of a covered scenario. In addition, we would be liable to indemnify the office holder or director for all reasonable litigation expenses with respect to certain proceedings. We have maintained liability insurance for our directors and office holders. On September 23, 2007, our shareholders approved the procurement of a policy, which provides for total coverage of up to US$ 4,000,000. All of our directors are parties to our Indemnification Agreements and are covered by our directors and office holders' insurance policy.
As per Amendment 20, it was decided on July 31, 2013, at the Extraordinary General Meeting of the Shareholders to adopt the Executive Compensation Policy of the Company, which was recommended by our Compensation Committee and approved by our Board of Directors, and was re-approved by our Compensation Committee, Board of Directors and ShareholdersShareholders. Most recently on June 8, 2016.7, 2022 our shareholders failed to approve our amended Executive Compensation Policy, but thereafter, it was approved by our Board of Directors on June 12, 2022 in accordance with the Companies Law and after determining that approval of the policy was for the benefit of the Company. Our approved Executive Compensation Policy includes the above referenced form of Indemnification Agreement to be entered into by the Company with our directors and office holders serving in such capacities from time to time, as well as the above referenced directors and office holders liability insurance policy. Under the Executive Compensation Policy, any change to the Indemnification Agreement or the insurance policy, including the cost and/or any changes which materially depart from the key terms of the current agreement and/or insurance policy (provided that such changes apply equally to all executives of the Company, including directors) will be submitted to the Company's compensation committee and the boardBoard of directorsDirectors for their approval but shall not, unless required by law or the Company's Articles of Association, be presented at a General Meeting of the shareholders.Shareholders.
Compensation Package for Liron Eizenman, the Company's President and Chief Executive Officer
In June 2022, following the approval of the Company's Compensation Committee and Board of Directors, the Company's shareholders approved a compensation package for Liron Eizenman. The approved Compensation Package consists of (i) an amendment to Liron Eizenman's compensation structure and (ii) a severance agreement, identical to the previous CEO severance agreement. The principal terms of the compensation package, which commenced on July 1, 2022, are as follows:
Gross monthly base salary of NIS 70,000.
| • | Entitlement to the Chief Executive Officer annual bonus upon the terms and in accordance with the formula approved by the Company’s shareholders at the Annual General Meeting held on June 8, 2016 (the “CEO Bonus”), provided only that Mr. Liron Eizenman will only be entitled to 50% of the applicable CEO Bonus for 2022, as and when determined by the Company's Compensation Committee and Board of Directors (with the remaining portion being payable to Mr. Shaike Orbach). |
Standard social benefits package applicable to all full-time employees of the Company.
Severance/Termination provisions.
In addition, at the June 2022 General Meeting, our shareholders approved a grant to Liron Eizenman of 50,000 Plan Options to purchase Ordinary Shares of the Company, pursuant to the Plan.
See also "Item 6 – Directors and Senior Management – Compensation".Compensation."
Item 8. FINANCIAL INFORMATIONItem 8. | FINANCIAL INFORMATION |
A. Consolidated Statements and Other Financial Information
Our consolidated financial statements and other financial information are included herein on pages F-1 through F-44.F-44 [To confirm].
A1. See Item 18 for our consolidated financial statements.
A2. See Item 18 for our consolidated financial statements, which cover the last three financial years.
A3. See page F-3 for the audit report of our accountants, entitled "Report of Independent Registered Public Accounting Firm".Firm."
A4. Not applicable.
A5. Not applicable.
A6. See Note 13A to our audited consolidated financial statements included in Item 18 of this annual report for the geographic distribution of our sales based on the location of the customer.
A7. Litigation
As of the date of this Annual Report, we are not a party to any material litigation and we are not aware of any pending or threatened litigation that would have a material adverse effect on us or our business.
On January 14, 2013, we announced that our Board of Directors has adopted a policy for distributing dividends, subject to all applicable laws. According to this policy, each year we will distribute a dividend of up to 50% of our annual distributable profits. Our Board of Directors reserves the right to declare additional dividend distributions, to change the rate of dividend distributions (either as a policy or on a one-time basis), to cancel a specific distribution or to cancel the policy as a whole at any time, at its sole discretion. According to the said policy, the actual distribution of a dividend will be subject to meeting the conditions required by applicable law, including the distribution tests set forth in Section 302 of the Companies Law, and to the specific decision of the Company's Board of Directors for each distribution. On March 15, 2018, our Board of Directors adopted a resolution to suspend the dividend policy until further notice.
Since the date of the annual financial statements included in this Annual Report, no significant changes have occurred.
Item 9. THE OFFER AND LISTING81
Item 9. | THE OFFER AND LISTING |
A. Offer and Listing Details
Markets and Share Price History
Following our delisting from trading on the TASE, the only trading market for our ordinary shares is the NASDAQ Global Select Market, where our shares have been listed and traded under the symbol SILC since January 2, 2014. Prior thereto, our shares were listed and traded on the NASDAQ Global Market (previously NASDAQ National Market) under the symbol SILC (previously SILCF) from February 11, 2008. Prior thereto, our shares were listed and traded on the NASDAQ Capital Market (previously known as the NASDAQ Small-Cap).
The table below sets forth the high and low reported sales prices in Dollars of our ordinary shares, as reported by NASDAQ during the indicated periods:
PERIOD | | LOW | | | HIGH | |
LAST 6 CALENDAR MONTHS | | | | | | |
March 2020 | | | 20.93 | | | | 31.49 | |
February 2020 | | | 29.00 | | | | 35.79 | |
January 2020 | | | 32.75 | | | | 37.60 | |
December 2019 | | | 31.51 | | | | 33.78 | |
November 2019 | | | 30.19 | | | | 34.20 | |
October 2019 | | | 29.30 | | | | 35.02 | |
FINANCIAL QUARTERS DURING THE PAST TWO YEARS | | | | | | | | |
First Quarter 2020 | | | 20.93 | | | | 37.60 | |
Fourth Quarter 2019 | | | 29.30 | | | | 35.02 | |
Third Quarter 2019 | | | 28.59 | | | | 34.03 | |
Second Quarter 2019 | | | 28.63 | | | | 39.70 | |
First Quarter 2019 | | | 30.58 | | | | 40.36 | |
Fourth Quarter 2018 | | | 32.10 | | | | 45.50 | |
Third Quarter 2018 | | | 36.59 | | | | 44.68 | |
Second Quarter 2018 | | | 33.12 | | | | 43.50 | |
FIVE MOST RECENT FULL FINANCIAL YEARS | | | | | | | | |
2019 | | | 28.59 | | | | 40.36 | |
2018 | | | 32.00 | | | | 77.95 | |
2017 | | | 34.86 | | | | 77.05 | |
2016 | | | 25.48 | | | | 44.00 | |
2015 | | | 24.86 | | | | 48.43 | |
PERIOD | | LOW | | | HIGH | |
March 2023 | | | 35.25 | | | | 39.25 | |
February 2023 | | | 37.55 | | | | 42.53 | |
January 2023 | | | 40.81 | | | | 50.00 | |
December 2022 | | | 40.75 | | | | 46.94 | |
November 2022 | | | 41.91 | | | | 46.00 | |
October 2022 | | | 34.36 | | | | 45.78 | |
FINANCIAL QUARTERS DURING THE PAST TWO YEARS | | | | | | | | |
First Quarter 2023 | | | 35.25 | | | | 50.00 | |
Fourth Quarter 2022 | | | 34.36 | | | | 46.94 | |
Third Quarter 2022 | | | 32.30 | | | | 44.47 | |
Second Quarter 2022 | | | 31.30 | | | | 39.57 | |
First Quarter 2022 | | | 35.79 | | | | 51.66 | |
Fourth Quarter 2021 | | | 36.02 | | | | 52.75 | |
Third Quarter 2021 | | | 40.25 | | | | 46.11 | |
Second Quarter 2021 | | | 38.97 | | | | 47.51 | |
FIVE MOST RECENT FULL FINANCIAL YEARS | | | | | | | | |
2022 | | | 31.30 | | | | 51.66 | |
2021 | | | 36.02 | | | | 59.27 | |
2020 | | | 20.93 | | | | 42.55 | |
2019 | | | 28.59 | | | | 40.36 | |
2018 | | | 32.00 | | | | 77.95 | |
On December 27, 2005, our shares commenced trading on the TASE in Israel under the symbol "SILC"."SILC." On October 26, 2015, our Board of Directors resolved to act to delist the Company's shares from trading on the TASE. The last trading day in our shares on the TASE was January 26, 2016, and on January 28, 2016, our shares were delisted from trading on the TASE. The following table sets forth, for the periods indicated, the high and low reported sales prices, in NIS, of the ordinary shares on the TASE, until delisted from trading as set forth above:
PERIOD | | LOW | | | HIGH | |
FIVE MOST RECENT FULL FINANCIAL YEARS | | | | | | |
2015 | | | 96.01 | | | | 189.60 | |
Item 10. ADDITIONAL INFORMATION82
Item 10. | ADDITIONAL INFORMATION |
A. Share Capital
Not applicableapplicable.
B. Memorandum and Articles of Association
Articles of Association
Our shareholders approved our Amendedamended and Restatedrestated Articles of Association on January 24, 2008, as well as certain additional amendments to the Articles of Association on April 11, 2012, June 8, 2016 and June 8, 2016.7, 2022. Our objective as stated in the Articles of Association is to carry on any business and perform any act which is not prohibited by law.
We currently have only one class of outstanding shares, our Ordinary Shares, having a nominal value of NIS 0.01 per share. Holders of Ordinary Shares have one vote per share, and are entitled to participate equally in the payment of dividends and share distributions and, in the event of a liquidation of the Company, in the distribution of assets after satisfaction of liabilities to creditors. No preferred shares are currently authorized.
Our Articles of Association require that we hold our annual general meeting of shareholders each year no later than 15 months from the last annual meeting, at a time and place, either within or without the State of Israel, determined by the board of directors, upon 21 days' prior notice to our shareholders or 35 days' prior notice to the extent required with respect to certain matters as required under the regulations to the Companies Law. In general, no business may be commenced at a general meeting until a quorum of two or more shareholders holding at least 33 1/3% of the voting rights is present in person or by proxy. Shareholders may vote in person or by proxy.
In general, a simple majority is required to amend our Articles.Articles of Association.
Pursuant to the Companies Law, resolutions regarding the following matters must be passed at a general meeting of shareholders:
Appointment or termination of our auditors;
Appointment and dismissal of external directors, unless the company elects to opt-in to the exemptions promulgated under the Amendment to the Relief Regulations as detailed above, under which there is no requirement to appoint external directors;
Approval of interested party acts and transactions requiring general meeting approval as provided in Sections 255 and 268 to 275 of the Companies Law;
A merger as provided in Section 320(a) of the Companies Law;
The exercise of the powers of the board of directors, if the board of directors is unable to exercise its powers and the exercise of any of its powers is vital for our proper management, as provided in Section 52(a) of the Companies Law;
Amendments to our Articles;Articles of Association; and
Approval of an increase or decrease of the registered share capital.
An extraordinary general meeting may be convened by demand of two directors or by written request of one or more shareholders holding at least 5% of our issued share capital and 1% of the voting rights or one or more shareholders holding at least 5% of the voting rights. Shareholders requesting a special meeting must include in their request all relevant information, including the reason that such subject is proposed to be brought before the special meeting.
Our ordinary shares may generally be freely transferred under our amended and restated Articles of Association, unless the transfer is restricted or prohibited by applicable law or the rules of the stock exchange on which the shares are traded. The ownership or voting of our ordinary shares by non-residents of Israel is not restricted in any way by our Amendedamended and Restatedrestated Articles of Association or the laws of the State of Israel, except under certain circumstances for ownership by nationals of certain countries that are, or have been, in a state of war with Israel.
We are subject to the provisions of the Companies Law. The Companies Law codifies the fiduciary duties that "office holders", including directors and executive office holders, owe to a company. An office holder, as defined in the Companies Law, is a general manager (also referred to as the "chief executive officer"), chief business manager, deputy general manager, vice general manager, executive Vice-President, Vice-President, any other person assuming the responsibilities of any of the foregoing positions without regard to such person's title, as well as a director, or another manager directly subordinate to the general manager. Each person listed in the table in "Item 6 – Directors, Senior Management and Employees" above is an office holder of Silicom.
The Companies Law requires that an office holder of a company promptly disclose, no later than the first board meeting in which such transaction is discussed, any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company. In addition, if the transaction is an extraordinary transaction, the office holder must also disclose any personal interest held by the office holder's relative (which includes for these purposes any members of his/her (or his/her spouse's) immediate family or the spouses of any such members of his or her (or his/her spouse's) immediate family), or by any corporation in which the office holder or the office holder's relative is a 5% or greater shareholder, holder of 5% or more of the voting power, director or general manager or in which he or she has the right to appoint at least one director or the general manager. An extraordinary transaction is defined as a transaction not in the ordinary course of business, not on market terms, or that is likely to have a material impact on the company's profitability, assets or liabilities.
In the case of a transaction in which an office holder of the company has a personal interest and which is not an extraordinary transaction, after the office holder complies with the above disclosure requirement, board approval is required unless the articles of association of the company provide otherwise. The transaction must be for the benefit of the company. If the transaction is an extraordinary transaction, then, in addition to any approval required by the articles of association, it must also be approved by the audit committee and by the board of directors, and, under specified circumstances, by a meeting of the shareholders, as well.
Subject to certain exceptions provided for in the regulations to the Companies Law, agreements regarding directors' terms of compensation require the approval of the compensation committee, board of directors and the shareholders of the company. The transaction must be for the benefit of the company.
In matters concerning an extraordinary transaction in which a person has a personal interest, as well as matters concerning his or her terms of compensation, he or she shall not be permitted to vote on the matter or be present in the audit committee or board of directors meeting in which the matter is considered, however, with respect to an office holder, he/she may be present at the meeting discussions if the chairman determines that the presence of the office holder is necessary in order to present the matter. However, if a majority of the audit committee or of the board of directors has a personal interest in the matter then:
All of the directors are permitted to vote on the matter and attend the meeting in which the matter is considered; and
The matter requires approval of the shareholders at a general meeting.
According to the Companies Law, the personal interest disclosure requirements discussed above also apply to a "controlling shareholder" of a public company. Such requirements also apply to certain shareholders of a public company who have a personal interest in the adoption by the shareholders of certain proposals with respect to (i) certain private placements that will increase their relative holdings in the company, (ii) certain special tender offers or forced bring along share purchase transactions, (iii) election of external directors, (iv) approval of a compensation policy governing the terms of employment and compensation of office holders, (v) approval of the terms of employment and compensation of the general manager, (vi) approval of the terms of employment and compensation of office holders of the company when such terms deviate from the compensation policy previously approved by the company's shareholders, and (vii) approving the appointment of either (1) the chairman of the board or his/her relative as the chief executive officer of the company, or (2) the chief executive officer or his/her relative as the chairman of the board of directors of the company. If any shareholder casting a vote at a shareholders meeting in connection with such proposals as aforesaid does not notify the company if he, she or it has a personal interest with respect to such proposal, his, her or its vote with respect to the proposal will be disqualified.
The term "controlling shareholder" is defined as a shareholder who has the ability to direct the activities of a company, other than if this power derives solely from the shareholder's position on the board of directors or any other position with the company, and the definition of "controlling shareholder" in connection with matters governing: (i) extraordinary transactions with a "controlling shareholder" or in which a "controlling shareholder" has a personal interest, (ii) certain private placements in which the "controlling shareholder" has a personal interest, (iii) certain transactions with a "controlling shareholder" or relative with respect to services provided to or employment by the company, (iv) the terms of employment and compensation of the general manager, and (v) the terms of employment and compensation of office holders of the company when such terms deviate from the compensation policy previously approved by the company's shareholders, also includes shareholders that hold 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company (and the holdings of two or more shareholders which each have a personal interest in such matter will be aggregated for the purposes of determining such threshold).
In general, extraordinary transactions with a "controlling shareholder" or in which a "controlling shareholder" has a personal interest, and agreements relating to non-office holder employment and compensation terms of a "controlling shareholder" (or a relative of such) or to the provision of services to the company by such "controlling shareholder" (or relative of such), require the approval of the audit committee, the board of directors and the shareholders of the company. Agreements relating to the terms of office and employment of a "controlling shareholder" (or relative of such) as an office holder in the company require the approval of the compensation committee, the board of directors and the shareholders of the company.
The shareholder approval for such matters requiring shareholder disclosure of a personal interest as noted above, generally must either include at least a majority of the shares held by non-controlling and disinterested shareholders who actively participate in the voting process (without taking abstaining votes into account), or, alternatively, the total shareholdings of the non-controlling and disinterested shareholders who vote against the transaction must not represent more than two percent of the voting rights in the company. The shareholder approval for approving the appointment of either (1) the chairman of the board or his/her relative as the chief executive officer of the company, or (2) the chief executive officer or his/her relative as the chairman of the board of directors of the company, must either include at least two-thirds of the shares held by non-controlling and disinterested shareholders who actively participate in the voting process (without taking abstaining votes into account), or, alternatively, the total shareholdings of the non-controlling and disinterested shareholders who vote against the transaction must not represent more than two percent of the voting rights in the company. Agreements and extraordinary transactions with a "controlling shareholder" or in which a "controlling shareholder" has a personal interest, or agreements relating to any employment terms of a "controlling shareholder" (or relative if such) or to the provision of services to the company by such "controlling shareholder" (or relative if such), as aforesaid, with duration exceeding three years, are subject to re-approval once every three years by the audit committee (or compensation committee, as applicable), the board of directors and the shareholders of the company. Extraordinary transactions with a "controlling shareholder" or in which a "controlling shareholder" has a personal interest may be approved in advance for a period exceeding three years if the audit committee determines such approval reasonable under the circumstances. In addition, agreements and extraordinary transactions with duration exceeding three years which were approved prior to Amendment 16 to the Companies Law, which was passed by the Israeli legislature, the Knesset, in March 2011, and which came into effect gradually during the year 2011 ("Amendment 16"), will need to be re-approved by the proper corporate actions at the later of (i) the first general meeting held after May 14, 2011, (ii) November 14, 2011, or (iii) the expiration of three years from the date on which they were originally approved, even though they were properly approved prior to the passing of the Amendment 16.
The board of directors of an Israeli company whose shares or debentures are publicly traded is obligated to adopt a compensation policy governing the terms of office and employment of office holders, after considering the recommendations of the compensation committee. The final adoption of the compensation policy is subject to the approval of the shareholders of the company. Such shareholder approval is subject to certain special majority requirements, as set forth in the Companies Law, pursuant to which the shareholder majority approval must also either include at least a majority of the shares held by non-controlling and disinterested shareholders who actively participate in the voting process (without taking abstaining votes into account), or, alternatively, the total shareholdings of the non-controlling and disinterested shareholders who voted against the transaction must not represent more than two percent of the voting rights in the company.
Nonetheless, even if the shareholders of the company do not approve the proposed compensation policy, the board of directors of a company may approve the proposed compensation policy, provided that the compensation committee and, thereafter, the board of directors resolved, based on detailed, documented, reasons and after a second review of the compensation policy, that the approval of such compensation policy is for the benefit of the company.
Pursuant to the Companies Law, the terms of office and employment of an office holder in a public company should be in accordance with the company's compensation policy. Nonetheless, provisions were established in the Companies Law that allow a company, under special circumstances, to approve terms of office and employment that are not in line with the approved compensation policy.
Terms of office and employment of office holders who are neither directors nor the general manager and which comply with the company's compensation policy require approval by the (i) compensation committee; and (ii) the board of directors. Approval of terms of office and employment for such office holders which do not comply with the compensation policy may nonetheless be approved subject to two cumulative conditions: (i) the compensation committee and thereafter the board of directors, approved the terms after having taken into account the various policy considerations and mandatory requirements set forth in the Companies Law with respect to office holder compensation, and (ii) the shareholders of the company approved the terms of office and employment for such office holders by means of the special majority required for approving the compensation policy (as detailed above). Following the Amendment to the Affiliation Regulations, non-material changes to the terms of compensation of office holders who are subordinated to the company general manager will require only general manager approval, provided that the company's compensation policy includes a reasonable range for such non-material changes.
Terms of office and employment of the general manager which comply with the company's compensation policy require approval by the (i) compensation committee; (ii) the board of directors; and (iii) the shareholders of the company by means of the special majority required for approving the compensation policy (as detailed above). Approval of terms of office and employment for the general manager which do not comply with the compensation policy may nonetheless be approved subject to two cumulative conditions: (i) the compensation committee and thereafter the board of directors, approved the terms after having taken into account the various policy considerations and mandatory requirements set forth in the Companies Law with respect to office holder compensation, and (ii) the shareholders of the company approved the terms of office and employment for the general manager which deviate from the compensation policy by means of the special majority required for approving the compensation policy (as detailed above). Notwithstanding the foregoing, a company may be exempted from receiving shareholder approval with respect to the terms of office and employment of a proposed candidate for general manager if such candidate meets certain independence criteria, the terms of office and employment are in line with the compensation policy, and the compensation committee has determined for specified reasons that presenting the matter for shareholder approval would thwart the proposed engagement. In addition, following the Amendment to the Affiliation Regulations, the terms of compensation of the general manager will not require shareholders' approval when extending or re-approving the company's engagement with its general manager, provided that such terms are not more beneficial compared to his previous compensation terms approved by the shareholders pursuant to the Companies Law and provided that such terms comply with the company's compensation policy.
Terms of office and employment of office holders (including the general manager) that are not directors may nonetheless be approved by the company despite shareholder rejection, provided that a company's compensation committee and thereafter the board of directors have determined to approve such terms of office and employment based on detailed reasoning, after having re-examined the proposed terms of office and employment, and having taken the shareholder rejection into consideration.
Terms of office and employment of directors which comply with the company's compensation policy require approval by the (i) compensation committee; (ii) the board of directors and (iii) the shareholders of the company. Approval of terms of office and employment for directors of a company which do not comply with the compensation policy may nonetheless be approved subject to two cumulative conditions: (i) the compensation committee and thereafter the board of directors, approved the terms after having taken into account the various policy considerations and mandatory requirements set forth in the Companies Law with respect to office holder compensation, and (ii) the shareholders of the company have approved the terms by means of the special majority required for approving the compensation policy (as detailed above).
Private placements in a public company require approval by a company's board of directors and shareholders in the following cases:
1. | A private placement that meets all of the following conditions: |
The private placement will increase the relative holdings of a shareholder that holds five percent or more of the company's outstanding share capital, assuming the exercise of all of the securities convertible into shares held by that person, or that will cause any person to become, as a result of the issuance, a holder of more than five percent of the company's outstanding share capital.
20 percent or more of the voting rights in the company prior to such issuance are being offered.
All or part of the consideration for the offering is not cash or registered securities, or the private placement is not being offered at market terms.
2. | A private placement which results in anyone becoming a "controlling shareholder" of the public company. |
In addition, under the Companies Law, certain transactions or a series of transactions are considered to be one private placement. A private placement that meets all of the above conditions, and which must be approved by the shareholders, must also be for the benefit of the company.
Any placement of securities that does not fit the above description may be issued at the discretion of the board of directors.
Under the Companies Law, a shareholder has a duty to act in good faith towards the company and other shareholders when exercising his or her rights and refrain from abusing his power in the company, including, among other things, voting in the general meeting of shareholders on the following matters:
Any amendment to the articles of association;
An increase of the company's authorized share capital;
Approval of interested party acts and transactions that require general meeting approval as provided in Sections 255 and 268 to 275 of the Companies Law.
Furthermore, the Companies Law requires that a shareholder refrain from acting in a discriminatory manner towards other shareholders.
The Companies Law does not describe the substance of the aforementioned duties of shareholders, but provides that laws applicable to a breach of contract, adjusted according to the circumstances shall apply to a breach of such duties. With respect to the obligation to refrain from acting discriminatorily, a shareholder that is discriminated against can petition the court to instruct the company to remove or prevent the discrimination, as well as provide instructions with respect to future actions.
In addition, any "controlling shareholder", any shareholder who knows that it possesses power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of a company's articles of association, has the power to appoint or prevent the appointment of an office holder in the company is under a duty to act with fairness towards the company. The breach of such duty is governed by Israeli contract laws. The Companies Law does not describe the substance of this duty to act with fairness, but provides that laws applicable to a breach of contract, adjusted according to the circumstances, and taking into account the status within the company of such shareholder, shall apply to a breach of such duty.
The Companies Law requires that specified types of transactions, actions and arrangements be approved as provided for in a company's articles of association and in some circumstances by the audit committee or compensation committee, by the board of directors and by the general meeting of the shareholders.
In addition, the Companies Law includes a code of recommended corporate governance practices, which was added to the Companies Law following the enactment of Amendment 16. In the explanatory notes to Amendment 16, the Knesset noted that an "adopt or disclose non-adoption" regulation would be issued by the ISA with respect to such code. As of the date of this Annual Report, the ISA has issued reporting instructions with respect to this code which are applicable only to publicly traded companies whose securities are traded solely on the Tel Aviv Stock Exchange and which report solely to the ISA.
The ISA is authorized to impose fines on any person or company performing a violation, in connection with a publicly traded company which reports to the ISA, and specifically designated as a violation under Amendment 16.
Although we expect to be in compliance with the Companies Law, there is no assurance that we will not be required to adjust our current corporate governance practices, as discussed in this annual report, pursuant to the provisions of the Companies Law.
The Israeli Securities Law
The Israeli Securities Law includes provisions relating to administrative enforcement procedure which are applicable to Israeli public companies, including companies which are listed for trading on the NASDAQ Global Market, which are designated to enable the ISA to enhance the efficacy of enforcement in the securities market in Israel. The administrative enforcement procedure may be applied to any company or person (including director, office holder or shareholder of a company) performing any of the actions specifically designated as breaches of law under the Securities Law.
Furthermore, the Securities Law requires that the chief executive officer of a company supervise and take all reasonable measures to prevent the company or any of its employees from breaching the Securities Law.
Under the Securities Law, a company cannot obtain insurance against or indemnify a third party (including its office holders and/or employees) for any administrative procedure and/or monetary fine (other than for certain legal expenses and payments of damages to an injured party). The Securities Law permits insurance and/or indemnification for expenses related to an administrative procedure, such as reasonable legal fees, provided that it is permitted under the company's articles of association. In January 2012, each of our Audit Committeeaudit committee and Board of Directors approved a new form of Indemnification Agreement with our directors and office holders serving in such positions from time to time so as to reflect this amendment, subject to approval of our shareholders to the relevant changes required to our Articles. Our shareholders approved these amendments to the Articles of Association and a revised form of Indemnification Agreement for directors serving in such capacity from time to time, at the Annual General Meeting of the Shareholders held on April 11, 2012. As per Amendment 20, it was decided on July 31, 2013, at the Extraordinary General Meeting of the Shareholders to adopt the Executive Compensation Policy of the Company, which had been recommended by our Compensation Committee and approved by our Board of Directors. The Policy was re-approved by our shareholders at the Annual General Meeting which took place on June 8, 2016. Our approved Executive Compensation Policy includes the above referenced form of Indemnification Agreement to be entered into by the Company with our directors and office holders serving in such capacities from time to time.
We periodically review all of our internal policies and procedures in order to ensure compliance with all the securities laws to which we are subject. There is no assurance that we will not be required to take certain actions in order to enhance our compliance with the securities laws to which we are subject, such as adopting and implementing an internal enforcement plan as well as additional internal policies and procedures in order to reduce our exposure to potential breaches of the Securities Law.
NASDAQ Listing Rules and Home Country Practices
Below is a concise summary of the significant ways in which our corporate practices, which are in accordance with Israeli law and practice, including the provisions of the Companies Law, differ from the requirements which may be applicable to domestic U.S. listed companies:
• | Distribution of annual and quarterly reports to shareholders – Under Israeli law we are not required to distribute annual and quarterly reports directly to shareholders and the generally accepted business practice in Israel is not to distribute such reports to shareholders. We do however make our audited financial statements available to our shareholders prior to our annual general meeting and furnish our quarterly and annual financial results with the SEC on Form 6-K. |
• | Independence, Nomination and Compensation of Directors– A majority of our board of directors may not necessarily be comprised of independent directors as defined in NASDAQ Listing Rule 5605(a)(2). Our board of directors contains two external directors in accordance with the provisions of the Companies Law. Israeli law does not require, nor do our external directors conduct, regularly scheduled meetings at which only they are present. In addition, with the exception of our external directors, our directors are elected to our board of directors in accordance with the provisions set forth in our Amendedamended and Restatedrestated Articles of Association, as approved by our shareholders on the Annual General Meeting which took place on June 8, 2016. According to our Amendedamended and Restatedrestated Articles of Association, directors are divided into three groups, Group A, Group B and Group C. Each group is brought for re-election once every three years, on a rotating basis, such that at each annual general meeting of the shareholders a given group of directors is brought for election, to serve on a continuous basis for a three-year term, until the third annual general meeting following the meeting on which such group was elected for service and until their respective successors are duly elected, at which point their term in office shall expire. At each annual general meeting, the annual general meeting shall be entitled to elect directors to replace the directors whose three-year term in office has expired, and so on ad infinitum, so that each year, the term in office of one group of directors shall expire. The nominations for director which are presented to our shareholders are generally made by our board of directors. One or more shareholders of a company holding at least one percent of the voting power of the company may nominate a currently serving external director for an additional three-year term. Israeli law does not require the adoption of, and our board has not adopted, a formal written charter or board resolution addressing the nomination process and related matters. Compensation of our directors and other office holders of the Company is determined in accordance with Israeli law. |
• | Audit Committee – Our audit committee does not meet with all the requirements of NASDAQ Listing Rule 5605. We are of the opinion that the members of our audit committee comply with the requirements of NASDAQ Listing Rule 5605(c)(3) and Rule 10A-3(b) of the general rules and regulations promulgated under the Securities Act of 1933 and all requirements under Israeli law. Our audit committee has not adopted a formal written audit committee charter specifying the items enumerated in NASDAQ Listing Rule 5605(c)(1). |
• | Compensation Committee – We follow the provisions of the Companies Law with respect to matters in connection with the composition and responsibilities of our compensation committee, office holder compensation, and any required approval by the shareholders of such compensation. Israeli law, and our amended and restated Articles of Association, do not require that a compensation committee composed solely of independent members of our board of directors determine (or recommend to the board of directors for determination) an executive officer's compensation, as required under NASDAQ's listing standards related to compensation committee independence and responsibilities; nor do they require that the Company adopt and file a compensation committee charter. Instead, our compensation committee has been established and conducts itself in accordance with provisions governing the composition of and the responsibilities of a compensation committee as set forth in the Companies Law. Furthermore, the compensation of office holders is determined and approved by our compensation committee and our boardBoard of directors,Directors, and in certain circumstances by our shareholders, either in consistency with our previously approved Executive Compensation Policy or, in special circumstances in deviation therefrom, taking into account certain considerations set forth in the Companies Law. The requirements for shareholder approval of any office holder compensation, and the relevant majority or special majority for such approval, are all as set forth in the Companies Law. Thus, we will seek shareholder approval for all corporate actions with respect to office holder compensation requiring such approval under the requirements of the Companies Law, including seeking prior approval of the shareholders for the Executive Compensation Policy and for certain office holder compensation, rather than seeking approval for such corporate actions in accordance with NASDAQ Listing Rules. |
• | Quorum – Under Israeli law a company is entitled to determine in its articles of association the number of shareholders and percentage of holdings required for a quorum at a shareholders meeting. Our Articles of Association provide that a quorum of two or more shareholders, present in person or by proxy, holding shares conferring in the aggregate more than thirty threethirty-three and a third (33 1/3 %) percent of the voting power of the Company is required for commencement of business at a general meeting. |
• | Approval of Related Party Transactions – All related party transactions are approved in accordance with the requirements and procedures for approval of interested party acts and transactions, set forth in Sections 268 to 275 of the Companies Law. |
• | Shareholder Approval – We seek shareholder approval for all corporate action requiring such approval, in accordance with the requirements of the Companies Law. |
• | Equity Compensation Plans – We do not necessarily seek shareholder approval for the establishment of, and amendments to, stock option or equity compensation plans (as set forth in NASDAQ Listing Rule 5635(c)), as such matters are not subject to shareholder approval under Israeli law. We will attempt to seek shareholder approval for our stock option or equity compensation plans (and the relevant annexes thereto) to the extent required in order to ensure they are tax qualified for our employees in the United States. However, even if such approval is not received, then the stock option or equity compensation plans will continue to be in effect, but the Company will be unable to grant options to its U.S. employees that qualify as Incentive Stock Options for U.S. federal tax purpose. Our stock option or other equity compensation plans are also available to our non-U.S. employees, and provide features necessary to comply with applicable non-U.S. tax laws. |
All of our commercial contracts over the past two years have been entered into in the ordinary course of business.
Fiberblaze Share Purchase Agreement
On December 10, 2014, we entered into the Fiberblaze SPA with Fiberblaze, Fiberblaze Holding, Hilmer, Jakob Hilmer and Nikolaj Herman (Fiberblaze Holding and Hilmer together, the "Selling Shareholders"). Under the Fiberblaze SPA, we purchased all of the share capital of Fiberblaze and Fiberblaze US LLC, a New York company and wholly owned subsidiary of Fiberblaze, for consideration of approximately US$ 10,000,000 in cash (of which US$ 3,000,000 was deposited in an escrow account to be distributed in accordance with specific terms or to be released to the Selling Shareholders upon the lapse of 18 months from the date of the Fiberblaze SPA), subject to certain adjustments, as well as additional consideration to be paid upon the attainment of future performance milestones relating to Fiberblaze revenues and achievement of design wins until August 31, 2015 (the "Additional Consideration"). Under the terms of the Fiberblaze SPA, ninety percent of the Additional Consideration, which amounted to US$ 1,460,000, was paid in cash during 2016, and the remaining ten percent was paid by way of a grant of 6,704 options to purchase the Company's ordinary shares with an exercise price equal to the closing trading price of the Company's ordinary shares on the NASDAQ Stock Market on the date of grant. For additional information see Note 3B to our consolidated financial statements included elsewhere in this annual report (in which Fiberblaze is referred to as Silicom Denmark).
ADI Engineering Asset Purchase Agreement
On September 30, 2015, we, together with one of our wholly owned subsidiaries, Silicom Connectivity Solutions, Inc., entered into the ADI APA with ADI, Steve Yates and Patricia Yates. Under the ADI APA, we purchased ADI's assets in consideration for an amount equal to US$ 10,000,000 in cash at closing, as well as the Excess Consideration to be paid upon the attainment of future performance milestones for each of the years 2015, 2016 and 2017. In April 2016, we paid the Excess Consideration for the attainment of the 2015 performance milestone detailed in the ADI APA, in the amount of US$ 3,000,000. In 2017 and 2018 we did not pay any Excess Consideration since the respective performance milestones for 2016 and for 2017, respectively, were not attained. For additional information see Note 3A to our consolidated financial statements included elsewhere in this annual report.
Information regarding our real property leases is provided in "Item 44.D. – Information on the Company – Property, Plant and Equipment" and "Item 19 – Exhibits".Exhibits."
For information on the engagement terms of our new President and CEO, see Item 7B “Related Party Transactions.”
Under current Israeli laws and regulations, any dividends or other distributions paid in respect of our ordinary shares purchased by nonresidents of Israel with certain non-Israeli currencies (including U.S. Dollars) and any amounts payable upon the dissolution, liquidation or winding up of our affairs, as well as the proceeds of any sale in Israel of our securities to an Israeli resident, will be freely repatriable in such non-Israeli currencies, provided that Israeli income tax has been paid on (or withheld from) such payments.
There are currently no Israeli currency control restrictions on remittances of dividends on our ordinary shares, proceeds from the sale of the shares or interest or other payments to non-residents of Israel, except under certain circumstances, for shareholders who are subjects of countries that are, or have been, in a state of war with Israel.
E. Taxation
The following is a summary of some of the current tax law applicable to companies in Israel, with special reference to its effect on us. The following also contains a discussion of specified Israeli tax consequences to our shareholders and government programs from which we benefit. To the extent that the discussion is based on tax legislation (including the legislation passed as part of the recent tax reform in Israel) that has not been subject to judicial or administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax authorities or courts.
The discussion is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.
Holders of our ordinary shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of our ordinary shares, or receipt of any dividend distributions made to our shareholders, including, in particular, the effect of any foreign, state or local taxes, including pursuant to the Tax Act (as defined below), and of any taxes withheld at source by the Company.
General Corporate Tax
Israeli companies are subject to corporate tax at the rate of 25% as of 2016, 24% as of 2017, and 23% as from 2018. However, the effective tax rate payable by a company which derives income from a "Benefited Enterprise", or from a "Preferred Enterprise" or from "Preferred Technological Enterprise" (as further discussed below) may be considerably less.
In 2006, transfer pricing regulations came into force, following the introduction of Section 85A of the Israeli Income Tax Ordinance (New Version), 5721-1961, referred to herein as the Israeli Tax Ordinance, under Amendment 132. In principal, the transfer pricing rules require that cross-border transactions between related parties be carried out implementing an arms' length principle and reported and taxed accordingly.
In 2008, an amendment to the Income Tax Law (Inflationary Adjustments), 1985 was enacted which limits the scope of the law starting in 2008 and thereafter. Starting in 2008, the revenues for tax purposes are measured in nominal values, excluding certain adjustments for changes in the Israeli Consumer Price Index carried out in the period up to December 31, 2007. The amended law includes, among other provisions, the elimination of the inflationary additions and deductions and the additional deduction for depreciation for the period starting in 2008.
The Encouragement of Capital Investments Law, 1959 (the "Investment Law")
Pursuant to the Investment Law, a "Preferred Enterprise" is entitled to a reduced corporate flat tax rate of 15%16% with respect to its preferred income derived by its "Preferred Enterprise"that qualifies as “Preferred Technological Income” as defined in 2011-2012,the Investment Law, unless the "Preferred Enterprise" is located in a certain development zone, in which case the rate will be 10%7.5%. Such corporate tax rates are 16%12% and 7.5% with respect to 2017 and thereafter.Preferred Technological Income. Income derived by a "Special Preferred Enterprise" (as such term is defined in the Investment Law) are entitled, during a benefits period of 10 years, to further reduced tax rates of 8%, or to 5% if the "Special Preferred Enterprise" is located in a certain development zone. Under the Investment Law, most of the tax incentives offered are not dependent on minimum qualified investments or on foreign ownership. Companies may be able to enjoy both government grants and tax benefits concurrently.
"Preferred Income" is defined as income from the sale of products of the "Preferred Enterprise" (including components that were produced by other enterprises); income from the sale of semiconductors by other non-related enterprises which use the Preferred Enterprise's self-developed know-how; income for providing a right to use the Preferred Enterprise's know-how or software; royalties from the use of the know-how or software which was confirmed by the chief of the appointed authority to be related to the production activity of the "Preferred Enterprise" and services with respect to the aforementioned sales. In addition, the definition of "Preferred Income" also includes income from the provision of industrial R&D services to foreign residents to the extent that the services were approved by the Head of Research for the Industrial Development and Administration.
"Preferred Enterprise" is defined as an Industrial Enterprise (including, inter alia, an enterprise which develops software, an enterprise which provides approved R&D services to foreign residents and an enterprise which the IIA confirmed is carrying out R&D in the field of alternative energy), which inter-alia, generally more than 25% of its business income is from export to market consisting more than 14 million residents.
Chapter B2 of the Investment Law determines the conditions and limitations applying to the tax benefits offered to a "Special Preferred Enterprise".Enterprise." Chapter B2 determines that a "Special Preferred Enterprise" is entitled to benefited corporate income tax rate: of 5% if located in a preferred zone and 8% if not.
"Special Preferred Enterprise" is defined as a "Preferred Enterprise" which meets oneall of the following conditions: (a) its Preferred Income is equal to or exceeds NIS 1 billion; (b) the total income of the company which owns the "Preferred Enterprise" or which operates in the same field of the "Preferred Enterprise" and which consolidates in its financial reports the company that owns the "Preferred Enterprise" equals or exceeds NIS 10 billion; and (c) its business plan was approved by the authorities as significantly benefitting the Israeli economy, either by an investment of at least NIS 400 - 800 million in assets; Annual growth of 100 - 150 million NIS in R&D (or half of this amount if the average annual R&D is above NIS 500 million) compared to the average R&D in the three tax years prior to the year of approval; or the employment of at least 250 to 500 new employees, for preferred zones and regular zones, respectively.
Dividends paid out of income attributed to a "Preferred Enterprise" are generally subject to withholding tax at source at a rate of 20% (15% until 2014) or such lower rate as may be provided in an applicable tax treaty, subject to the submission and approval of a request submitted on behalf of the recipient of such dividends to the Israel Tax Authority. However, if such dividends are paid to an Israeli company no tax will be withheld.
The Company elected in 2014 to be taxed as a "Preferred Enterprise" under the Investment Law, commencing with the 2014 fiscal year.
There can be no assurance that we will comply with the conditions of the Investment Law in the future or that we will be entitled to any additional benefits under the Investment Law and whether the influence of any changes to the Investment Law will be beneficial to the Company or not.
On January 6, 2011 the Israeli Parliament (the "Knesset") enacted the Economic Policy Law for 2011 and 2012 (legislative amendments), 2011 in which the Investment Law was also amended (the “2011 Amendment”). The 2011 Amendment introduced new benefits for income generated by a “Preferred Company” through its “Preferred Enterprise” (as such terms are defined in the Investment Law) as of January 1, 2011.
The definition of a “Preferred Company” includes a company incorporated in Israel that is not fully owned by a governmental entity, and that has, among other things, a “Preferred Enterprise” and is controlled and managed from Israel. Pursuant to the 2011 Amendment, beginning in 2014 and in each year thereafter until 2016, a Preferred Company may only be entitled to a reduced corporate tax rate of 16% with respect to its preferred income derived by its Preferred Enterprise, unless the Preferred Enterprise is located in a specified development zone, in which case the rate will be 9%.
On December 29, 2016 the Knesset enacted the "Economic Efficiency Law (Legislative Amendments for Achieving Budget Objectives in the Years 2017 and 2018) – 2016" in which the Investment Law was amended again (hereinafter: “the 2017 Amendment”). The 2017 Amendment added new tax benefit tracks for a “preferred technological enterprise” and a “special preferred technological enterprise” which award reduced tax rates to a technological industrial enterprise for the purpose of encouraging activity relating to the development of qualifying intangible assets. In addition, the corporate tax rate for Preferred Enterprise which is located in a specified development zone will be 7.5%.
The benefits will be awarded to a “preferred company” that has a “preferred technological enterprise” or a “special preferred technological enterprise” with respect to taxable “preferred technological income” per its definition in the Investment Law.
Preferred technological income that meets the conditions required in the law, will be subject to a reduced corporate tax rate of 12%, and if the preferred technological enterprise is located in "Development Area A" in Israel - to a reduced tax rate of 7.5%. A company that owns a special preferred technological enterprise will be subject to a reduced corporate tax rate of 6% regardless of the development area in which the enterprise is located. The 2017 Amendment is effective as from January 1, 2017.
Income derived by a Preferred Company from a “Special Preferred Enterprise” (as such term is defined in the Investment Law) would be entitled, during a benefit period of ten years, to further reduced tax rates of 8%, or 5% if the Special Preferred Enterprise is located in a certain development zone.
On June 14, 2017 the Knesset Finance Committee approved "Encouragement of Capital Investment Regulations (Preferred Technological Income and Capital Gain of Technological Enterprise) – 2017" (hereinafter: “the Regulations”), which provides rules for applying the “preferred technological enterprise” and “special preferred technological enterprise” tax benefit tracks, including the Nexus formula that provides the mechanism for allocating the technological income eligible for the benefits.
Should the Company derive income from sources other than the “preferred technological enterprise”, such income will be taxable at the "Preferred Company" tax rate (for manufacturing activity in Israel) or regular corporate tax rates for the applicable year.
On November 15, 2021, the Knesset Finance approved Economic Efficiency Law (Legislative Amendments for Achieving Budget Objectives in the Years 2021 and 2022) – 2021 (“the 2021 Amendment”). The 2021 Amendment stipulated rules with respect to “Accumulated income” which was generated by a company until December 31, 2020.
“Accumulated Income” is defined as an income including capitalized income that was exempt from corporation tax on the year in which it was generated, according to the Investment Law provisions, and the company did not pay any corporation tax except for tax payments made regarding a distribution made to a subsidiary or which was attributed to the subsidiary directly or indirectly.
The tax rate that will be imposed on the Selected Accumulated Income shall be at the corporation tax rate which would have applied to that income under section 47 provisions, in the year it was generated, multiplied by the tax coefficient (according to the definition of this term under the Investment Law provisions), and not less than 6%. The company shall pay the tax within 30 days and will not be able to regret it. The rest of the Accumulated Income which is not the Selected Accumulated Income will be taxed according to the provisions of the Investment Law.
The company shall be entitled to pay tax regarding its Accumulated Income, in whole or in part, in accordance with its choice by written notice to the ITA (“Selected Accumulated Income” and “Selection Date” respectively). After paying the corporate tax, the Investment Law provisions stipulate that the company shall invest in its Industrial Enterprise, during the 5 years starting on the Selection Date for at least one of the following: (1) purchase of productive assets according to the definition of this term and excluding buildings; (2) investment in research and development in Israel; or (3) payment of salaries to new employees in the company compared to the employees employed by the company at the end of the tax year 2020, and excluding salaries to company’s officers (as defined under the Investment Law). The investment amount will be calculated according to the Investment Law Provisions. Subject to additional conditions stipulated by the Investment Law provisions, the company will be able to distribute Its Selected Accumulated income as a dividend, after withholding 15% tax from the distributed amount. The 2021 Amendment is effective as from January 1, 2022.
As a result of the aforesaid legislation, starting 2021 the Company has implemented the “preferred technological enterprise” tax benefit track.
Law for the Encouragement of Industrial Research, Development and Development,Technological Innovation in Industry, 1984
Under the terms of the pre-R&D Amendment regime, research and development programsPrograms approved by the Research Committee (the "Research Committee") of the OCS wereIIA are eligible for grants or loans if they metmeet certain criteria, generally in return for the payment of royalties from the sale of the product or services developed in accordance with the program and subject to other restrictions. Once a project wasis approved, the OCS wouldIIA award grants generally of up to 50% of the project's expenditures in return for royalties, usually at the rate of 3% to 5% of sales of products developed with such grants. For projects approved after January 1, 1999, the amount of royalties payable is up to a dollar-linked amount equal to 100% of such grants plus interest at LIBOR.LIBOR or other applicable interest rate.
The terms of these grants prohibited the manufacture outside of Israel of the product developed in accordance with the program without the prior consent of the Research Committee of the OCS.IIA. Such approval, if granted, was generally subject to an increase in royalty rates, as well as in the total amount to be repaid to the OCSIIA to between 120% and 300% of the amount granted, depending on the extent of the manufacturing to be conducted outside of Israel.
The R&D Law as in effect prior to the R&D Amendment, also providedprovides that know-how from the research and development, which is used to develop or produce produce the product, may not be transferred to Israeli third parties without the approval of the Research Committee. Until 2005, the Research Law stated that such know-how may not be transferred to non-Israeli third parties at all. An amendment to the Research Law set forth certain exceptions to this rule; however, the practical implications of such exceptions were quite limited. The R&D Law as in effect prior to the R&D Amendment, stressedstresses that it is not just transfer of know-how that is prohibited, but also transfer of any rights in such know-how. Such restriction diddoes not apply to exports from Israel of final products developed with such technologies. It wasis possible to receive approval of the transfer only if the transferee undertookundertakes to abide by all of the provisions of the R&D Law and regulations promulgated thereunder, including the restrictions on the transfer of know-how and the obligation to pay royalties. Generally, royalty payments by the transferor are required in connection with the transfer to an Israeli third party. There could beis no assurance that such consent, if requested, would be granted or, if granted, that such consent would be on reasonable commercial terms.granted. For additional information regarding the R&D Law, and R&D Amendment, see "Item 4.B. – Information on the Company – Business Overview – Governmental Regulation Affecting the Company".Company."
Tax Benefits for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction in the year incurred for expenditures (including capital expenditures) in scientific research and development projects, if the expenditures are approved by the relevant Israeli Government Ministry (determined by the field of research) and the research and development is for the promotion of the enterprise and is carried out by or on behalf of the company seeking such deduction. Such expenditures not so approved are required to be deducted over a three-year period.
Law for the Encouragement of Industry (Taxes), 1969
Under the Law for the Encouragement of Industry (Taxes), 1969 (the "Industry"Industry Encouragement Law"), Industrial Companies (as defined below) are entitled to the following tax benefits:
(a) | Amortization of expenses incurred in connection with certain public securities issuances over a three-year period; and |
(b) | Accelerated depreciation rates on know-how, patents and/or right to use a patent or certain other intangible property rights. |
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. Under the Industry Encouragement Law, an "Industrial Company" is defined as a company which is an Israeli resident and incorporated in Israel, at least 90% of the income of which, in any tax year, determined in Israeli currency, exclusive of income from government loans, is derived from an "Industrial Enterprise" owned by it.it and located in Israel or in the “Area” as defined in the Israeli Tax Ordinance. An "Industrial Enterprise" is defined as an enterprise whose major activity in a given tax year is industrial production activity.
We believe that we currently qualify as an "Industrial Company" within the definition of the Industry Encouragement Law. No assurance can be given that we will continue to qualify as an "Industrial Company" or that the benefits described above will be available in the future.
Calculation of Results for Tax Purposes
The Israeli Income Tax Regulations (Rules for Maintaining Accounting Records of Foreign Investors' Companies and Certain Partnerships and Determining Their Taxable Income), 1986, provide that as a "Foreign Investors' Company" (as defined in the Investment Law described above) is eligible to calculate its taxable income in accordance with these regulations, and therefore, if we elect to follow such regulations, our taxable income or loss is to be calculated in US Dollars. We have elected to apply these regulations and accordingly our taxable income or loss is calculated in US Dollars in the manner set forth in such regulations.
Taxation of our Shareholders
Capital Gains Taxes Applicable to Israeli Resident Shareholders.
In general, an individual is subject to a 25% tax rate on real capital gains derived from the sale of shares, as long as the individual is not a "substantial shareholder" in the company issuing the shares. A "substantial shareholder" is generally a person who alone, or together with his relative or another person who collaborates with him on a permanent basis, holds, directly or indirectly, at least 10% of any of the "Means of control" of the corporation. "Means of control" generally include the right to vote, receive profits, nominate a director or an office holder, receive assets upoupon liquidation, or order someone who holds any of the aforesaid rights how to act, and all regardless of the source of such right.
A "substantial shareholder" will be subject to a withholding tax rate of 30% in respect of real capital gains derived from the sale of shares issued by a company in which he or she is a "substantial shareholder".shareholder." The determination of whether the individual is a "substantial shareholder" will be made on the date on which the securities are sold. In addition, the individual will be deemed to be a "substantial shareholder" if at any time during the 12 months preceding the date of sale, he or she was a "substantial shareholder".shareholder."
Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders.
Shareholders that are not Israeli residents are generally exempt from Israeli capital gains tax on any gains derived from the sale, exchange or disposition of our shares, provided that such share is not traded on the TASE on the day of the sale and such gains were not derived from a permanent establishment or business activity of such shareholders in Israel. However, non-Israeli corporations will not be entitled to the foregoing exemptions if an Israeli resident(s) (i) have a controlling interest of more than 25% in such non-Israeli corporation; or (ii) are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In addition, under the U.S.-Israel Income Tax Treaty, 1995, or the U.S.-Israel Tax Treaty, the sale, exchange or disposition of our shares by a shareholder who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) holding the shares as a capital asset is exempt from Israeli capital gains tax unless either (i) the shareholder holds, directly or indirectly, shares representing 10% or more of our voting capital during any part of the 12-month period preceding such sale, exchange or disposition; or (ii) the capital gains arising from such sale are attributable to a permanent establishment of the shareholder located in Israel; or (iii) the shareholder, being an individual, was present in Israel for a period of time or several periods of time, which aggregate to a total of 183 days or more, during a single taxable year. In either case, the sale, exchange, or disposition of the shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, the U.S. resident would be permitted to claim a credit for the tax against the U.S. federal income tax imposed with respect to the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes.
Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding of tax at source at the time of sale.
Taxation of Israeli Shareholders on Receipt of Dividends.
Residents of Israel who are individuals are generally subject to Israeli income tax on the receipt of dividends paid on our shares at the rate of 25%, which tax will be withheld at the source. With respect to a person who is a "substantial shareholder" at the time of receiving the dividend or on any date within the 12 months preceding such date, the applicable tax rate is 30%.
Israeli resident corporations are generally exempt from Israeli tax for dividends paid on our shares.
In case of dividends paid out of the profits of a "Preferred Enterprise" or "Preferred Technological Enterprise", the applicable tax rate is 20% for an individual and 0% for aan Israeli corporation.