INTRODUCTION
We manufacture, market and sell technologically advanced custom-made
printed circuit boards, or PCBs, including high density interconnect, or HDI, flex-rigid and rigid, with high layer count boards.
Our principal customers include manufacturers of defense and aerospace, medical, industrial, telecom and networking equipment, as well
as contract electronic manufacturers. We were incorporated in 1970 under the laws of the State of Israel. Since our initial public
offering in January 1997, our ordinary shares have been listed on the NASDAQ Stock Market (symbol: ELTK) and are presently traded on the
NASDAQ Capital Market. As used in this annual report, the terms “we,” “us” and “our” mean Eltek Ltd.
and its subsidiaries, unless otherwise indicated.
Our functional currency is the New Israeli Shekel while our reporting
currency is the U.S. Dollar. All references in this annual report to “dollars” or “$” are to U.S. Dollars and
all references in this annual report to “NIS” are to New Israeli Shekels. Our consolidated financial statements appearing
in this annual report are prepared in accordance with U.S. GAAP. The consolidated financial statements appearing in this annual
report are translated into dollars at the representative rate of exchange under the current rate method. Under such method, the
income statement and cash flows statement items for each year (or period) stated in this report are translated into dollars using the
average exchange rates in effect at each period presented, and assets and liabilities for each year (or period) are translated using the
exchange rate as of the balance sheet date as published by the Bank of Israel ($1.00 = NIS 3.627 as of December 31, 2023), except for
equity accounts, which are translated using the rates in effect at the date of the transactions. All resulting exchange differences
that do not affect our earnings are reported in the accumulated other comprehensive income as a separate component of shareholders’
equity.
Statements made in this annual report concerning the contents of
any contract, agreement or other document are summaries of such contracts, agreements or documents and are not complete descriptions of
all of their terms. If we filed any of these documents as an exhibit to this annual report or to any registration statement or annual
report that we previously filed, you may read the document itself for a complete description of its terms.
Except for the historical information contained in this annual
report, the statements contained in this annual report are “forward‑looking statements” within the meaning of Section
27A of the Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended,
or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, as amended, with respect to our business, financial condition
and results of operations. Such forward-looking statements reflect our current view with respect to future events and financial
results. We urge you to consider that statements which use the terms “anticipate,” “believe,” “do
not believe,” “expect,” “plan,” “intend,” “estimate” and similar expressions are
intended to identify forward‑looking statements. We remind readers that forward-looking statements are merely predictions
and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results,
performance, levels of activity, or our achievements, or industry results, to be materially different from any future results, performance,
levels of activity, or our achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by applicable law,
including the securities laws of the United States, we undertake no obligation to publicly release any update or revision to any forward‑looking
statements to reflect new information, future events or circumstances, or otherwise after the date hereof. We have attempted to
identify significant uncertainties and other factors affecting forward-looking statements in the Risk Factors section that appears in
Item 3.D. “Key Information- Risk Factors.”
TABLE
OF CONTENTS
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1 |
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1 |
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1 |
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1 |
A.
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[RESERVED]
|
1 |
B.
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Capitalization
and Indebtedness |
1 |
C.
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Reasons
for the Offer and Use of Proceeds |
1 |
D.
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Risk
Factors |
1 |
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|
22 |
A.
|
History
and Development of the Company |
22 |
B.
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Business
Overview |
23 |
C.
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Organizational
Structure |
28 |
D.
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Property,
Plants and Equipment |
29 |
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29 |
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|
29 |
A.
|
Operating
Results |
29 |
B.
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Liquidity
and Capital Resources |
32 |
C.
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Research
and Development, Patents and Licenses |
34 |
D.
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Trend
Information |
34 |
E.
|
Critical
Accounting Estimates |
34 |
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|
35 |
A.
|
Directors
and Senior Management |
35 |
B.
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Compensation
|
38 |
C.
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Board
Practices |
39 |
D.
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Employees
|
48 |
E.
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Share
Ownership |
50 |
F.
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Disclosure
of a Registrant’s Action to Recover Erroneously Awarded Compensation |
51 |
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|
51 |
A.
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Major
Shareholders |
51 |
B.
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Related
Party Transactions |
52 |
C.
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Interests
of Experts and Counsel |
54 |
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|
55 |
A.
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Consolidated
Statements and Other Financial Information |
55 |
B.
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Significant
Changes |
56 |
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|
56 |
A.
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Offer
and Listing Details |
56 |
B.
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Plan
of Distribution |
56 |
C.
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MARKETS |
56 |
D.
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Selling
Shareholders |
56 |
E.
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Dilution
|
56 |
F.
|
Expense
of the Issue |
56 |
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|
56 |
A.
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Share
Capital |
56 |
B.
|
Memorandum
and Articles of Association |
56 |
C.
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Material
Contracts |
57 |
D.
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Exchange
Controls |
57 |
E.
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Taxation
|
58 |
F.
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Dividends
and Paying Agents |
66 |
G.
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Statement
by Experts |
66 |
H.
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Documents
on Display |
66 |
I.
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Subsidiary
Information |
66 |
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66 |
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67 |
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67 |
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67 |
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67 |
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67 |
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68 |
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68 |
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68 |
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69 |
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69 |
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69 |
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69 |
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69 |
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70 |
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70 |
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INSIDER TRADER POLICY
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70 |
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CYBERSECURITY
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70 |
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71 |
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71 |
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71 |
PART
I
ITEM 1.
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS |
Not applicable.
ITEM 2. |
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not applicable.
A. Reserved
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Investing in our ordinary shares involves a
high degree of risk and uncertainty. You should carefully consider the risks and uncertainties described below before investing
in our ordinary shares. Our business, prospects, financial condition and results of operations could be adversely affected due to
any of the following risks. In that case, the value of our ordinary shares could decline, and you could lose all or part of your
investment. These risk factors include:
Risks Related to Our Business and Our Industry
• |
We will likely require additional capital in the future, which may not be available to us. |
• |
We are dependent on one-of-a-kind machinery that may malfunction and may not be easily replaced. |
• |
Because competition in the PCB market is intense, our business, operating results and financial condition may be adversely affected.
|
• |
Rapid changes in the Israeli and international electronics industries and recessionary pressures may adversely affect our business.
|
• |
Our products and product components need to meet certain industry standards. |
• |
Key customers account for a significant portion of our revenues. The loss of a key customer would have an adverse impact on our business
results. |
• |
We are dependent upon a select number of suppliers for timely delivery of key raw materials and the loss of one or more of these
suppliers or delays in supply of these raw materials would adversely affect our manufacturing ability. If these suppliers delay
or discontinue the manufacture or supply of these raw materials, we may experience delays in production and shipments, increased costs
and cancellation of orders for our products. |
• |
Our results of operations may be adversely affected by currency fluctuations. |
• |
Unfavorable national and global economic conditions could adversely affect our business, operating results and financial condition.
|
• |
We expect that our business insurance policies will be more limited in scope and our premiums will be higher than in prior years,
which could cause us to decrease our insurance coverage. As a result, we may incur uninsured losses. |
• |
We are subject to environmental laws and regulations. Compliance with those laws and regulations requires us to incur costs and we
are subject to fines or other sanctions for non-compliance. |
• |
We have in the past been, and currently are, subject to claims and litigation relating to environmental matters. If we are
found to be in violation of environmental laws, we could be liable for damages and costs of remediation and may be subject to a halt in
production, which may adversely affect our business, operating results and financial condition. |
• |
We may fail to be in compliance with financial covenants in our unutilized lines of credit. |
• |
While we have been profitable in recent years, we may not be able to sustain long term profitable operations and may not have sufficient
resources to fund our operations in the future, |
• |
We may not succeed in our efforts to expand our activity in the U.S. and other foreign markets. If we are unsuccessful, our
future revenues and profitability would be adversely affected. |
• |
We may be subject to the requirements of the National Industrial Security Program Operating Manual for our facility security clearance,
which is a prerequisite to our ability to work on classified contracts for the U.S. government. |
• |
We may encounter difficulties with our international operations and sales that may have a material adverse effect on our sales and
profitability. |
• |
Compliance with the conditions of a new business permit issued to us in 2018, if required, may be costly. We may become subject to
certain sanctions, including significant fines, criminal proceedings and in an unlikely event an order shutting down our factory.
|
• |
Damage to our manufacturing facilities due to fire, natural disaster, or other events could materially adversely affect our business,
financial condition, insurance premiums and results of operations. |
• |
We are vulnerable to the general economic effects of epidemics, pandemics and other public health crises, such as the COVID-19 pandemic
which began in 2020. |
• |
Our quarterly operating results fluctuate significantly. Results of operations in any period should not be considered indicative
of the results to be expected for any future period. |
• |
Our products and related manufacturing processes are often highly complex and therefore we may be delayed in product shipments. Our
products may at times contain manufacturing defects, which may subject us to product liability and warranty claims. Our operating margins
may be affected as a result of price increases for our principal raw materials. |
• |
Increasing scrutiny and changing expectations from investors, lenders, customers and other market participants with respect to our
Environmental, Social and Governance policies may impose additional costs on us or expose us to additional risks. |
• |
We compete with PCB manufacturers in Asia whose manufacturing costs are lower than ours. |
• |
We may fail to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley
Act of 2002, which could have a material adverse effect on our operating results, investor confidence in our reported financial information,
and the market price of our ordinary shares. |
• |
We are required to comply with “conflict minerals” rules which impose costs on us, may make our supply chain more complex,
and could adversely impact our business. |
• |
Increased regulation associated with climate change and greenhouse gas emissions could impose significant additional costs on operations.
|
• |
Obstacles in our transition to a new enterprise resource planning system may adversely affect our business and results of operations
and the effectiveness of our internal control over financial reporting. |
• |
Breaches of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our
business. |
• |
Technological change may adversely affect the market acceptance of our products. |
• |
The measures we take in order to protect our intellectual property may not be effective or sufficient. |
• |
Claims that our products infringe upon the intellectual property of third parties may require us to incur significant costs.
|
• |
We are affected by increasing global inflation and higher interest rates which may increase our cost of goods and services and borrowing
costs. |
Risks Related to Our Human Capital
• |
If our workforce will be represented by a labor union we could incur additional costs or experience work stoppages as a result of
the renegotiation of our labor contracts. |
• |
From time to time, we may be named as a defendant in actions involving the alleged violation of labor laws
related to employment practices, wages and benefits. |
• |
Under current Israeli law, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors
from benefiting from the expertise of some of our former employees. |
• |
We depend on key personnel for the success of our business. |
• |
Our ability to have access to insurance programs for directors and officers may be curtailed,
which may adversely affect our ability to retain and attract directors and officers. |
Risks Related to Our Ordinary Shares
• |
Our share price has been volatile in the past and may continue to be susceptible to significant market price and volume fluctuations
in the future. |
• |
The voting interest of Mr. Nissan, individually and through Nistec Golan, our controlling shareholder, may conflict with the interests
of other shareholders. |
• |
We may in the future be classified as a passive foreign investment company, or PFIC, which would subject our U.S. investors to adverse
tax rules. |
• |
We do not guarantee that dividends will continue to be distributed in the foreseeable future. |
Risks Related to Our Organization and Location in Israel
• |
Political, economic and military instability in Israel, including due to the recent attack by Hamas and other terrorist organizations
and Israel’s war against them, may disrupt our operations and negatively affect our business condition, harm our results of operations
and adversely affect our share price. |
• |
Our results of operations may be negatively affected by the obligation of our personnel to perform military reserve service.
|
• |
Service and enforcement of legal process on us and our directors and officers may be difficult to obtain. |
• |
Provisions of Israeli law may delay, prevent or make difficult an acquisition of us, which could prevent a change of control and
therefore impact the price of our shares. |
• |
The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities
of shareholders under U.S. law. |
• |
The termination or reduction of tax and other incentives that the Israeli government provides to domestic companies may increase
the costs involved in operating a company in Israel. |
Risks Related to Our Business and Our Industry
We will likely require additional capital in the future,
which may not be available to us.
As of December 31, 2023, we had $12.1 million in cash and cash
equivalents and short-term bank deposits and working capital of $16.1 million. In February 2024, we completed an offering of 625,000 of
our ordinary shares and raised $10 million before expenses. The lack of sufficient working capital in the future could negatively
impact our ability to compete effectively in the future or to expand our production facilities, including with respect to our investment
plans. To the extent that we incur operating losses in the future or are unable to generate free cash flows from our business, we may
not have sufficient working capital to fund our operations and will be required to obtain additional financing. Our working capital requirements
and cash flow provided by our operating and financing activities are likely to vary greatly from quarter to quarter, depending on the
following factors: (i) the timing of orders and deliveries; (ii) net profit in the period; (iii) the purchase of new equipment; (iv) the
build‑up of inventories; (v) the payment terms offered to our customers; (vi) the payment terms offered by our suppliers; and (vii)
ability to maintain our current, or obtain additional, lines of credit and long-term loans from banks and other lenders. The lack of sufficient
working capital could negatively impact our ability to compete effectively in the future.
As of December 31, 2023, we did not have any outstanding long-term
loans from banks and had unutilized revolving lines of credit aggregating NIS 8.7 million (approximately $2.4 million). These credit facilities
may not remain available to us in the future. All of our assets are pledged as security for our liabilities to our banks, whose consents
are required for any future pledge of such assets.
We are dependent on one-of-a-kind machinery that may malfunction
and may not be easily replaced.
The proper function of our manufacturing equipment is an important
element in our effectively operating our business. We own and use several unique manufacturing machines, some of which are aging and sometimes
malfunction, causing disruptions and occasionally even cessation of our manufacturing activities, which adversely affects our business.
It is possible that substantial funds may be required to repair or replace our production machinery, for which replacements or replacement
parts may not be readily available to us. Machinery failure could cause a cessation of our manufacturing activities for a significant
period of time, which may have a material adverse effect on our business, financial condition and results of operations.
Key customers account for a significant portion
of our revenues. The loss of a key customer would have an adverse impact on our business results.
In the years ended December 31, 2023, 2022 and 2021, a group of
affiliated companies accounted for 13.7% 18.7% and 21.2% of our total revenues, respectively, and another group of affiliated companies
accounted for 14.0%, 9.2% and 7.9% of our total revenues, respectively. We expect that a significant portion of our future revenues will
continue to be dependent on a small number of customers. If we are unable to retain our key customers, or maintain our level of business
with such customers, or, if we are unable to attract sufficient new business to compensate for the loss of or reduction in business from
any of our key customers, our results of operations and financial condition would be adversely affected.
We are dependent upon a select number of suppliers
for timely delivery of key raw materials and the loss of one or more of these suppliers or delays in supply of these raw materials would
adversely affect our manufacturing ability. If these suppliers delay or discontinue the manufacture or supply of these raw materials,
we may experience delays in production and shipments, increased costs and cancellation of orders for our products.
We currently obtain our key raw materials from a select number
of suppliers. We do not have long-term supply contracts with our suppliers and our principal suppliers may not continue to supply
raw materials to us at current levels or at all. Any delays in delivery or shortages in these raw materials could interrupt and
delay manufacturing of our products and may result in the cancellation of orders for our products.
As the majority of PCB manufacturing is centered in South East
Asia, raw material suppliers may focus their attention and give higher priority to manufacturers in those areas, which may interrupt the
supply of raw materials to us. In addition, these suppliers could discontinue the manufacture or supply of these raw materials at
any time. During the year ended December 31, 2023, our purchases from two (2) suppliers accounted for 28% and 26% of our total of consolidated
raw material costs, respectively. In the event such raw materials are not readily available to us, we may not be able to identify and
integrate alternative sources of supply in a timely fashion. Any transition to alternate suppliers may result in delays in production
and shipment and increased expenses and may limit our ability to deliver products to our customers.
If a raw material or component supplier fails to satisfy our product
quality standards, including standards relating to “conflict minerals” it could harm our customer relationships. Furthermore,
if we are unable to identify an alternative source of supply, we may have to modify our products or a large portion of our production
process to use a substitute raw material, which requires customers’ consent of use of such materials and which may cause delays
in production and shipments, increased design and manufacturing costs and increased prices for our products.
Because competition in the PCB market is intense,
our business, operating results and financial condition may be adversely affected.
The global PCB industry is highly fragmented and intensely competitive.
It is characterized by rapidly changing technology, frequent new product introductions and rapidly changing customer requirements.
We compete principally in the market for complex, flex-rigid and rigid multi-layer PCBs. In the Israeli market we mainly compete
with PCB Technologies Ltd. and major international PCB exporters, mainly from South East Asia, Europe and North America.
In the European market we mainly compete with Advanced Circuit
Boards NV (Belgium), AT&S Austria Technologie & Systemtechnik AG (Austria), Dyconex and Cicor (Switzerland), Graphics, Exception
PCB and Invotec (United Kingdom), Cistelaier and Somacis (Italy), Schoeller-Electronics GmbH (formerly Ruwel Werke GmbH) (Germany) and
certain other German companies. In the North American market we mainly compete with TTM, Inc. (previously known as DDi Corp. and
Viasystems), KCA Electronics Inc., Lenthor Engineering, Printed Circuits, Inc., Teledyne and certain other American companies. Many
of these competitors have significantly greater financial and marketing resources than us. Our current competition in the rigid
PCB segment is mainly from PCB manufacturers in Southeast Asia (mainly in China), which have substantially lower production costs than
us. Continued competitive pressures could cause us to lose significant market share.
In addition, these competitors may respond more quickly to new
or emerging technologies or adapt more quickly to changes in customer requirements than we do. We must continually develop improved manufacturing
processes to meet our customers’ needs for complex products, and our manufacturing process technology is generally not subject to
significant proprietary protection. During recessionary periods in the electronics industry, our strategy of providing quick-turn services,
an integrated manufacturing solution, and responsive customer service may take on reduced importance to our customers. As a result, we
may need to compete more on the basis of price, which would cause our gross margins to decline.
Our results of operations may be adversely affected by currency
fluctuations.
Our revenues and expenses are denominated in NIS, US dollars and
euros. Due to the different proportions of currencies our revenues and expenses are denominated in, fluctuations in rates of exchange
between NIS and other currencies may affect our operating results and financial condition. The NIS value of our dollar and euro denominated
revenues are negatively impacted by the devaluation of the dollar and the euro against the NIS. The average exchange rate for the NIS
against the dollar was approximately 9.7% higher in 2023 than in 2022, which had a positive impact on our operating results in 2023. If
NIS value of our dollar or Euro denominated revenues decreases, our results of operations will be adversely affected. We cannot predict
any future trends in the rate of inflation in Israel or the rate of devaluation or appreciation of the NIS against the dollar or other
foreign currencies.
We currently do not engage in hedging transactions. If we were
to decide to enter into any hedging transactions in the future in order to protect ourselves in part from currency fluctuations, we may
not be successful in our hedging efforts, or such transactions, if entered into, may not materially reduce the effect of fluctuations
in foreign currency exchange rates on our results of operations. Such hedging transactions may not necessarily mitigate the longer-term
impact of currency fluctuations on the operating costs of our business operations, and may result in additional expenses.
Unfavorable national and global economic conditions
could adversely affect our business, operating results and financial condition.
During periods of slowing economic activity, our customers may
reduce their demand for our products, technology and professional services, which would reduce our sales, and our business, operating
results and financial condition may be adversely affected. The global and domestic economies continue to face a number of economic challenges,
including threatened sovereign defaults, credit downgrades, restricted credit for businesses and consumers and potentially falling demand
for a variety of products and services. These developments, or the perception that any of them could occur, could result in longer sales
cycles, slower adoption of new technologies and increased price competition for our products and services. We could also be exposed to
credit risk and payment delinquencies on our accounts receivable, which are not covered by collateral.
Significant portions of our business are conducted outside the
markets in which our products and solutions are manufactured or generally sold, and accordingly, we often export a substantial number
of products into such markets. We may be denied access to potential customers or suppliers or denied the ability to ship products from
any of our subsidiaries into the countries in which we currently operate or wish to operate, as a result of economic, legislative, political
and military conditions, including hostilities and acts of terrorism, in such countries.
In particular, there is currently significant uncertainty about
the future relationship between the U.S. and various other countries, with respect to trade policies, treaties, government regulations,
and tariffs. For example, the recent imposition of tariffs and/or changes in tariffs on various products by the U.S. and other countries,
including China and Canada, have introduced greater uncertainty with respect to trade policies and government regulations affecting trade
between the U.S. and other countries, and new and/or increased tariffs have subjected, and may in the future subject, us to additional
costs and expenditure of resources. Major developments in trade relations, including the imposition of new or increased tariffs by the
U.S. and/or other countries, and any emerging nationalist trends in specific countries could alter the trade environment and consumer
purchasing behavior which, in turn, could have a material effect on our financial condition and results of operations. While the
U.S. and China signed a “phase one” trade deal on January 15, 2020 to reduce planned increases to tariffs, concerns over the
stability of bilateral trade relations remain.
The Russian invasion of Ukraine, which began in February 2022 resulted
in the imposition of certain sanctions by the U.S., EU, UK and other jurisdictions. Any heightened military conflict, economic impact
or persistent geopolitical instability, including heightened operating risks in Russia and Europe, additional sanctions or counter-sanctions,
heightened and prolonged inflation, cyber disruptions or attacks, and higher supply chain costs, could lead to further disruption, instability
and volatility in global markets and industries that could have a material adverse effect on our operation. We have operations or activities
in countries and regions outside Israel and the United States, including Europe, and any of the foregoing could have a material adverse
effect on our business, financial condition, and results of operations. To date, we have experienced longer shipping times but which did
not have any material adverse effect on our business. If global economic and market conditions or economic conditions in key markets
remain uncertain or weaken further, our financial condition and operating results may be materially adversely affected.
We expect that our business insurance policies
will be more limited in scope and their premiums higher than prior years. As a result, we may incur uninsured losses.
The coverage limits and scope of our insurance policies may not
be sufficient to cover future potential claims. The insurance coverage we do obtain may contain large deductibles or insufficient coverage
or fail to cover certain risks or potential losses. In addition, our insurance policies are subject to annual review by our insurers and
may not be renewed on similar or favorable terms, including with respect to coverage, deductibles or premiums, or at all. If we suffer
future machinery deficiency, fires or floods, or product liability claims, we may be unable to maintain applicable insurance at satisfactory
rates or with adequate amounts or at all. Such an insurance claim could negatively affect our manufacturing process and therefore, sales,
or require a change in the design or manufacturing process, any of which could harm our relationship with our customers and partners and
have a material adverse impact on our reputation and business, financial condition, results of operations and prospects.
We are subject to environmental laws and regulations.
Compliance with those laws and regulations requires us to incur costs and we are subject to fines or other sanctions for non-compliance.
Our operations are regulated under various environmental laws and
regulations that govern, among other things, the discharge of hazardous materials into the air and water, as well as the handling, storage
and disposal of such materials. Compliance with these laws and regulations is a major consideration for PCB manufacturers because
metals and chemicals classified as hazardous substances are used in the manufacturing process. Since May 2003, our environmental
management system has been ISO 14001 certified. This certification was based on successful implementation of environmental management
requirements and includes ongoing monitoring of our processes, raw materials and products. The certification is subject to periodic
compliance audits conducted by the Standards Institution of Israel. If, in the future, we are found to be in violation of environmental
laws or regulations, we could be liable for damages, costs of remedial actions, may be subject to criminal prosecution including a range
of potential penalties, and could also be subject to revocation of permits necessary to conduct our business or any part thereof.
Any such liability or revocation could have a material adverse effect on our business, financial condition and results of operations.
Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated
with a violation. A shortage of water in Israel may reduce the allocation of water available to manufacturing plants, including ours,
which could affect the concentrations of pollutants in our wastewater, making it harder to comply with the foregoing regulations, in which
event we would be required to invest additional funds to improve our wastewater treatment systems.
The cost of compliance with environmental laws and regulations
depends in part on the requirements in such laws and regulations and on the method selected to implement them. If new or more restrictive
standards are imposed, the cost of compliance could be very high and have an adverse impact on our revenues and results of operations
if we cannot recover those costs through the rates that we charge our customers.
Our customers are also required to comply with various government
regulations, legal requirements and industry standards, including many of the industry-specific regulations discussed above. Our
customers’ failure to comply could affect their businesses, which in turn would affect our sales to them. In addition, if
our customers are required by regulation or other requirements to make changes in their product lines, these changes could significantly
disrupt particular programs for these customers and create inefficiencies in our business.
We have in the past been, and currently are,
subject to claims and litigation relating to environmental matters. If we are found to be in violation of environmental laws, we
might be liable for damages and costs of remediation and may be subject to a halt in production, which may adversely affect our business,
operating results and financial condition.
We have in the past been, and currently are, subject to claims
and litigation relating to environmental matters. We may be subject to further environmental claims alleging that we are in violation
of environmental laws. If we are unsuccessful in such claims and other future claims and litigations or if actual results are not consistent
with our assumptions and judgments, we may be exposed to losses that could be material to our company.
In March 2019, representatives of the Ministry inspected our premises
and issued a warning related to an alleged breach of the Clean Air Law and a warning related to the Hazardous Materials Law (1993).
In 2022, our permit providing for deviations from the standards
for discharges into the municipal sewage system was extended. There can be no assurance that such an extension will be granted in
the future.
In July 2022, we received a notification from the Israeli Ministry
of Environmental Protection about its intention to impose a penalty of approximately $0.1 million for an alleged breach of the Hazardous
Materials Law (1993). We submitted a response to the notification and asked that the penalty be reduced by 40%. In June 2023, the Ministry
of Environmental Protection decided to partially accept our request and reduced 20% of the amount of the financial sanction. Following
the reduction we have paid the penalty.
In January 2023, we received a notification from the Ministry of
Environmental Protection that it intends to impose a penalty of approximately $0.6 million for an alleged breach of the Clean Air Law
during the years 2019-2020. We have paid this penalty and recorded a relevant expense in our financial statements. We have filed an administrative
appeal to reduce the penalty and get a refund for part of the paid penalty. In February 2024, the court hearing the administrative petition
ruled on a refund of 10% of the amount of the penalty paid.
In October 2023, we received a notice from the Ministry regarding
some suspicion of contamination of the soil from a drilling survey that was done in May 2021 at the factory. On January 24, 2024, representatives
of the Ministry visited the Company's facility and informed the Company that an additional survey of the soil and groundwater in the facility
area would be required.
If we are found to be in violation of environmental laws, we could
be liable, in addition to fines, for damages, costs of remedial actions and a range of potential penalties, and could also be subject
to a shutdown of our factory. Such sanctions could have a material adverse effect on our business, financial condition and results of
operations.
Increased regulation associated with climate
change and greenhouse gas emissions could impose significant additional costs on operations.
Various governments and governmental agencies have adopted or are
contemplating statutory and regulatory changes in response to the potential impacts of climate change and emissions of greenhouse gases.
International treaties or agreements may also result in increasing regulation of climate change and greenhouse gas emissions, including
the introduction of greenhouse gas emissions trading mechanisms. Any such law or regulation regarding climate change and greenhouse
gas emissions could impose significant costs on our operations and on the operations of our customers and suppliers, including increased
energy, capital equipment, environmental monitoring, reporting and other compliance costs. The potential costs of “allowances,”
“offsets” or “credits” that may be part of potential cap-and-trade programs or similar proposed regulatory measures
are still uncertain. Any adopted future climate change and greenhouse gas laws or regulations could negatively impact our ability,
and that of our customers and suppliers, to compete with companies situated in areas not subject to such laws or regulations. These statutory
and regulatory initiatives, if enacted, may impact our operations directly or indirectly through our suppliers or customers. Until
the timing, scope and extent of any future law or regulation becomes known, we cannot predict the effect on our business, financial condition,
results of operations or cash flows.
Increasing scrutiny and changing expectations
from investors, lenders, customers and other market participants with respect to our Environmental, Social and Governance, or ESG, policies
may impose additional costs on us or expose us to additional risks.
Companies across all industries are facing increasing scrutiny relating to their ESG
policies. Investors, lenders and other market participants are increasingly focused on ESG practices and in recent years have placed increasing
importance on the implications and social cost of their investments. The increased focus and activism related to ESG may hinder our access
to capital, as investors and lenders may reconsider their capital investment allocation as a result of their assessment of our ESG practices.
If we do not adapt to or comply with investor, lender or other industry shareholder expectations and standards, which are evolving, or
we are perceived to have not responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement
to do so, we may suffer from reputational damage and the business, financial condition and the price of our company’s shares could
be materially and adversely affected.
While we have been profitable in recent years,
we may not be able to sustain long term profitable operations and may not have sufficient resources to fund our operations in the future.
While we achieved net profits in each of the three years ended
December 31, 2023, we have not maintained consistent profitable operations in the past. We have incurred an accumulated deficit of approximately
$4.9 million since inception. There can be no assurance that we will be able to operate profitably in the future. To the extent
that we incur operating losses in the future, we may have insufficient working capital to fund our operations. If we do not generate
sufficient cash from operations, we will be required to obtain additional financing or reduce our level of expenditure. Such financing
may not be available in the future, or, if available, may not be on terms favorable to us. If adequate funds are not available to
us, our business, and results of operations and financial condition will be materially and adversely affected.
We may not be able to receive Israeli governmental
grants in the future.
We received final approval from the Israel Innovation Authority
(“IIA”) for a 40%, royalty bearing participation in an approximately $800,000 one-year development program, which started
in January 2023. The program was extended for an additional period of 13 months until February 2025. This R&D program is meant to
enable us to achieve a significantly faster production rate in certain stages of our manufacturing process, which will also drastically
reduce scrap. There can be no assurance that the R&D program will succeed in achieving its goals or that all pre-defined benefits
will be attained, thus any additional grants are not guaranteed.
Rapid changes in the Israeli and international
electronics industries and recessionary pressures may adversely affect our business.
Our principal customers include manufacturers of defense and aerospace,
medical, industrial, telecom and networking equipment, as well as contract electronic manufacturers. The electronics industry is subject
to rapid technological changes and products obsolescence. Discontinuance or modification of products containing PCBs manufactured by our
company could have a material adverse effect on us. In addition, the electronics industry is subject to sharp economic cycles. Increased
or excess production capacity by our competitors in the PCB industry and recessionary pressure in major electronics industry segments
may result in intensified price competition and reduced margins. As a result, our financial condition and results of operations
may be adversely affected. A decline in the Israeli and international electronic markets may cause a decline in our revenues and adversely
affect our operating results and financial condition in the future.
We may not succeed in our efforts to expand
our activity in the U.S. and other foreign markets. If we are unsuccessful, our future revenues and profitability would be adversely
affected.
Our business plan assumes an increase in revenues from the U.S.
and other markets. However, our efforts to increase sales to such markets may not succeed. Sales to the medical, defense and aerospace
industries may be affected by several factors, including with respect mainly to the U.S., cutbacks in government spending. If we
are unsuccessful in such efforts, our future revenues and profitability would be adversely affected.
In order to sell PCBs to the U.S. defense market we were required
to obtain International Traffic in Arms Regulations (ITAR) registration from the U.S. Department of State, which is subject to periodic
extension. There can be no assurance that we will be able to retain our ITAR certification. In the event of a change in control of our
company, the U.S. Department of State may investigate the transfer of control and oppose the transaction. The loss of our ITAR certification
could adversely affect our future revenues and profitability.
We may be subject to the requirements of the
National Industrial Security Program Operating Manual for our facility security clearance, which is a prerequisite to our ability to work
on classified contracts for the U.S. government.
A facility security clearance is required in order to be awarded
and perform classified contracts for the U.S. Department of Defense, or the DoD, and certain other agencies of the U.S. government. To
become a cleared entity, we must comply with the requirements of the National Industrial Security Program Operating Manual, or the NISPOM,
and any other applicable U.S. government industrial security regulations. Further, due to the fact that a significant portion of our voting
equity is owned by a non-U.S. entity, we are required to be governed by and operate in accordance with the terms and requirements of a
Special Security Agreement, or the SSA.
If we were to violate the terms and requirements of the SSA, the
NISPOM, or any other applicable U.S. government industrial security regulations (which may apply to us under the terms of classified contracts),
we could lose our security clearance. We cannot be certain that we will be able to maintain our security clearance. If for some reason
our security clearance is invalidated or terminated, we may not be able to continue to perform on classified contracts and would not be
able to enter into new classified contracts, which could materially adversely affect our business, financial condition, and results of
operations.
Breaches of
network or information technology security, natural disasters or terrorist attacks could have an
adverse effect on our business.
Cyber-attacks or other breaches of network or IT security, natural
disasters, terrorist acts or acts of war may cause equipment failures or disrupt our systems and operations. We may be subject to attempts
to breach the security of our networks and IT infrastructure through cyber-attack, malware, computer viruses and other means of unauthorized
access, which could also impact the operation of our products and services. Our inability to operate our facilities as a result of such
events, even for a limited period of time, may result in significant expenses or loss of market share to other competitors in the global
PCB industry. In addition, a failure to protect the privacy of customer and employee confidential data against breaches of network or
IT security could result in damage to our reputation. During the third quarter of 2021, an unusual activity was detected on our computer
network systems. We immediately took a number of actions that led to the removal of the potential threat. The event ended without the
need to disable our systems or any other impact. We believe that the attempt was aimed at extracting information and not for a ransom
demand. Following the incident, we took steps to strengthen our computer infrastructure protection systems. Due to our quick response,
we did not have a material adverse effect on our business or operations to date. However, we could incur significant costs in order to
investigate and respond to future attacks, to respond to evolving regulatory oversight requirements, to upgrade our cybersecurity systems
and controls, and to remediate security compromise or damage. In response to past threats and attacks, we have implemented further controls
and planned for other preventative actions to further strengthen our systems against future attacks. However, we cannot assure that such
measures will provide absolute security, that we will be able to react in a timely manner in the future, or that our remediation efforts
following past or future attacks will be successful. Consequently, our financial performance and results of operations would be materially
adversely affected.
We may encounter difficulties with our international
operations and sales that may have a material adverse effect on our sales and profitability.
Contracts with U.S. military agencies, as well as military equipment
manufacturers in Europe, are subject to certain regulatory restrictions and approvals, which we may not be able to comply with or obtain.
We may not be able to maintain or increase international market demand for our products. To the extent that we cannot do so, our
business, operating results and financial condition may be adversely affected.
International operations are subject to inherent risks, including the following:
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the impact of possible recessionary environments or economic instability in multiple foreign markets; |
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changes in regulatory requirements and complying with a wide variety of foreign laws; |
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tariffs and other trade barriers; |
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the imposition of exchange or price controls or other restrictions on the conversion of foreign currencies; and |
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difficulties and costs of staffing and managing foreign operations. |
Significant political developments could also have a materially
adverse effect on us. In the United States, potential or actual changes in fiscal, defense appropriations, tax and labor policies could
have uncertain and unexpected consequences that materially impact our business, results of operations and financial condition.
Damage to our manufacturing facilities due
to fire, natural disaster, or other events could materially adversely affect our business, financial condition, insurance premiums and
results of operations.
The destruction or closure of our facility for a significant period
of time as a result of fire, explosion, act of war or terrorism, flood, tornado, earthquake, lightning, other natural disasters, required
maintenance, or other events could harm us financially, increasing our costs of doing business and limiting our ability to deliver our
manufacturing services on a timely basis.
Our insurance coverage with respect to damage to our facility or our customers’
products caused by natural disasters is limited and is subject to deductibles and coverage limits. Such coverage may not be adequate or
continue to be available at commercially reasonable rates and terms. In addition, our insurance premiums have risen due to recent events.
In the event our facility is closed on a temporary or permanent
basis as a result of a natural disaster, required maintenance or other event, our operations could be significantly disrupted. Such events
could delay or prevent product manufacturing and shipment for the time required to transfer production or repair, rebuild or replace the
affected manufacturing facilities. This time frame could be lengthy and result in significant expenses for repair and related costs. While
we have disaster recovery plans in place, there can be no assurance that such plans will be sufficient to allow our operations to continue
in the event of disaster, required repair or other extraordinary event. Any extended inability to continue our operations at unaffected
facilities following such an event would reduce our revenue and potentially damage our reputation as a reliable supplier.
On June 14, 2022, a fire broke out in one of the production
rooms in our plant in Petach-Tikva. We were able to contain the fire without any injuries and have completed the repair of the damaged
line and our manufacturing capacity has returned to normal levels. We received compensation from our insurance company regarding the damages
we incurred.
We are vulnerable to the general economic effects
of epidemics, pandemics and other public health crises, such as the COVID-19 pandemic which began in 2020.
Although public health and quarantine conditions appear to have
improved in the majority of countries globally, uncertainty remains regarding the emergence of additional strains of COVID-19 and
whether governments and health authorities around the globe will be forced to implement the same or similar quarantine measures as utilized
previously. The reimplementation of quarantine, lockdowns, or other measures in response to COVID-19 could significantly increase
the expenses we incur for precautionary protective measures, as well as the costs we incur due to operational disruptions. For example,
we may be required to limit the number of employees working based on our physical space or our production capabilities may suffer due
to shortages in raw material. Any of the foregoing factors could have an adverse effect on our business, financial condition and
operating results.
Unlike other industries, as a manufacturer of physical products,
we cannot rely on our main work force to be working from home. Israel and other countries have previously enforced quarantines and shutdowns
to slow the spread of COVID-19, and restricted international travel during this pandemic. While prior government shutdowns did not have
a significant impact on our business, a future government shutdown could result in the suspension of work in progress and delivery delays
which would adversely affect our future revenue and cash flow. We are continuing to closely monitor COVID-related impacts on all aspects
of our business and geographies, including on our workforce, supply chain and customers.
Our future results of operations and liquidity could be adversely
impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and operational
challenges faced by our customers. Continued outbreaks of COVID-19 could result in a widespread health crisis that could adversely affect
the economies and financial markets of many countries, resulting in an economic downturn or a global recession that could cause significant
volatility or decline in the trading price of our securities, affect our ability to execute strategic business activities, affect demand
for our products and likely impact our operating results. These may further limit or restrict our ability to access capital on favorable
terms, or at all, lead to consolidation that negatively impacts our business, weaken demand, increase competition, cause us to reduce
our capital spend further, or otherwise disrupt our business.
Our quarterly operating results fluctuate significantly.
Results of operations in any period should not be considered indicative of the results to be expected for any future period.
Our quarterly operating results have fluctuated significantly in
the past and are likely to fluctuate significantly in the future. Our future operating results will depend on many factors, including
(but not limited to) the following:
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the size and timing of significant orders and their fulfillment; |
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demand for our products and the mix of products purchased by our customers; |
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competition from lower priced manufacturers; |
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fluctuations in foreign currency exchange rates, primarily the NIS against the Dollar and the Euro; |
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availability of raw materials; |
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plant or line shutdowns to repair or replace malfunctioning manufacturing equipment; |
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the length of our sales cycles; |
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changes in our strategy; |
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the number of working days in the quarter; |
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changes in seasonal trends; and |
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general domestic and international economic and political conditions. |
Due to the foregoing factors, quarterly revenues and operating results are difficult
to forecast, and it is likely that there will be significant differences between the results from one quarter to another.
Quarterly sales and operating results are also difficult to forecast
because they are dependent almost exclusively on the volume and timing of orders during the quarter and our customers generally operate
with a short delivery cycle and expect delivery of a significant portion of the order within 30 working days. The delivery of such
orders is subject to the number of available working days during the quarter, which can fluctuate significantly from quarter to quarter
due to holidays and vacations. Certain prototype and pre-production runs require even shorter turn-around times stemming from customers’
product launches and design changes. In addition, there might be sudden increases, decreases or cancellations of orders for which there
are commitments, which further characterize the electronics industry and the companies that operate in it. The industry practice is to
make such changes without any penalties, except for the time and materials expended on the order.
Our expenses are, in significant part, relatively fixed. If revenue
levels fall below expectations, our net income is likely to be disproportionately adversely affected because a proportionately smaller
amount of the expenses varies with our revenues. We may not be able to be profitable on a quarterly or annual basis in the future.
An ongoing pattern of cancellations, reductions in orders and delays could have a material adverse effect on our results of operations.
Due to all of the foregoing, it is very difficult to predict revenues for any future quarter with any significant degree of accuracy.
Accordingly, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied
upon as indications of future performance.
Our products and related manufacturing processes
are often highly complex and therefore we may be delayed in product shipments. Our products may at times contain manufacturing defects,
which may subject us to product liability and warranty claims.
Our business involves highly complex manufacturing processes that
are subject to periodic failure. Process failures have occurred in the past and have resulted in delays in product shipments, and
process failures may occur in the future. Furthermore, we face an inherent business risk of exposure to warranty and product liability
claims, which are likely to be substantial in light of the use of our products in business-critical applications. Our products may
fail to perform as expected or may be alleged to result in bodily injury or property damage. If we were to manufacture and deliver products
to our customers that contain defects, whether caused by a design, manufacturing or component failure, or by deficiencies in the manufacturing
processes, it may result in delayed shipments to customers and reduced or cancelled customer orders. In addition, if any of our
products are or are alleged to be defective, we may be required to participate in a recall of such products. Over the years we have
been involved in claims or litigation relating to allegedly defective products. A successful warranty or product liability claim against
us in excess of our established warranty and legal reserves or available insurance coverage, or a requirement that we participate in a
product recall may have a material adverse effect on our business, financial condition, results of operations or cash flows and may harm
our business reputation, which could lead to customer cancellations or non-renewals.
Our products and product components need to
meet certain industry standards.
Our products and product components need to meet certain standards
for the aerospace, defense, and other industries to which we market our products. In addition, new industry standards in the aviation
and defense industries could cause some or all of our products and services to become obsolete and unmarketable, which would adversely
affect our results of operations. Noncompliance with any of these standards could limit our sales and adversely affect our business,
financial condition, and results of operations.
Our operating margins may be affected as a
result of price increases for our principal raw materials.
In recent years, our suppliers have increased their prices for
most of our principal raw materials. We have faced pressure to raise our prices for our products to compensate for supplier price increases
in order to maintain our operating margins, which we may not be able to achieve due to the competitive market. Furthermore, our existing
suppliers or new suppliers or sources of materials may pass the increase in sourcing costs due to the coronavirus outbreak to us through
price increases, thereby impacting our margins. Material changes in the pricing practices of our suppliers could negatively impact our
profitability. Additional price increases for our principal raw materials may materially affect our operating margins and future profitability.
We compete with PCB manufacturers in Asia whose
manufacturing costs are lower than ours.
In recent years, many electronics manufacturers have moved their
commercial production to Asia to take advantage of its exceptionally large, relatively low-cost labor pool. The continued outsourcing
of production to Asia is likely to result in additional commercial market share potential for PCB manufacturers with a strong presence
and reputation in such markets. Accordingly, we will need to compete with PCB manufacturers whose costs of production may be substantially
lower than ours. This competition may limit our ability to price our products profitably, which could significantly harm our financial
condition and results of operations. In addition, we distinguish ourselves by focusing on developing cutting edge technologies for high-end
products, in order to serve our sophisticated defense, aerospace and medical customers. This may limit our ability to reach certain clientele
that demand lower-end products in order to reduce their costs.
Our enterprise resource planning system is
no longer being fully supported by its developer and the hardware on which it runs may not be supported in the future. The failure
of such system before we transition to a new system may adversely affect our business and results of operations and the effectiveness
of our internal control over financial reporting.
Our current enterprise resource planning system (“ERP”)
is designed to improve the efficiency of our supply chain and financial transaction processes, accurately maintain our books and records,
and provide information important to the operation of the business to our management team. Our system is no longer being fully supported
by its developer and the hardware on which the ERP runs and the operating system of the hardware are at high risk of not being supported
in the near future. While we intend to replace the system in the future, there is no immediate plan to do so. Any significant disruption
or deficiency in our ERP could have a material adverse effect on our ability to fulfill and invoice customer orders, apply receipts, place
purchase orders with suppliers, and make disbursements, and could negatively impact data processing and electronic communications among
business locations, which may have a material adverse effect on our business, consolidated financial condition or results of operations.
Regulations related to conflict minerals may
cause us to incur additional expenses and could limit the supply and increase the costs of certain metals used in the manufacturing of
our solutions.
The Dodd-Frank Wall Street Reform and Consumer Protection Act imposes
disclosure requirements regarding the use in components of our products of “conflict minerals” mined from the Democratic Republic
of Congo and adjoining countries, whether the components of our products are manufactured by us or third parties. These requirements could
affect the pricing, sourcing and availability of minerals used in the manufacture of components we use in our products. Although the U.S.
Securities and Exchange Commission, or the SEC, has provided guidance with respect to a portion of the conflict mineral filing requirements
that may somewhat reduce our reporting practices, there are costs associated with complying with the disclosure requirements and customer
requests, such as costs related to our due diligence to determine the source of any conflict minerals used in our products.
Because of the complexity of our supply chain, we may face reputational challenges if we are unable to sufficiently verify the origins
of the subject minerals. Moreover, we are likely to encounter challenges to satisfy those customers who require that all of the components
of our products are certified as “conflict free.” If we cannot satisfy these customers, they may choose a competitor’s
products.
We may fail to maintain effective internal
control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, which could have a material adverse
effect on our operating results, investor confidence in our reported financial information, and the market price of our ordinary shares.
Our efforts to comply with the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002, governing internal control and procedures for financial reporting have resulted in increased general and administrative
expenses and a diversion of management time and attention, and we expect these efforts to require the continued commitment of significant
resources. We may identify material weaknesses or significant deficiencies in our assessments of our internal control over financial
reporting. Failure to maintain effective internal control over financial reporting could result in investigations or sanctions by
regulatory authorities, and could have a material adverse effect on our operating results, investor confidence in our reported financial
information, and the market price of our ordinary shares.
Technological change may adversely affect the
market acceptance of our products.
Technological change in the PCB industry is rapid and continual.
To satisfy customers’ needs for increasingly complex products, PCB manufacturers must continue to develop improved manufacturing
processes, provide innovative solutions and invest in new facilities and equipment. To the extent we determine that new technologies
and equipment are required to remain competitive, the development, acquisition and implementation of such technologies and equipment are
likely to require significant capital investment. We expect that we will need to invest large amounts in the next few years to replace
or refurbish old equipment and to remain competitive in the market. This capital may not be available to us in the future for such
purposes and any new manufacturing processes developed by us may not become or remain commercially viable. As a result, we may not
be able to maintain our current technological position. Furthermore, the PCB industry may in the future encounter competition from
new technologies that may reduce demand for PCBs or may render existing technology less competitive or obsolete. Our future process
development efforts may not be successful or the emergence of new technologies, industry standards or customer requirements may render
our technology, equipment or processes obsolete or uncompetitive.
The measures we take in order to protect our
intellectual property may not be effective or sufficient.
Our success depends in part on our proprietary techniques and manufacturing
expertise, particularly in the area of complex multi-layer and flex-rigid PCBs. We currently rely on a combination of trade secrets,
copyright and trademark law, together with non-disclosure and invention assignment agreements, to establish and protect the proprietary
rights and technology used in our products. Like many companies in the PCB industry, we currently do not hold any patents.
We believe that, because of the rapid pace of technological change in the electronics industry, the legal protections for our products
are less significant factors in our success than the knowledge, ability and experience of our employees, the frequency of product enhancements
and the timeliness and quality of support services that we provide.
We generally enter into confidentiality agreements with our employees,
consultants, customers and potential customers and limit the access to and the distribution of our proprietary information. Despite
these precautions, it may be possible for a third party to copy or otherwise obtain and use our technology without authorization, or to
develop similar technology independently. Further, the laws of certain countries in which we sell our products do not protect our
intellectual property rights to the same extent as do the laws of the United States. Substantial unauthorized use of our products could
have a material adverse effect on our business. We cannot make assurances that our means of protecting our proprietary rights will
be adequate or that our competitors will not independently develop similar technology.
Claims that our products
infringe upon the intellectual property of third parties may require us to incur significant costs.
While we do not believe that our products and proprietary rights
infringe upon the proprietary rights of others, third parties may assert infringement claims against us or claims that we have violated
a patent or infringed on a copyright, trademark or other proprietary right belonging to them. Any infringement claim, even one without
merit, could result in the expenditure of significant financial and managerial resources to defend against the claim. Moreover,
a successful claim of product infringement against us or a settlement could require us to pay substantial amounts or obtain a license
to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology.
We might not be able to obtain a license from the third party asserting the claim on commercially reasonable terms, if at all. We
also may not be able to obtain a license from another provider of suitable alternative technology to permit us to continue offering the
product. Infringement claims asserted against us could have a material adverse effect on our business, operating results and financial
condition.
During the last several years, a supplier of one of our software
packages requested us to conduct an audit of our operations to verify that we do not breach any intellectual property rights it allegedly
owns. We believe that we have fully, diligently and timely complied with our obligation toward the supplier. We also believe that
the supplier has no right to conduct any audit of our products or services and such audit may cause us to breach confidentiality obligations
to other entities, and therefore replied that there were no grounds for his request. If we are found to be in violation of such
supplier’s intellectual property rights, we could be liable for compensation and costs of an unknown amount. Such liability could
have a material adverse effect on our business, financial condition and results of operations.
We are affected by increasing global inflation and higher interest
rates which may increase our cost of goods and services and borrowing costs.
Global inflation and high interest rates pose a significant risk
factor to our company. The rise in inflation may lead to an increase in the cost of goods and services and to affect our sales and revenues.
In addition, higher rates of inflation in Israel and globally, and demand for high-tech personnel in Israel, have impacted, and may continue
to impact our costs of labor and the prices at which we are able to acquire goods and services from third-party vendors on which we rely.
High interest rates have increased borrowing costs, which may reduce
our ability to finance operations and investments, and potentially impact our financial stability. As a result, we are closely monitoring
global economic trends and proactively taking measures to mitigate the impact of inflation and high interest rates on our business operations
and financial performance.
Risks Related to Our Human Capital
If our workforce will be represented by a labor union we could incur
additional costs or experience work stoppages as a result of the renegotiation of our labor contracts.
Our employees have previously presented us with the possibility
of establishing an employees’ union committee, which was soon after dissolved. If our employees are represented by a union in the
future, we could incur additional costs, experience work stoppages, either of which could adversely affect our business operations, including
through a loss of revenue and strained relationships with customers. Strikes and work stoppages occur relatively frequently in Israel.
If Israeli trade unions threaten additional strikes or work stoppages and such strikes or work stoppages occur, these may, if prolonged,
have a material adverse effect on the Israeli economy and on our business, including our ability to deliver products to our customers
in a timely manner.
From time to time, we may be named as a defendant in actions
involving the alleged violation of labor laws related to employment practices, wages and benefits.
From time to time we are involved in labor related legal proceedings
arising from the operation of our business. During the last years we recruited a new management team and reduced our overall headcount,
which actions may expose our company to increased labor related legal proceedings.
Under current Israeli law, we may not be able to enforce covenants
not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.
We currently have non-competition clauses in the employment agreements
of most of our employees. The provisions of such clauses prohibit our employees, if they cease working for us, from directly competing
with us or working for our competitors. Recently, Israeli labor courts have required employers, seeking to enforce non-compete undertakings
against former employees, to demonstrate that the competitive activities of the former employee will cause harm to one of a limited number
of material interests of the employer recognized by the courts (for example, the confidentiality of certain commercial information or
a company’s intellectual property). In the event that any of our employees chooses to leave and work for one of our competitors,
we may be unable to prevent our competitors from benefiting from the expertise our former employee obtained from us, if we cannot demonstrate
to the court that we would be harmed.
We depend on key personnel for the success of our business.
Our success depends, to a significant extent, on the continued
active participation of our executive officers and other key personnel. In addition, there is significant competition for employees
with technical expertise in our industry. In order to succeed we would need to be able to:
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retain our executive officers and key technical personnel; |
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attract and retain additional qualified personnel to provide technological depth and support to enhance existing products and develop
new products; and |
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attract and retain highly skilled operations, marketing and financial personnel. |
We cannot make assurances that we will be successful in attracting,
integrating, motivating and retaining key personnel. If we are unable to retain our key personnel and attract additional qualified
personnel as and when needed, our business may be adversely affected.
Our ability to have access to insurance programs for
directors and officers may be curtailed, which may adversely affect our ability to retain and attract directors and officers.
In recent years we have experienced difficulties in obtaining directors
& officers' insurance on reasonable terms as result of a tightening insurance market. If we are unable to continue to obtain directors
& officers’ insurance or in limits of coverage sufficient to satisfy our indemnification obligations to our directors and officers,
we may be unable to retain such directors and officers and have limited ability to attract replacements.
We may be required to make payments to satisfy our indemnification
obligations.
We have agreements with our directors and senior officers which may require us, subject
to Israeli law and certain limitations in the agreements, to indemnify our directors and senior officers for certain liabilities and expenses
that may be imposed on them due to acts performed, or failures to act, in their capacity as office holders as defined in the Israeli Companies
Law, 5759-1999, or the Israeli Companies Law. These liabilities may include financial liabilities imposed by judgments or settlements
in favor of third parties, and reasonable litigation expenses imposed by a court in relation to criminal charges from which the indemnitee
was acquitted or criminal proceedings in which the indemnitee was convicted of an offense that does not require proof of criminal intent.
Furthermore, we agreed to exculpate our directors and officers with respect to a breach of their duty of care towards our company. On
October 17, 2017, our shareholders approved an updated indemnification agreement to be entered into with our directors and officers, and
our shareholders approved an amendment thereto on December 5, 2019.
Risks Related to Our Ordinary Shares
Our share price has been volatile in the past
and may continue to be susceptible to significant market price and volume fluctuations in the future.
Our ordinary shares have experienced significant market price and
volume fluctuations in the past and may experience significant market price and volume fluctuations in the future in response to factors
such as the following, some of which are beyond our control:
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quarterly variations in our operating results; |
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operating results that vary from the expectations of securities analysts and investors; |
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changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
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announcements of technological innovations or new products by us or our competitors; |
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announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital
commitments; |
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changes in the status of our intellectual property rights; |
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announcements by third parties of significant claims or proceedings against us; |
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announcements by governmental or regulatory authorities of significant investigations or proceedings against us; |
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additions or departures of key personnel; |
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changes in our cost structure due to factors beyond our control, such as new laws or regulations relating to environmental matters
and employment; |
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future sales of our ordinary shares; |
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our involvement in litigation; |
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general stock market price and volume fluctuations; |
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changes in the prices of our products and services; and |
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devaluation of the dollar against the NIS. |
Domestic and international stock markets often experience extreme
price and volume fluctuations. Market fluctuations, as well as general political and economic conditions, such as a recession, interest
rate or currency rate fluctuations or political events or hostilities in or surrounding Israel, could adversely affect the market price
of our ordinary shares. Low trading volume may also increase the price volatility of our ordinary shares. A thin trading market could
cause the price of our ordinary shares to fluctuate significantly more than the stock market as a whole.
The voting interest of Mr. Nissan, individually
and through Nistec Golan, our controlling shareholder, may conflict with the interests of other shareholders.
Mr. Yitzhak Nissan, our Chairman of the Board and the controlling
shareholder of Nistec Golan, beneficially owned 51.6% of our outstanding ordinary shares as of March 12, 2024. Accordingly, Mr. Nissan
and Nistec Golan have the ability to exercise a significant influence over our business and affairs and generally have the power to determine
all matters submitted to a vote of our shareholders where our shares vote together as a single class, including the election of directors
and approval of significant corporate transactions. Mr. Nissan and Nistec Golan may make decisions regarding Eltek and our business
that are opposed to other shareholders’ interests or with which other shareholders may disagree. Nistec Golan’s and Mr. Nissan’s
voting power could have the effect of deterring or preventing a change in control of our company that might otherwise be beneficial to
our other shareholders.
We may in the future be classified as a passive
foreign investment company, or PFIC, which would subject our U.S. investors to adverse tax rules.
U.S. holders of our ordinary shares may face income tax risks.
There is a risk that we will be treated as a “passive foreign investment company” (“PFIC”). Our treatment
as a PFIC could result in a reduction in the after-tax return to U.S. Holders (as defined below in “Material U.S. Federal Income
Tax Considerations”) of our ordinary shares and would likely cause a reduction in the value of such shares. A foreign corporation
will be treated as a PFIC for U.S. federal income tax purposes if either (1) at least 75% of its gross income for any taxable year consists
of certain types of “passive income,” or (2) at least 50% of the average value of the corporation’s gross assets produce,
or are held for the production of, such “passive income.” For purposes of these tests, “passive income” includes
dividends, interest, gains from the sale or exchange of investment property and rents and royalties other than rents and royalties that
are received from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests, income
derived from the performance of services does not constitute “passive income.” If we are treated as a PFIC, U.S. Holders of
ordinary shares would be subject to a special adverse U.S. federal income tax regime with respect to the income derived by us, the distributions
they receive from us, and the gain, if any, they derive from the sale or other disposition of their ordinary shares. In particular, dividends
paid by us, if any, would not be treated as “qualified dividend income,” eligible for preferential tax rates in the hands
of non-corporate U.S. shareholders. We believe that we were not a PFIC for the 2023 tax year. However, since PFIC status depends
upon the composition of our income and the market value of our assets from time to time, there can be no assurance that we will not become
a PFIC in any future taxable year. U.S. Holders should carefully read “Material U.S. Federal Income Tax Considerations” for
a more complete discussion of the U.S. federal income tax risks related to owning and disposing of our ordinary shares.
We do not have a dividend policy and cannot
assure you that we will continue to pay dividends in the future.
In November 2022, our board of directors declared the Company’s
first cash dividend, in the amount of US$0.17 per share and approximately $1 million in the aggregate. The dividend was paid in US dollars
on December 19, 2022 to all of the Company’s shareholders of record as of December 12, 2022. In November 2023, our board of directors
declared another cash dividend in the amount of $0.22 per share and in the aggregate an amount of approximately $1.3 million. The dividend
was paid on December 21, 2023, in US dollars, to all of the Company’s shareholders of record as of December 13, 2023.
Prior to such distributions, we had never declared or paid any
cash dividends to our shareholders. We presently do not have a dividend policy and any future dividend policy will be determined by our
board of directors and will be based upon conditions then existing, including our results of operations, financial condition, current
and anticipated cash needs, contractual restrictions and other conditions.
In addition, the distribution of dividends is limited by the Israeli
Companies Law, according to which, a company may distribute dividends out of its profits, provided that there is no reasonable concern
that such dividend distribution will prevent the company from paying all its current and foreseeable obligations, as they become due.
Notwithstanding the foregoing, dividends may be paid even if not out of profit, with the approval of a court, provided that there is no
reasonable concern that such dividend distribution will prevent the company from satisfying its current and foreseeable obligations, as
they become due. Profits, for purposes of the Israeli Companies Law, means the greater of retained earnings or earnings accumulated during
the preceding two years, after deducting previous distributions that were not deducted from the surpluses. In the event cash dividends
are declared, such dividends will be paid in NIS, and will be subject to applicable Israeli withholding taxes. For additional information,
see Item 10E. “Additional Information – Taxation – Taxation of Gains Upon Disposition of, and Dividends Paid on, our
Ordinary Shares.”
Risks Related to Our Organization and Location in Israel
Political, economic and military instability
in Israel, including due to the recent attack by Hamas and other terrorist organizations and Israel’s war against them, may disrupt
our operations and negatively affect our business condition, harm our results of operations and adversely affect our share price.
We are incorporated under the laws of, and our principal executive
offices, production, manufacturing and research and development facilities are located in, the State of Israel. As a result, political,
economic and military conditions affecting Israel directly influence us. Conflicts in North Africa and the Middle East, including
Syria which borders Israel, have resulted in continued political uncertainty and violence in the region. Efforts to improve Israel’s
relationship with the Palestinian Authority have failed to result in a permanent solution, and there have been numerous periods of hostility
in recent years. In addition, relations between Israel and Iran continue to be seriously strained, especially with regard to Iran’s
nuclear program. Such instability may affect the local and global economy, could negatively affect business conditions and, therefore,
could adversely affect our operations.
On October 7, 2023, Hamas terrorists infiltrated Israel’s
southern border from the Gaza Strip and conducted a series of attacks on civilian and military targets. Hamas also launched extensive
rocket attacks on the Israeli population and industrial centers located along Israel’s border with the Gaza Strip and in other areas
within the State of Israel. Following the attack, Israel’s security cabinet declared war against Hamas and the Israeli military
began to call-up reservists for active duty. At the same time, and because of the declaration of war against Hamas, the clash between
Israel and Hezbollah in Lebanon has escalated and there is a possibility that it will turn into a greater regional conflict in the future.
As of today, these events have had no material impact on our operations.
According to the recent guidelines of the Israeli government, our offices are open and functioning as usual. Eltek holds the status of
an Essential Enterprise as designated by the Israeli government, granting us permission to operate around the clock, 365 days a year,
as needed. However, if the war escalates and expands to the northern border with Lebanon, the Israeli government may potentially impose
additional restrictions on movement and travel, and our management and employees’ ability to effectively perform their daily tasks
might be temporarily disrupted, which may result in delays in some of our projects.
We currently have a sufficient supply of materials for our regular
operations. While there may be some possible delays in supply, we do not currently anticipate such delays to be material to our operations.
However, if the war continues for a significant amount of time, this situation may change.
Any hostilities involving Israel, terrorist activities, political
instability or violence in the region, or the interruption or curtailment of trade or transport among Israel and its trading partners
could make it more difficult for us to raise capital, if needed in the future, and adversely affect our operations and results of operations
and the market price of our Ordinary Shares.
Our commercial insurance does not cover losses that may occur as
a result of an event associated with the security situation in the Middle East. Although the Israeli government is currently committed
to covering the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this
government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses
or damages incurred by us could have a material adverse effect on our business, financial conditions and results of operations.
Parties with whom we do business have sometimes declined to travel
to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary in order to meet
our business partners face to face. In addition, the political and security situation in Israel may result in parties with whom
we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements
pursuant to force majeure provisions in such agreements. Furthermore, several countries and companies restrict business with Israel
and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies. Restrictive
laws or policies directed towards Israel or Israeli businesses may have an adverse impact on our operations, our financial results or
the expansion of our business.
The intensity and duration of Israel’s current war against
Hamas is difficult to predict at this stage, as are such war’s economic implications on our business and operations and on Israel’s
economy in general. However, if the war extends for a long period of time or expands to other fronts, such as Lebanon, Syria and the West
Bank, our operations may be harmed. It is currently not possible to predict the duration or severity of the ongoing conflict or its effects
on our business, operations and financial condition. The ongoing conflict is rapidly evolving and developing, and could disrupt our business
and operations, and adversely affect our ability to raise additional funds or sell our securities, among other impacts.
Further, Israel has held five general elections between 2019 and
2022, and prior to the Hamas attack in October 2023, the Israeli government had been pursuing legislative changes, which, if adopted,
will alter the current state of separation of powers among the three branches of government and, as a result, have sparked a considerable
political debate. Many individuals, organizations, and institutions, within and outside of Israel, voiced concerns over the potential
negative impacts of such changes and the controversy surrounding them on the business and financial environment in Israel. Such negative
impacts may include, among others, increased interest rates, currency fluctuations, inflation, civil unrest and volatility in securities
markets, which could adversely affect the conditions in which we operate and potentially deter foreign investors and organizations from
investing or transacting business with Israeli-based companies. To date, these initiatives have been substantially put on hold, but if
such changes to Israel’s judicial system are again pursued by the government and approved by the parliament, or if any of the foregoing
negative impacts were to materialize, it may have an adverse effect on our business, our results of operations and our ability to raise
additional funds.
To date, these matters have not had any material effect on our
business and results of operations; however, the internal political situation, the regional security situation and worldwide perceptions
of it are outside our control and there can be no assurance that these matters will not negatively affect us in the future.
Our results of operations may be negatively
affected by the obligation of our personnel to perform military reserve service.
Many Israeli citizens, including some of our employees, are obligated to perform several
days, and in some cases, more, of annual reserve duty in the Israeli Defense Forces until they reach the age of 40 (or older for certain
reservists) and, in the event of a military conflict, may be called to active duty for extended periods of time. Our operations
could be disrupted by the absence for a significant period of one or more of our executive officers or key employees or a significant
number of other employees due to military service. Any disruption in our operations could adversely affect our business. In response
to the series of attacks on civilian and military targets in October 2023, there have been significant call-ups of military reservists.
Currently, only a few of our employees have been called up to military service, none of whom are in management positions. However, if
the number of reservists in our company increases and becomes significant, our operations could be disrupted by such call-ups.
Service and enforcement of legal process on
us and our directors and officers may be difficult to obtain.
Service of process upon our directors and officers and the Israeli
experts named herein, all of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore,
since substantially all of our assets, all of our directors and officers and the Israeli experts named in this annual report are located
outside the United States, any judgment obtained in the United States against us or these individuals or entities may not be collectible
within the United States.
There is doubt as to the enforceability of civil liabilities under
the Securities Act and the Exchange Act in original actions instituted in Israel. However, subject to certain time limitations and
other conditions, Israeli courts may enforce final judgments of United States courts for liquidated amounts in civil matters, including
judgments based upon the civil liability provisions of those and similar acts.
Provisions of Israeli law may delay, prevent
or make difficult an acquisition of us, which could prevent a change of control and therefore impact the price of our shares.
Provisions of Israeli corporate and tax laws may have the effect
of delaying, preventing or making more difficult a merger with, or other acquisition of, us or all or a significant portion of our assets.
Israeli corporate law regulates acquisitions of shares through tender offers and mergers, requires special approvals for transactions
involving significant shareholders and regulates other matters that may be relevant to these types of transactions. These provisions of
Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult for a third party to acquire
us, even if doing so would be beneficial to our shareholders. These provisions may limit the price that investors may be willing
to pay in the future for our ordinary shares. Furthermore, Israeli tax considerations may make potential transactions undesirable to us
or to some of our shareholders.
These laws may have the effect of delaying or deterring a change
in control of our company, thereby limiting the opportunity for shareholders to receive a premium for their shares and possibly affecting
the price that some investors are willing to pay for our company’s securities. This could cause our ordinary shares to trade
at prices below the price for which third parties might be willing to pay to gain control of us. Third parties who are otherwise
willing to pay a premium over prevailing market prices to gain control of us may be unable or unwilling to do so because of these provisions
of Israeli law.
The rights and responsibilities of our shareholders
are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.
We are incorporated under Israeli law. The rights and responsibilities
of holders of our ordinary shares are governed by our memorandum of association, articles of association and by Israeli law. These
rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations.
In particular, each shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising his or her
rights and fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his or her power in
the company, including, among other things, in voting at the general meeting of shareholders on certain matters. Israeli law provides
that these duties are applicable in shareholder votes on, among other things, amendments to a company’s articles of association,
increases in a company’s authorized share capital, mergers and interested party transactions requiring shareholder approval. In
addition, a controlling shareholder of an Israeli company, or a shareholder who knows that he or she possesses the power to determine
the outcome of a shareholder vote or who has the power to appoint or prevent the appointment of a director or officer in the company,
has a duty of fairness toward the company. Currently there is not a clear definition of the duty of fairness under Israeli law.
There is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions.
These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically
imposed on shareholders of U.S. corporations.
As a foreign private issuer whose shares are
listed on the NASDAQ Capital Market, we may follow certain home country corporate governance practices instead of certain NASDAQ requirements.
We follow Israeli law and practice instead of NASDAQ rules regarding the composition of the board of directors, director nomination process
and quorum at shareholders’ meetings.
As a foreign private issuer whose shares are listed on the NASDAQ
Capital Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the
NASDAQ Stock Market Rules. We follow Israeli law and practice instead of the NASDAQ Stock Market Rules regarding the composition
of the board of directors, director nomination process and quorum at shareholders’ meetings. As a foreign private issuer listed
on the NASDAQ Capital Market, we may also follow home country practice regarding, for example, the requirement to obtain shareholder approval
for certain dilutive events (such as for the establishment or amendment of certain equity based compensation plans, an issuance that will
result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest
in the company and certain acquisitions of the stock or assets of another company). A foreign private issuer that elects to follow
a home country practice instead of NASDAQ requirements must submit to NASDAQ in advance a written statement from an independent counsel
in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws.
In addition, a foreign private issuer must disclose in its annual reports filed with the SEC, or on its website, each such requirement
that it does not follow and describe the home country practice followed by the issuer instead of any such requirement. Accordingly,
our shareholders may not be afforded the same protection as provided under NASDAQ’s corporate governance rules.
The termination or reduction of tax and other
incentives that the Israeli government provides to domestic companies may increase the costs involved in operating a company in Israel.
The Israeli government currently provides tax and capital investment
incentives to domestic companies, as well as grant and loan programs relating to research and development and marketing and export activities.
In recent years, the Israeli government has reduced the benefits available under these programs and the Israeli governmental authorities
have indicated that the government may in the future further reduce or eliminate the benefits of those programs. We have taken in the
past and may take advantage of these benefits and programs again in the future, however, there is no assurance that such benefits and
programs will continue to be available to us in the future. If such benefits and programs were terminated or further reduced, it could
have an adverse effect on our business, operating results and financial condition. The government tax benefits that we currently are entitled
to receive require us to meet several conditions and may be terminated or reduced in the future.
Some of our operations in Israel may entitle us to certain tax
benefits under the Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law, once we are profitable. If we do
not meet the requirements for maintaining these benefits, they may be reduced or canceled and the relevant operations would be subject
to Israeli corporate tax at the standard rate, which is set at 23% in 2018 and thereafter. In addition to being subject to the standard
corporate tax rate, we could be required to refund any tax benefits that we have already received, plus interest and penalties thereon.
Even if we continue to meet the relevant requirements, the tax benefits that our current “Benefited Enterprise” is entitled
to may not be continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the amount
of taxes that we pay would likely increase, as all of our operations would consequently be subject to corporate tax at the standard rate,
which could adversely affect our results of operations. Additionally, if we increase our activities outside of Israel, for example, by
way of acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefits programs.
ITEM 4. |
INFORMATION ON THE COMPANY |
A. History and Development of the Company
We were incorporated under the laws of the State of Israel on January
1, 1970. We are a public limited liability company under the Israeli Companies Law, and operate under that law and associated legislation.
Our registered offices and principal place of business are located at 20 Ben Zion Gelis Street, Sgoola Industrial Zone, Petach-Tikva 4927920,
Israel and our telephone number is +972-3-9395025. Our website is www.nisteceltek.com. The information on our website is not
incorporated by reference into this annual report.
We manufacture and supply technologically advanced custom made
circuitry solutions for use in sophisticated and compact electronic products. We provide specialized services and are a solution
provider in the PCB business, mainly in Israel, Europe, North America and Asia. PCBs are platforms that conduct an electric current among
active and passive microelectronics components, microprocessors, memories, resistors and capacitors and are integral parts of the products
produced by high‑technology industries. Our focus is on short run quick-turnaround, prototype, pre-production and low to medium
volume runs of high-end PCB products for high growth, advanced electronics applications, mainly flex-rigid PCBs.
We design and develop innovative manufacturing solutions pursuant
to complex interconnect requirements of original equipment manufacturers, and provide our customers with a wide range of custom designed
PCBs, including complex rigid, double-sided and multi-layer PCBs as well as flexible circuitry (flex and flex-rigid boards) made of several
types of high-performance base material. To complement our quick-turnaround, prototype, pre-production and low to medium volume
production capability and provide our customers with single source service, we also act as an agent for the importation of PCBs from South
East Asia when customers require high volume production runs, although such activity was not significant in recent years.
In July 2007, we established Eltek USA Inc. (“Eltek USA”),
a wholly-owned subsidiary incorporated in Delaware, to manage our sales and marketing in the North American market. In December
2008, we established Eltek Europe GmbH, a wholly-owned subsidiary that is no longer active, to manage our sales and marketing activities
for certain European customers.
In November 2013, Nistec acquired 50.5% of our issued share capital
and gained control of our company. In June 2016, Mr. Nissan, the controlling shareholder of Nistec, and our Chairman and then CEO, acquired
124,028 ordinary shares of our company in the market, increasing his ownership interest from 50.5% to 56.6%.
In December 2018, Nistec Ltd., transferred its ownership interest
in our company to Nistec Golan Ltd. Nistec Golan and Nistec Ltd. are privately held companies indirectly controlled by Mr. Nissan,
through Nistec Holdings Ltd.
In March 2019, we completed a rights offering to our shareholders
of 2,351,716 ordinary shares at a price of $1.464 per share, for an aggregate consideration of $3.4 million. Of such shares, Nistec
acquired 1,707,364 shares and Mr. Nissan individually acquired 206,712 of our ordinary shares, increasing his direct and indirect voting
interest from 56.6% to 65.4%.
In December 2020, we completed a rights offering to our shareholders
of 1,460,089 shares at a price of $3.90 per share, for an aggregate consideration of $5.7 million. Of such shares, Nistec acquired 1,159,813
shares, and Mr. Nissan individually acquired 43,576 of our ordinary shares, increasing his direct and indirect voting interest from 65.4%
to 69.6%.
In February 2024, we completed a public offering of 625,000 shares
at a price of $16.00 per share, for an aggregate consideration of $10 million, before expenses.
During the three years ended December 31, 2023, we invested approximately
$7 million in new equipment and the expansion of our facilities and infrastructure. Subject to availability of financial resources,
we expect to invest approximately $10 million in capital expenditures in 2024, mainly for manufacturing equipment to expand our manufacturing
capacity and to upgrade our technological capabilities. We intend to finance these expenditures with suppliers’ credit, cash flow
from operations, and our cash balances; however, external financing may not be available, or, if available, may not be on terms favorable
to us.
B. Business Overview
Industry Overview
PCBs are constructed from a variety of base raw materials.
PCBs can be double-sided or multi-layered and made of rigid, flexible, flex-rigid or high-frequency materials. In essence, they
are platforms that conduct electrical signals among active and passive microelectronics components, microprocessors, memories, resistors
and capacitors. Photolithographic type processes transfer the images of the electrical circuit onto the layers, and chemical processes
etch these lines on the boards. There are several broad categories of PCBs:
Rigid PCBs. Rigid
PCBs are the core product of the industry and can be found in virtually every electronics device. The layer count of these products
generally ranges from two to 30 layers, although some PCBs are composed of 42 layers.
Flexible and flex‑rigid
PCBs. Flexible boards are thin, light-weight circuits used to interconnect other circuit boards and electronic devices within
electronic equipment. Flex-rigid boards are composed of rigid parts and flexible layers. They generally range from two to
30 layers. Flex-rigid boards provide solutions for electronic systems that impose space
and shape restrictions and for systems in which reliability of connectivity is crucial. These
products are often found in military applications (primarily avionics), medical and measurement equipment and the automotive industry,
among other uses.
Backplanes. Backplanes
are large, high-density circuit boards with design features such as tight tolerance finished hole sizes that require precise process controls.
These products are commonly known as “motherboards” on which connectors are mounted to receive and interconnect other PCBs
and can be found primarily in telecommunications applications.
PCB manufacturers can generally be classified based on two parameters,
product sophistication and service sophistication. Product sophistication is evident in the capability of a PCB manufacturer to
offer products with higher layer counts and more complex construction, as well as in the line width and the spacing of lines on the circuit
boards. The state-of-the-art HDI technology enables manufacturers to produce PCBs with line width and spaces as narrow as 2-3 mils
and hole diameters of 4 to 6 mils.
Industry Trends
We believe that several trends are impacting the PCB manufacturing
industry. These trends include:
Shorter electronic product life
cycles. Continual advances in technology have shortened the life cycles of complex commercial electronic products, placing
greater pressure on manufacturers to quickly bring new products to market. The accelerated time-to-market and ramp-to-volume needs
of manufacturers for high-end commercial equipment create opportunities for PCB manufacturers that can offer engineering support in the
prototype stage and manufacturing scalability throughout the production life cycle.
Increasing complexity of electronic
products. Manufacturers continue to design higher performance electronic products which take advantage of advances in semiconductor
technology. This in turn requires technologically complex PCBs that can accommodate higher speeds and component densities, including
HDI, flexible and substrate PCBs. These complex PCBs can require very high layer counts, miniaturized circuit connections, advanced
manufacturing processes and materials, and high-mix production capabilities, which involve processing small lots in a flexible manufacturing
environment. Manufacturers increasingly rely upon larger PCB manufacturers, which possess the financial resources necessary to invest
in advanced manufacturing process technologies and sophisticated engineering staff, often to the exclusion of smaller PCB manufacturers
that do not possess such technologies or resources.
Decreasing concentration of global
PCB production in Asia. During the past decade, many electronics manufacturers have moved their commercial production to
Asia to take advantage of its exceptionally large, relatively low-cost labor pool. In particular, the trend has favored China, which
according to industry sources has the largest PCB market in terms of both revenue and number of suppliers. The overall technical
capability of suppliers in China has improved dramatically in recent years, and China has emerged as a global production center for cellular
phones, smartphones, tablet PCs, computers and computer peripherals, and high-end consumer electronics. However, in recent years,
there has been a growing trend of companies shifting their PCB production back to Western countries. This trend is driven by several factors
including increasing labor costs in traditional manufacturing hubs, concerns over supply chain disruptions and quality control, concerns
over IP theft and security issues and a desire to enhance supply chain resilience. The trend towards reshoring PCB production presents
an opportunity for companies in Western countries, such as ours, to tap into the growing demand for high-quality electronics and capture
a share of the global PCB market.
Decreased reliance on multiple
PCB manufacturers. Manufacturers traditionally have relied on multiple PCB manufacturers to provide different services as
an electronic product moves through its life cycle. The transfer of a product among different PCB manufacturers often results in
increased costs and inefficiencies due to incompatible technologies and manufacturing processes and production delays. In addition,
manufacturers generally find it easier and less costly to manage fewer PCB manufacturers. As a result, manufacturers are reducing
the number of PCB manufacturers and backplane assembly service providers on which they rely, presenting an opportunity for those that
can offer one-stop manufacturing capabilities — from prototype to volume production.
Increased requirements for aerospace
and defense products. The aerospace and defense markets are characterized by increasingly time-consuming and complex certification
processes, long product life cycles, and a demand for leading-edge technology with extremely high reliability and durability. While
the DoD budget faces increasing scrutiny as part of overall U.S. budget deficit reduction efforts, we anticipate that a continued DoD
commitment to new product development and upgrades — incorporating leading-edge PCB technology in products for intelligence, surveillance
and reconnaissance, communications and weapon systems — combined with Foreign Military Sales programs and a recovering global commercial
aerospace industry will support a significant long-term market for these products. In addition, the current political climate in Europe
has led to an increased demand for defense products. This has resulted in heightened interest from countries looking to upgrade their
military capabilities and secure their borders. The situation has also sparked a renewed focus on national security, with governments
investing more resources towards strengthening their defense systems.
Shortage of key raw materials.
PCB manufacturers obtain their key raw materials from a select number of suppliers. Any delays in delivery of or shortages in these
raw materials could interrupt and delay manufacturing of PCB products and may result in the cancellation of orders for our products. If
a raw material or component supplier fails to satisfy our product quality standards, including standards relating to “conflict minerals”
it could harm our customer relationships. Furthermore, if we are unable to identify an alternative source of raw material or component
supplier, we may have to modify our products or a large portion of our production process to use a substitute raw material, which requires
customers’ consent of use of such materials and which may cause delays in production and shipments, increased design and manufacturing
costs and increased prices for our products. In addition, price increases for our principal raw materials may materially affect our operating
margins and future profitability.
Uncertainty in respect of future
orders. Due to the costs involved, our customers are increasingly reluctant to maintain inventory and refrain from placing orders
significantly in advance. As a result, there is uncertainty in respect of future orders.
Introduction of new disruptive
technologies. The traditional PCB production method is the burning method, in which most of the copper is burned onto the surface
on the basis of a defined mold, at the end of which the desired processor picture is obtained. In recent years a new technology has been
introduced, the mSAP/SAP, an additive method, in which the copper in the photolithographic processes is enlarged on the basis of a predefined
mold. The advantage of this production method is the ability to utilize a limited path area on which are compressed a large number of
processors with a conductor space/width of less than 25 microns. These new semi-additive and fully additive technologies for ultra-dense
(1/1 mil line/space) topography are gaining traction and are affecting the conventional industries including us. If found to be cost effective
and reliable it can require us to adopt such production capabilities in the future.
Manufacturing and Engineering Processes
Continued significant investments in equipment are necessary in
order to maintain technological competitiveness in the PCB industry. During the three years ended December 31, 2023, we invested
approximately $7 million in machinery and equipment for that purpose.
Manufacturing Capabilities.
We have the capability to manufacture PCBs having up to 40 layers, flex-rigid boards consists of blind and buried vias and designs using
materials as thin as 1 mil. We receive orders for production with turnaround times of generally between several days to two months.
We are able to produce short runs of five to 30 units of simple type PCBs within four to five working days, and a few hundred units within
ten working days, and are capable of producing such number of boards within five working days when production line scheduling permits.
During 2018 we incurred water damage to two electrical testing
systems in our production facility. We were not able to reach an agreement for the damage and the payment from the insurance company on
our insurance claim; therefore, we filed a claim with the Israeli court. We cannot be sure that such legal proceedings in this matter
will be successful. During 2023, we invested in machinery and equipment, including UV LED exposure unit for direct imaging of solder mask,
two routing machines, CCD equipped routing machine, CCD equipped drilling machine, 2 drilling machine (4 drilling heads each), Laser direct
imaging of dry film photoresist (inner & outer layer) and AOI (automatic optical inspection) machine.
In the beginning of 2022, we decided to accelerate our investment
program in machines and equipment. The program includes investments in new production lines as well as in infrastructure in order to enable
us to increase our production capabilities as well as our efficiency. The program includes investments of $15 million and is expected
to last three years. We expect that the program will allow us to increase our yearly sales by $10-15 million, based on the continuity
of the increased demand for our products. Due to the complexity of the investment program, we may encounter delays in the schedule and
the completion of the investments.
Computer Aided Design/Computer
Aided Manufacturing (CAD/CAM). We utilize a state-of-the-art CAD system developed by Frontline PCB Solutions Ltd., an Israeli-based
company, and can receive CAD data by electronic data transmission. Our CAD workstations perform design rule checks on transmitted
designs, incorporate any customer-specific design modifications and perform manufacturability enhancements that increase PCB quality.
Advanced Finishing Capabilities
for Dense Packaging Designs. We provide a wide assortment of alternative surface finishes, including hot air solder leveling,
E-less nickel (ENIG), E- less nickel & palladium (ENEPIG), hard& soft electrolytic gold, immersion silver, outsource nickel/palladium/gold
and immersion tin, for component soldering .
Other Advanced Process Capabilities.
We provide fabrication of dense multi-layer PCBs. We use an advanced inner-layer production line, a direct laser imaging system,
mechanical and laser drilling equipment and clean room environments (ISO-7) to produce technologically advanced products.
Quality, Environmental and Safety
Standards. Our quality management system has been ISO 9001:2008 certified since July 2002. Such certification is based
on successful implementation of quality assurance requirements and includes ongoing monitoring of our business and periodic compliance
audits conducted by the Israeli Institute of Standards. We have obtained United States Department of Defense Qualified Product List
approval (MIL-PRF-55110G and MIL-P-50884E) for our products. Since 1976, our rigid glass epoxy (FR4 and FR5) and flex-rigid boards
have been UL 94V-0 certified by Underwriters Laboratories Inc. (a standards organization that offers product safety testing and certification
of product safety). Our environmental management system has been ISO 14001:2004 certified since 2005 (and prior to such date was
ISO 14001 certified from 2003). We are OHSAS 18001:2007 certified for occupation health and safety management systems since December
2007. In November 2009, we became certified to the AS 9100B quality management standard for the aerospace industry and in August
2012 we were upgraded to AS 9100C.
Sales, Customers and Marketing
Sales. In the years
ended December 31, 2023, 2022 and 2021, the primary industries for which we produced PCBs were defense and aerospace equipment (50.7%,
48.7% and 41.2% of production, respectively), medical equipment (7.3%, 8.0%, and 8.8% of production, respectively), industrial equipment
(14.4%, 7.1% and 4.4% of production, respectively), distributors, contract electronic manufacturers and others (26.7%, 36.2% and 45.6%
of production, respectively).
Customers. During
the year ended December 31, 2023, we provided PCBs to approximately 130 customers in Israel and approximately 80 customers outside
of Israel. Our customers outside of Israel are located primarily in North America, the Netherlands, India, Italy, Romania and Uruguay.
Sales to non-Israeli customers were $20 million (43% of revenues) for the year ended December 31, 2023, $17.5 million (44% of revenues)
for the year ended December 31, 2022 and $14.9 million (44% of revenues) for the year ended December 31, 2021. In the years ended December
31, 2023, 2022 and 2021, a group of affiliated companies accounted for 13.7%, 18.7% and 21.2%, of our total revenues, respectively, and
another group of affiliated companies accounted for 14%, 9.2% and 7.9% of our total revenue, respectively.
Marketing. We market
and sell our products primarily through our direct sales personnel, sales representatives and through PCB trading and manufacturing companies.
We currently have eleven persons involved in sales, of which ten persons are located in Israel and two persons are located in the United
States. In North America, we market and sell our products through Eltek USA as well as through independent local sales representatives.
PCB trading and manufacturing companies act as distributors of our products in the Netherlands, Italy, and South Africa. In India,
we market our products through a local sales representative. We maintain technical support services for our customers worldwide.
We also maintain customer service support centers that handle all logistical matters relating to the delivery of our products and receive
and handle complaints relating to delivered products. Our customer service personnel currently consist of five persons.
Our strategy is to focus on the high end of the PCB market, mainly
in flex-rigid PCBs, in which margins are better. We are currently focusing our marketing efforts on the defense and medical industries.
To penetrate the U.S. defense market, we applied for ITAR registration from the U.S. Department of State, Bureau of Political-Military
Affairs, which we received in January 2009. ITAR regulates the manufacture, export and transfer of defense articles, information
and services. ITAR is a set of U.S. government regulations that controls the export and import of certain defense-related articles
and services. The regulations restrict sensitive information and technologies only to be shared with U.S. persons, unless special
approval is acquired. To qualify for ITAR registration, we met strict requirements for corporate structure, security, record keeping
and procedures to allow us to sell our PCBs for use in U.S. defense products. In November 2009, we became certified to the AS 9100B
quality management standard for the avionic industry in order to strengthen our position in the avionic and aerospace market in North
America and Europe. In January 2014, we received accreditation from Nadcap, a global cooperative accreditation program for aerospace
engineering and related industries, for our advanced circuitry solutions, including rigid and flex-rigid printed circuit boards.
Starting in 2021, we have a dedicated sales team for commercial
activities whose members cooperate with reliable PCB manufacturers from the Far East.
We have ongoing programs to upgrade our processes by implementing
high-quality standards, employee training and special training activities for clients. Marketing efforts include recruiting independent
sales representatives in various geographic areas, the distribution of promotional materials, seminars for engineers, and the supply of
technical information to business publications.
Materials and Supplies
The materials used in the manufacture of PCBs are primarily laminates
(copper clad, with an isolating core separating them), prepreg composite materials, photo-chemical films, chemicals and inks. The
materials we use are manufactured in Europe, North America and South East Asia. Some of the materials are purchased directly from
the manufacturer, while others are purchased from local distributors.
We, like most PCB manufacturers, generally obtain our key raw materials
from a select number of suppliers. Any delays in delivery of or shortages in these raw materials could interrupt and delay manufacturing
of PCB products and may result in the cancellation of orders for our products. If a raw material or component supplier fails to satisfy
our product quality standards, including standards relating to “conflict minerals” it could harm our customer relationships.
Furthermore, if we are unable to identify an alternative source of raw material or component supplier, we may have to modify our products
or a large portion of our production process to use a substitute raw material, which requires customers’ consent of use of such
materials and which may cause delays in production and shipments, increased design and manufacturing costs and increased prices for our
products.
Competition
The global PCB industry is highly fragmented and intensely competitive,
trends that we believe will continue. The global PCB industry is characterized by rapidly changing technology, frequent new product
introductions and rapidly changing customer requirements. We compete principally in the market for complex, flex-rigid multi-layer
PCBs. In the Israeli market, we mainly compete with major PCB exporters, mainly from South East Asia, North America and Europe,
and the Israeli firm PCB Technologies Ltd. In the European market we mainly compete with Advanced Circuit Boards NV (Belgium), Dyconex
and Cicor (Switzerland), Graphics, Exception PCB and Invotec (United Kingdom), Cistelaier and Somacis (Italy), Schoeller-Electronics
GmbH (formerly Ruwel Werke GmbH) (Germany) and certain other German companies. In the North American market, we mainly compete with
TTM, Inc. (previously known as DDi Corp and Viasystems), KCA Electronics Inc., Lenthor Engineering, Printed Circuits, Inc., Teledyne.
Many of these competitors have significantly greater financial, technical and marketing resources than us. Although capital requirements
are a significant barrier to entry for manufacturing complex PCBs, the basic interconnect technology is generally not protected by patents
or copyrights. Our current competition in the rigid PCB segment is mainly from PCB manufacturers in the Far-East (mainly in China),
which have substantially lower production costs than us. Continued competitive pressures could cause us to lose market share and
reduce prices.
Backlog
Due to the costs involved, our customers are increasingly reluctant
to maintain inventory and refrain from placing orders significantly in advance. Accordingly, the backlog outstanding at any point in time
is not necessarily indicative of the level of business to be expected in the ensuing period.
Our backlog at December 31, 2023 was approximately $18.1 million
compared to a backlog of approximately $16.8 million at December 31, 2022. We include in our backlog all purchase orders scheduled
for delivery within the next 12 months.
Environmental Matters
Our environmental management system has been ISO 14001 certified
since May 2003. This certification was based on successful implementation of environmental management requirements and includes
ongoing monitoring of our processes, raw materials and products. The certification is subject to periodic compliance audits conducted
by the Israeli Institute of Standards.
PCB manufacturing requires the use of metals and chemicals classified
as hazardous substances. Water used in the manufacturing process must be treated to remove metal particles and other contaminates
before it can be discharged into the local sewer systems. We operate and maintain effluent water treatment systems and use approved
testing procedures at our manufacturing facilities. There is no assurance, however, that violations will not occur in the future.
We are also subject to environmental laws and regulations relating to the storage, use and disposal of chemicals, solid waste and other
hazardous materials, as well as air quality regulations. Environmental laws and regulations could become more stringent over time,
and the costs of compliance with more stringent laws could be substantial. Environmental regulations enacted in Israel in September
2000 provide that a company that is found to have discharged water containing contaminates will be liable for quadruple the amount normally
charged for its water consumption. Over the years, we have undertaken various actions to reduce the use of water in our manufacturing
facilities, and invested in improving our effluent wastewater treatment system to lower the amounts of inorganic salts and copper concentration
in the discharged water.
A shortage of water in Israel may reduce the allocation of water
available to manufacturing plants, including ours, which could affect the concentrations of pollutants in our wastewater, making it harder
to comply with the foregoing regulations, in which event we would be required to invest additional funds to improve our wastewater treatment
systems.
In March 2019, representatives of the Ministry of Environmental
Protection inspected our premises and issued a warning related to an alleged breach of the Clean Air Law and a warning related to the
Hazardous Materials Law (1993).
On July 18, 2022, we received a notification from the Ministry
of Environmental Protection about its intention to impose a penalty of approximately $0.1 million for an alleged breach of the Hazardous
Materials Law (1993). We have filed a request to reduce the amount of the penalty. In June 2023, the Ministry of Environmental Protection
decided to partially accept the company's request, reducing 20% of the amount of the financial sanction. Following the reduction we have
paid the penalty.
In January 2023, we received a notification from the Ministry of
Environmental Protection about its intention to impose a penalty of approximately $0.6 million for an alleged breach of the Clean Air
Law during the years 2019-2020. We have paid this penalty and recorded a relevant expense in our financial statements. We have filed an
administrative appeal to reduce the penalty and get a refund for part of the paid penalty. In February 2024, the court hearing the administrative
petition ruled on a refund of 10% of the amount of the penalty paid.
In October 2023, we received a notice from the Ministry regarding
some suspicion of contamination of the soil from a drilling survey that was done in May 2021 at the factory. On January 24, 2024, representatives
of the Ministry visited the Company's facility and informed us that an additional survey of the soil and groundwater in the facility area
would be required.
If we are found to be in violation of environmental laws in the
future, we could be liable for fees, damages, costs of remedial actions and a range of potential penalties, and could also be subject
to revocation of permits necessary to conduct our business or any part thereof. Any such liability or revocation could have a material
adverse effect on our business, financial condition and results of operations.
Intellectual Property Rights
Our success depends in part on our proprietary techniques and manufacturing
expertise, particularly in the area of manufacturing complex multi-layer and flex-rigid PCBs. Like many companies in the PCB industry,
we do not hold any patents and rely principally on trade secret protection of our intellectual property. We believe that, because
of the rapid pace of technological change in the electronics industry, the legal protections for our products are less significant factors
in our success than the knowledge, ability and experience of our employees, the frequency of product enhancements and the timeliness and
quality of support services that we provide.
C. Organizational Structure
In July 2007, we established Eltek USA Inc., a wholly-owned subsidiary
incorporated in Delaware, to manage our sales and marketing activities in the North American market.
D. Property, Plants and Equipment
Leased Facilities
Our executive offices, as well as our design, production, storage
and shipping facilities, aggregating approximately 90,000 square feet, are located in an industrial building in the Sgoola Industrial
Zone of Petach-Tikva, Israel. In 2020, we signed an amendment to the lease agreement which extend the lease contract until February 2027
with a 7% increase in rent, with an option to extend the lease for an additional five years period with an additional 3% increase in rent,
which will expire in February 2032. In the year ended December 31, 2023, we incurred $1.2 million of leasing expenses for these
premises.
ITEM 4A. |
UNRESOLVED STAFF COMMENTS
|
Not applicable.
ITEM 5. |
OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
A. Operating Results
The following discussion
of our results of operations should be read together with our consolidated financial statements and the related notes, which appear elsewhere
in this annual report. The following discussion contains forward-looking statements that reflect our current plans, estimates and
beliefs and involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this annual
report.
Overview
We were incorporated under the laws of the State of Israel in 1970.
We develop, manufacture, market and sell PCBs, including HDI multi-layered and flex-rigid boards for electronic devices. Our principal
customers include manufacturers of medical equipment, defense and aerospace equipment, industrial equipment, and telecom and networking
equipment, as well as contract electronic manufacturers. We have our principal offices and production facilities in Israel and a
marketing subsidiary in the United States.
Our consolidated financial statements appearing in this annual
report are prepared in dollars in accordance with U.S. GAAP. Our functional currency is the NIS. The consolidated financial
statements appearing in this annual report are translated into dollars at the representative rate of exchange under the current rate method.
Under such method, the income statement and cash flows statement items for each year (or period) stated in this report are translated
into dollars using the average exchange rates in effect at each period presented, and assets and liabilities for each year (or period)
are translated using the exchange rate as of the balance sheet date (as published by the Bank of Israel), except for equity accounts,
which are translated using the rates in effect at the date of the transactions. All resulting exchange differences that do not affect
our earnings are reported in the accumulated other comprehensive income as a separate component of shareholders’ equity.
Recent Developments
In October 2023, we received a notice from the Ministry of Environmental
Protection regarding some suspicion of contamination of the soil from a drilling survey that was done in May 2021 at the factory. On January
24, 2024, representatives of the Ministry visited the Company's facility and informed the Company that an additional survey of the soil
and groundwater in the facility area would be required.
Results of Operations
The following table sets forth, for the periods indicated, selected
financial information expressed as a percentage of our total revenues:
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
28.1 |
|
|
|
20.9 |
|
|
|
20.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
Selling, general and administrative expenses
|
|
|
(12.3 |
) |
|
|
(13.1 |
) |
|
|
(14.4 |
) |
Operating profit |
|
|
15.6 |
|
|
|
7.6 |
|
|
|
5.8 |
|
Financial income (expenses), net |
|
|
0.9 |
|
|
|
2.2 |
|
|
|
(1.4 |
) |
Other income (loss), net |
|
|
|
|
|
|
|
|
|
|
|
|
Profit before income tax expense
|
|
|
16.5 |
|
|
|
9.8 |
|
|
|
4.5 |
|
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Net profit |
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2023 Compared with
Year Ended December 31, 2022
Revenues. Revenues
increased by 18% to $46.7 million in the year ended December 31, 2023, from $39.6 million in the year ended December 31, 2022. The
increase in revenues is primarily attributable to the increased demand for the Company's products.
Cost of Revenues.
Cost of revenues increased by 7% to $33.6 million for the year ended December 31, 2023, from $31.4 million for the year ended December
31, 2022. The increase in cost of revenues is primarily attributable to the increase in revenues.
Gross Profit. Gross
profit increased by 58% to $13.1 million for the year ended December 31, 2023, from $8.3 million for the year ended December 31, 2022.
Gross profit as a percentage of revenues increased to 28.1% for the year ended December 31, 2023, from 20.9% for the year ended December
31, 2022. The increase in gross profit is primarily attributable to the increase in revenues.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses were $5.8 million in the year ended December 31, 2023, compared to
$5.2 million in the year ended December 31, 2022. The increase is primarily attributable to sales incentives paid in regard to the increased
sales and to the increase in our sales and marketing staff.
Operating Profit.
We recorded an operating profit of $7.2 million in the year ended December 31, 2023, compared to an operating profit of $3.0 million in
the year ended December 31, 2022. The increase is primarily attributable to the increase in revenues.
Financial Expenses, Net.
Financial income, net decreased to $0.4 million in the year ended December 31, 2023, from $0.9 million financial income in the year ended
December 31, 2022. The decrease in 2023 compared to 2022 is primarily attributable to the devaluation of the Dollar against the
NIS and its impact on our cash and trade receivable balances during the year.
Income Tax Expense.
Tax expenses were $1.4 million in the year ended December 31, 2023, compared to $0.7 million in the year ended December 31, 2022. During
the year ended December 31, 2021, we released the tax loss carryforwards valuation allowance recorded in prior years. This release resulted
in a tax benefit of $3.5 million in the year ended December 31, 2021.
Year Ended December 31, 2022 Compared with Year Ended December 31,
2021
Please see Item 5A of our Form 20-F for the year ended December
31, 2022, as amended, filed on March 29, 2023, for this comparison.
Impact of Currency Fluctuations and Inflation
Our revenues and expenses are denominated in the NIS, dollars and
Euros. Due to the different proportions of currencies our revenues and expenses are denominated in, fluctuations in rates of exchange
between NIS and other currencies may affect our operating results and financial condition. For example, the NIS value of our dollar
or Euro denominated revenues are negatively impacted in case of a devaluation of the dollar and the Euro against the NIS. The average
exchange rate for the NIS against the dollar was approximately 9.7% higher in 2023 than 2022 and the average exchange rate of the NIS
against the Euro was 12.8% higher in 2023 than 2022 and in total, these changes had a positive impact on our operating results in 2023.
The average exchange rate for the NIS against the dollar was approximately 4% higher in 2022 than 2021 and the average exchange rate of
the NIS against the Euro was 7.5% lower in 2022 than 2021, and in total, these changes had a positive impact on our operating results
in 2022.
The following table sets forth, for the periods indicated, devaluation
or appreciation of the NIS against the most important currencies for our business, the Dollar and Euro, between December 31 each year
and December 31 of the year before.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
3.1 |
% |
|
|
13.15 |
% |
|
|
(3.27 |
)% |
|
|
(6.97 |
)% |
|
|
(7.79 |
)% |
Euro |
|
|
6.9 |
% |
|
|
6.62 |
% |
|
|
(10.76 |
)% |
|
|
(1.7 |
)% |
|
|
(9.63 |
)% |
From time to time in the past we have used currency hedging instruments
in order to partially protect ourselves from currency fluctuation and may use hedging instruments from time to time in the future.
Because exchange rates between the NIS and the dollar and Euro
fluctuate continuously, exchange rate fluctuations, particularly larger periodic devaluations, may have an impact on our profitability
and period-to-period comparisons of our results. We cannot assure you that in the future our results of operations may not be materially
adversely affected by currency fluctuations.
Increase in inflation is due to many factors beyond our
control, such as rising production and labor costs, high debts, changes in the Israeli and foreign governmental policy and regulations,
and movements in exchange rates and interest rates. The Israeli national consumer price index, which is an indicator of the inflation,
was 3%, 5.3% and 2.8% in 2023, 2022 and 2021, respectively. Inflation rates may increase in the future. If inflation rates
rise, the costs of our business operations may become significantly higher than anticipated, and we may be unable to pass on such higher
costs to consumers in amounts that are sufficient to cover those increasing operating costs. As a result, further inflationary pressures
in Israel, and worldwide, may have a material adverse effect on our business, financial condition and results of operations, as well as
our liquidity and profitability.
Conditions in Israel
We are incorporated under the laws of, and our executive offices,
principal production facilities and research and development facilities are located in, the State of Israel. See Item 3D. “Key Information
– Risk Factors – Risks Relating to Our Operations in Israel” for a description of governmental, economic, fiscal, monetary
or political polices or factors that have materially affected or could materially affect our operations.
Trade Relations
Israel is a member of the United Nations, the International Monetary
Fund, the International Bank for Reconstruction and Development and the International Finance Corporation. Israel is a member of
the World Trade Organization and is a signatory to the General Agreement on Tariffs and Trade. In addition, Israel has been granted
preferences under the Generalized System of Preferences from Australia and Canada. These preferences allow Israel to export the
products covered by such programs either duty-free or at reduced tariffs. Israel is also a member of the Organization for Economic
Co-operation and Development, or the OECD, an international organization whose members are governments of mostly developed economies.
The OECD’s main goal is to promote policies that will improve the economic and social well-being of people around the world.
Israel and the E.U. concluded a Free Trade Agreement in July 1975
that confers some advantages with respect to Israeli exports to most European countries and obligated Israel to lower its tariffs with
respect to imports from these countries over a number of years. In 1985, Israel and the United States entered into an agreement
to establish a Free Trade Area. The Free Trade Area has eliminated all tariff and some non-tariff barriers on most trade between
the two countries. On January 1, 1993, an agreement between Israel and the European Free Trade Association, known as the EFTA, established
a free-trade zone between Israel and the EFTA nations. In November 1995, Israel entered into a new agreement with the E.U., which
includes a redefinition of rules of origin and other improvements, such as allowing Israel to become a member of the Research and Technology
programs of the E.U. In June 2014, Israel joined the E.U.’s Horizon 2020 Research and Innovation program. In recent
years, Israel has established commercial and trade relations with a number of other nations, including Russia, China, India, Turkey and
most recently, UAE, and other nations in Eastern Europe and Asia.
Effective Corporate Tax Rate
Israeli companies are generally subject to income tax on their
taxable income under the Income Tax Ordinance, 5721-1961. The regular corporate tax rate in Israel has been 23% since 2018. However,
our production facility qualifies as a “benefited enterprise” under the Law for the Encouragement of Capital Investments,
5719-1959, as amended. We may select a “preferred enterprise” status, which will allow us to be taxed at a rate of 16%
on all of our income. For additional information see Item 10E. “Additional Information – Taxation – Tax Benefits
under the Law for the Encouragement of Capital Investments, 5719-1959” and Note 18 to our consolidated financial statements.
As of December 31, 2023, we had approximately $5.3 million in tax
operating loss carryforwards which can be offset against future income in Israel without time limitation. In addition, as of December
31, 2023, we had $9.5 million in capital loss carry forwards, which can be offset against future capital gains in Israel without time
limitation. In Israel, we have received final tax assessments through the 1995 tax year. Tax assessments through the
2018 tax year are considered final due to the statute of limitations. Our inactive European subsidiary, Eltek Europe, has received
final tax assessments through the 2013 tax year. Our U.S. subsidiary has not yet received any final tax assessments since its incorporation.
The subsidiary is no longer subject to federal and state examinations for fiscal years before 2019.
In 2023, we recorded tax expenses of $1.4 million , mainly in respect
of our operations in Israel. In 2022, we recorded tax expenses of $0.7 million, mainly in respect of our operations in Israel. In 2021,
we reversed the valuation allowance recorded in past years due to our conclusion that it is more likely than not that the Company will
realize its deferred tax losses in the future and recorded a tax benefit of $3.5 million.
B. Liquidity and Capital Resources
As of December 31, 2023, we had $12.1 million in cash and cash
equivalents and short-term bank deposits and working capital of $16.1 million compared to $7.4 million in cash and cash equivalents and
working capital of $12.9 million at December 31, 2022.
Historically, we have financed our operations through cash generated
by operations, shareholder loans, long-term and short-term bank loans, borrowings under available credit facilities, proceeds from our
initial public offering in 1997 (approximately $5.8 million), proceeds of $4.2 million from an investment in our company by Nistec in
2013, and proceeds from rights offerings in March 2019 (approximately $2.5 million) and December 2020 (approximately $5.7 million).
In February 2024, we completed an underwritten public offering
of 625,000 of our ordinary shares at an offering price of $16.00 per share. The gross proceeds from this offering were $10,000,000 before
deducting underwriting discounts and other offering expenses. We intend to use the net proceeds to strategically invest in the expansion
of its production capabilities and for general corporate purposes, including working capital.
During 2023 we repaid all our bank loans and as of December 31,
2023 we did not have any outstanding bank debt.
As of December 31, 2023, we had revolving lines of credit of approximately
$2.4 million with Bank Hapoalim B.M. The credit lines from the banks are secured by specific pledge on certain assets, by a first priority
charge on the rest of our now-owned or after-acquired assets and by a fixed pledge on goodwill (intangible assets) and insurance rights
(rights to proceeds on insured assets in the event of damage). In addition, the agreements with the banks prohibit us from selling
or otherwise transferring any assets except in the ordinary course of business or from placing a lien on our assets without the banks’
consent.
These credit facilities may not remain available to us in the future.
All of our assets are pledged as security for our credit facilities from our banks, whose consents are required for any future pledge
of such assets.
Our working capital requirements and cash flow provided by our
operating and financing activities are likely to vary greatly from quarter to quarter, depending on the following factors: (i) the timing
of orders and deliveries; (ii) net profit in the period; (iii) the purchase of new equipment; (iv) the build‑up of inventories;
(v) the payment terms offered to our customers; and (vi) the payment terms offered by our suppliers.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Net cash provided by operating activities
|
|
|
8,862 |
|
|
|
3,829 |
|
|
|
3,875 |
|
Net cash used in investing activities
|
|
|
(2,959 |
) |
|
|
(3,029 |
) |
|
|
(1,647 |
) |
Net cash provided by (used in) financing activities |
|
|
(3,806 |
) |
|
|
(1,638 |
) |
|
|
2,124 |
|
Effect of translation adjustments
|
|
|
(185 |
) |
|
|
(1,079 |
) |
|
|
196 |
|
Net increase (decrease) in cash and cash equivalents |
|
|
1,912 |
|
|
|
(1,917 |
) |
|
|
4,548 |
|
Cash and cash equivalents at beginning of year |
|
|
7,366 |
|
|
|
9,283 |
|
|
|
4,735 |
|
Cash and cash equivalents at end of year
|
|
|
9,278 |
|
|
|
7,366 |
|
|
|
9,283 |
|
The changes in assets and liabilities reflected in the cash flow
statement do not correspond exactly to the respective amounts in the balance sheets included with this annual report, mainly because our
functional currency is the NIS and our reporting currency is the dollar.
Net cash provided by operating activities was $8.9 million in the
year ended December 31, 2023. This amount was primarily attributable to our pre-tax income of $7.7 million, depreciation of fixed assets
of $1.3 million and a net increase in working capital items of $0.5 million.
Net cash provided by operating activities was $3.8 million in the
year ended December 31, 2022. This amount was primarily attributable to our pre-tax income of $3.9 million, depreciation of fixed assets
of $1.5 million and a net increase in working capital items of $1.8 million.
Net cash provided by operating activities was $3.9 million in the
year ended December 31, 2021. This amount was primarily attributable to our pre-tax income of $1.5 million, depreciation of fixed assets
of $1.8 million and a net increase in working capital items of $0.5 million.
Net cash used in investing activities was $3.0 million in the year
ended December 31, 2023, compared to $3.0 million in the year ended December 31, 2022, and $1.6 million in the year ended December 31,
2021. Net cash used in investing activities in each of the three years ended December 31, 2023 was primarily for the purchase of
fixed assets for our production lines and leasehold improvements. In 2023 it included also investment in short-term bank deposits in the
amount of $2.7 million and a repayment from our insurance company in the amount of $2 million.
Net cash used in financing activities was $3.8 million in the year
ended December 31, 2023, which was primarily attributable to the $3.3 million of repayment of long-term loans and dividend distribution
of $1.3 million.
Net cash used in financing activities was $1.6 million in the year
ended December 31, 2022, which was primarily attributable to the $0.7 million of repayment of long-term loans and dividend distribution
of $1.0 million.
Net cash provided by financing activities was $2.1 million in the
year ended December 31, 2021, which was primarily attributable to the $3.1 million of proceeds from long term loans of $3.1 million. These
amounts were partially offset by repayment of short-term credits.
Capital expenditures on a cash basis for the years ended December
31, 2023, 2022 and 2021 were approximately $2.4 million, $3.0 million and $1.5 million, respectively. Our capital expenditures in
such periods mainly
We expect to finance our 2024 operations from our cash flow from
operations and cash balances. Although we anticipate that these capital resources will be adequate to satisfy our liquidity requirements
through 2024, our liquidity could be negatively affected by the continuation of the Coronavirus outbreak, as well as by Israel’s
ongoing war against Hamas and other terrorist organizations, either of which could have an adverse effect on the global markets and on
our operations, shortage in raw materials, continued operational difficulties in our manufacturing and a decrease in demand for our products,
including the impact of changes in customer buying that may result from the general economic downturn, the stability of the dollar/NIS
exchange rate, our results of operations, our suppliers’ payment terms, our customers’ demand for extending their payment
terms and other factors detailed in Item 3D “Key Information - Risk Factors”. If available liquidity is not sufficient
to meet our operating and debt service obligations as they come due, we would need to pursue alternative financing arrangements or reduce
expenditures to meet our cash requirements through 2024. Such additional financing may not be available to us or, if available, may not
be obtained on terms favorable to us, and there is no assurance that we would be able to reduce discretionary spending to provide the
required liquidity.
C. Research and Development, Patents and Licenses
During January 2021 we received approval for grants from the Israeli
Investment Authority that will fund 15%-20% of our expected $1.5 million investment in Advanced Manufacturing Equipment compatible with
Industry 4.0 standards, which focuses on interconnectivity, automation, machine learning, and real-time data. In addition, during December
2022, we received final approval from the Israel Innovation Authority (“IIA”) for a 40% participation in an approximately
$800,000 one-year development program, which started in January 2023. The program was extended for an additional 13 months until February
2025. This R&D program is meant to enable Eltek to achieve a significantly faster production rate in certain stages of its manufacturing
process, which will also drastically reduce scrap. There can be no assurance that the R&D program will succeed in achieving
its goals or that all pre-defined benefits will be attained.
D. Trend Information
We include in our backlog all purchase orders scheduled for delivery
within the next 12 months. Our backlog as of December 31, 2023 was approximately $18.1 million compared to a backlog of approximately
$16.8 million as of December 31, 2022.
E. Critical Accounting Estimates
The preparation of our consolidated financial statements and other
financial information appearing in this Annual Report requires our management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate on an
on-going basis these estimates, mainly related to inventory, deferred tax assets and share based compensation expenses.
We base our estimates on our experience and on various assumptions
that we believe are reasonable under the circumstances. The results of our estimates form the basis for our management’s judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions, which could result in a decline in the trading price of our ordinary shares.
In addition to our results determined in accordance with GAAP,
we believe certain non-GAAP financial measures and key metrics may be useful in evaluating our operating performance. We sometimes in
our filings present certain non-GAAP financial measures and key performance metrics and intend to continue to present certain non-GAAP
financial measures and key performance metrics in future filings with the SEC and other public statements. Any failure to accurately report
and present our non-GAAP financial measures and key performance metrics could cause investors to lose confidence in our reported financial
and other information, which would likely have a negative effect on the trading price of our Class A ordinary shares.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation of the financial information included in this annual report:
Inventory
We are required to state our inventories at the lower of cost or
net realizable value. Cost is determined on the weighted average basis for raw materials. For work in progress and finished
goods, the cost is determined based on calculation of accumulated actual direct and indirect costs. Net realizable value is the estimated
selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
We periodically evaluate the inventory quantities on hand relative
to historical and projected sales volumes, current and historical selling prices and contractual obligations to maintain certain levels
of parts. Based on these evaluations, inventory write-offs are provided to cover risks arising from slow-moving items, discontinued products,
excess inventories, market prices lower than cost and adjusted revenue forecasts. Any write-off is recognized in our consolidated statements
of income as cost of revenues. In addition, if required, we record a liability for firm non-cancelable and unconditional purchase commitments
with contract manufacturers for quantities in excess of our forecast of future demand consistent with our valuation of excess and obsolete
inventory.
The process for evaluating these write-offs often requires us to
make subjective judgments and estimates concerning future sales potential at which such inventory will be sold in the normal course of
business. Incorrect estimates of future sales potential may cause actual results to differ from the estimates at the time such inventory
is disposed of or sold. Given the significant assumptions required and the possibility that actual conditions will differ, we consider
the valuations to be a critical accounting estimate.
Recently Issued Accounting Standards
See Note 2v to our 2023 consolidated financial statements.
ITEM 6. |
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
A. Directors and Senior Management
Directors
Set forth below are the name, age, principal position and a biographical
description of each of our directors:
Name |
|
Age |
|
Position |
Yitzhak Nissan (3)
|
|
74 |
|
Chairman of the Board of Directors |
Mordechai Marmorstein (1)(2)
|
|
77 |
|
Director |
David Rubner(4) |
|
83 |
|
Director |
Erez Meltzer(4) |
|
66 |
|
Director |
Revital Cohen-Tzemach |
|
40 |
|
Director |
Gad Dovev(1)(2)(3)(4)
|
|
77 |
|
External Director |
Ilana Lurie (1)(2)(3)(4)
|
|
51 |
|
External Director |
__________________________
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Banking Committee
(4) Member of the Special Independent Committee for M&A purposes
At our 2023 annual general meeting of shareholders held on September
12, 2023, our shareholders re-elected Messrs. Yitzhak Nissan, Mordechai Marmorstein, David Rubner and Erez Meltzer, and elected Ms. Revital
Cohen-Tzemach, to serve as a directors until our 2024 annual general meeting of shareholders. At the same annual general meeting of shareholders,
Mr. Gad Dovev was elected to serve as an external director for a fourth three-year term. Ms. Ilana Lurie was elected to serve as an external
director for a second three-year term, at our 2021 meeting of shareholders held on June 3, 2021. Our Audit Committee and Board of Directors
determined that Mordechai Marmorstein has the accounting and financial expertise required under the Companies Law in order to serve as
an independent director, and therefor Mr. Marmorstein was nominated as an independent director.
Yitzhak Nissan
has served as our Chairman of the Board of Directors since November 2013, and is a member of our Banking Committee. From October
2014 to July 2018, Mr. Nissan also served as our Chief Executive Officer. Mr. Nissan is the founder of Nistec Group and has served as
its chief executive officer since 1985. Mr. Nissan served as a member of ILTAM (Israeli Users' Association of Advanced Technologies
in Hi-Tech Integrated Systems) Presidential Board between 2008 and 2009, and as a Presiding Member of the Israeli Association of Electronics
and Software Industries between 2012 and 2022. Mr. Nissan also established the VPs Operations Forum, which brings thought leadership
to 200 VPs of operations from diverse hi-tech companies in Israel. In 2008, Mr. Nissan received the Distinguished Industry Award
from the mayor of Petach Tikva Municipality. Mr. Nissan holds a BSc. degree in Electronic Engineering from the University of Buffalo,
New York.
Dr. Mordechai
Marmorstein has served on our Board of Directors since October 2013 and is a member of our audit and compensation committees.
From 1992 to 2001, Dr. Marmorstein was the chief financial officer of Pazchim Co. Ltd. Dr. Marmorstein was also an internal auditor
and accountant at Negev Phosphate Works. Dr. Marmorstein served as the chairman of Teshet (Tourist Enterprises and Aviation Services
Co. Ltd.), a subsidiary of El-Al, the Israeli national airline, from 1999 to 2000. Dr. Marmorstein holds a B.A. degree in Economics,
an M.A. degree in Contemporary Jewry Studies and a Ph.D. in Jewish History Studies, all from Bar-Ilan University.
David Rubner has served on
our Board of Directors since October 2013. Mr. Rubner is the chairman and chief executive officer of Rubner Technology Ventures Ltd. Previously,
he was a partner in Hyperion Israel Advisors Ltd., a venture capital firm. During the years 1991 to 2000, Mr. Rubner was the president
and chief executive officer of ECI Telecom Ltd. (“ECI”). Prior to that, Mr. Rubner held several senior positions within ECI.
Before joining ECI, Mr. Rubner was a senior engineer in the Westinghouse Research Laboratories in Pittsburgh, Pennsylvania. Mr. Rubner
served on the boards of Check Point Software Ltd., Radware Ltd., Telemessage International Ltd., Koor Industries Ltd., Lipman Industries
Ltd. and a number of private companies. He also serves on the boards of trustees and executive councils of Shaare Zedek Hospital
and Jerusalem College of Technology. Mr. Rubner holds a B.Sc. (Hons) degree in engineering from Queen Mary College, University of London
and an M.S. degree from Carnegie Mellon University. Mr. Rubner was awarded 14 U.S. Patents and was the recipient of the Israeli Industry
Prize for 1995.
Erez Meltzer
has served as a director since 2009 including as the Chairman of our Board of Directors from 2011 to 2013. Mr. Meltzer was the Executive
Chairman of Hadassah Medical Center from 2014 until the end of 2020. He is currently the CEO and BOD member of Nano-x Imaging Ltd.
Mr. Meltzer also serves as a director of Hadasit Bio Holding (HBL) Ltd., Mentfield Ltd. Capital Nature Ltd., GEM Pharma Ltd., Atlasense
Ltd., Supplant Ltd., Tevel Aerobotics Technologies Ltd., Xenia Ltd. and Rivulis (Plastro) Ltd. From 2008 to 2013, Mr. Meltzer served
as the Chief Executive Officer of Gadot Chemical Tankers & Terminals Ltd. From 2006 to 2007, Mr. Meltzer served as the Chief Executive
Officer of Africa Israel Group. From 2002 to 2006, Mr. Meltzer served as the President and Chief Executive Officer of Netafim Ltd.
From 1999 to 2001, Mr. Meltzer served as the President and Chief Executive Officer of CreoScitex. Mr. Meltzer is a teaching Professor
on Crisis Management at the Tel Aviv University since 2008. Mr. Meltzer served as a colonel in the Israeli Defense Forces –
Armored Corps (reserve). Mr. Meltzer serves as the Chairman of the Lowenstein Hospital Friends Association since 1999. Mr.
Meltzer studied Economics and Business at the Hebrew University of Jerusalem and Boston University and is a graduate of the Advanced Management
Program at Harvard Business School.
Ms. Revital
Cohen-Tzemach, Yitzhak Nissan’s daughter, was first elected to the Board of Directors in September 2023. She was employed
by the Company from 2015 until 2024, first as a trainee in the office of the CEO and then as an assistant to the CEO and as a special
project manager. Since 2022, Ms. Cohen-Tzemach has been attending Board meetings as a non-voting observer. From 2008 until 2014, Ms. Cohen-Tzemach
served as a branch manager for Halperin Optics Ltd., a major Israeli optics supplier. Ms. Cohen-Tzemach holds a B.Sc. degree in Optometry
and an Executive M.B.A. degree from Bar-Ilan University.
Gad Dovev was
re-elected to serve as an external director in September 2023 and is a member of our audit, compensation and banking committees.
Mr. Dovev retired from the Israeli Ministry of Defense in August 2012. He served as head of the Israeli Ministry of Defense Mission
to the United States from August 2008 to August 2011. From August 2005 to August 2008, Mr. Dovev served as head of the Israeli Ministry
of Defense Mission to Germany. Prior to that, from 2001 to 2005, Mr. Dovev acted as Deputy General Manager of the Israeli Ministry
of Defense and Head of the Rehabilitation Department. From 1993 to 2001, Mr. Dovev served as Director of the Finance Department
and the Financial Comptroller of the Israeli Ministry of Defense. Mr. Dovev served as member of the Board of Directors of Bank Otsar
Ha-Hayal Ltd., IMI-Israel Military Industries Ltd., Shekem Ltd. and Gapim Ltd. Mr. Dovev holds a BSc. degree in Financial and Agricultural
Administration from the Hebrew University of Jerusalem.
Ms. Ilana Lurie was re-elected
to serve as an external director in June 2021 and is a member of our audit and compensation committees. Ilana Lurie is a CFO, COO and
Director with significant experience in international finance and operations, within both large technology companies as well as Start-Ups.
In the course of the last 10 years, Ilana led significant financing rounds, as well as debt restructuring processes. Ms. Lurie played
a critical role in transition from R&D to production in NovelSat and she is currently leading this activity in IO Tech, in her capacity
as CFO & COO and serving as External Director in Wearable devices (NASDAQ:WLDS). During 2012- 2020, Ms. Lurie has been CFO of NovelSat,
Landa Ventures portfolio company. Prior to her tenure at NovelSat, Ms. Lurie served as Finance Manager for the Enterprise Services business
unit (formerly EDS) of Hewlett Packard (NYSE:HPQ). From 2006 to 2011, Ms. Lurie held several financial management positions at Ness
Technologies (NASDAQ/TASE:NSTC), which, at the time, was a public company. Ms. Lurie earned her B.A. degree and an MBA degree with a specialization
in Finance and Marketing from Hebrew University of Jerusalem.
Executive Officers
Set forth below are the name, age, principal position and a biographical
description of each of our executive officers:
Name |
|
Age |
|
Position |
Eli Yaffe |
|
69 |
|
Chief Executive Officer |
Ron Freund |
|
59 |
|
Chief Financial Officer |
Yitzhak Zemach |
|
48 |
|
Director of Operations |
Oriel Sallary |
|
61 |
|
VP Sales and Marketing |
Sagi Balter |
|
43 |
|
VP Process Engineering |
Shlomi Kisluk |
|
49 |
|
VP Quality Assurance |
Eli Yaffe
joined us in July 2018 as our Chief Executive Officer. Prior to joining our company, Mr. Yaffe was the President of Carmel Forge Ltd.
(Aerospace) for almost 16 years. Prior thereto Mr. Yaffe served as the President of Urdan Industries Ltd. (Defense). Previously,
Mr. Yaffe served as VP of Business Development & Strategic Planning, responsible for strategy, M&A, and business development at
Ormat Industries Ltd., including 5 years in the USA. Mr. Yaffe holds a B.Sc. degree (with distinction) from the Technion- Israel Institute
of Technology, M.Sc. degree in Mechanical Engineering from Tel Aviv University and an MBA degree (with distinction) in Finance & Marketing
from Bar Ilan University.
Ron Freund joined us in January
2022 as our Chief Financial Officer. Mr. Freund served as the CFO of Ophir Tours Ltd. from 2015 to 2021. From 2011 to 2014, Mr. Freund
served as the CFO of Middle East Tube Company Ltd., an Israeli public company, traded on the Tel Aviv Stock Exchange (TASE). In previous
roles, Mr. Freund served as Deputy CEO and CFO of Soltam Systems LTD. and as a Senior Partner at Ernst & Young Israel. Mr. Freund
holds a B.A. degree in Accounting and Economics from the Hebrew University, Jerusalem, and is a licensed CPA (Israel).
Yitzhak Zemach
joined us in September 2018 as Vice President of Operations. Previously, Mr. Zemach served as the Plant Manager of Kahane Group Ltd.
from February 2011 to September 2018 and prior thereto he served as the VP Operations of Bental Electronics Systems Ltd. Previously, Mr.
Zemach served as Plant Manager of Aladdin Knowledge Systems and prior thereto he served as the Production Manager of the Nistec group.
Mr. Zemach holds a B.Sc. degree in Electronic Engineering from Ariel University and an MBA degree with distinction in IT from Bar Ilan
University.
Oriel Sallary joined
us in May 2020 as Vice President of Worldwide Sales and Marketing. Mr. Sallary has over 25 years of sales experience in the semiconductor
industry. Mr. Sallary served as VP Sales and Marketing at Tritech ltd. a distribution company in Israel from 2010 to April 2020. Previously,
Mr. Salary held various positions including VP Sales and Marketing, senior account executive, sales director at Tritech Ltd. Mr. Sallary
holds a bachelor’s degree in Business Administration from Ruppin Academic Center and Electronic Engineering from ORT Singalovski
College.
Sagi Balter
joined us in December 2015 as our electroplating process engineer and became our VP Process Engineering in September 2019. Previously,
Mr. Balter served as a senior researcher in the surface physics laboratory of the Weizmann Institute from 2013 to 2015. Prior thereto,
he served as a R&D engineer at American Aviation Ltd from 2009 to 2014. Mr. Balter holds a Ph.D. degree (magna cum laude) in Chemistry
from the Bar-Ilan University.
Shlomi Kisluk
joined us in October 2022 as a quality manager. Prior to joining Eltek, he served as a Quality manager in different startup companies
responsible for quality, environment, and safety management system implementation. Between 2010 and 2020 Mr. Kisluk served as a quality
manager at IDE Technologies, which is a world leader in water-treatment solutions. Mr. Kisluk holds a B.Sc. in Material Engineering from
Ben-Gurion University and an MBA from Bar-Ilan University.
There are no family relationships among any of our directors and executive officers.
B. Compensation
The following table sets forth all compensation we paid with respect to all of our directors
and executive officers as a group for the year ended December 31, 2023.
|
Salaries, fees,
|
|
Pension, retirement
|
All directors and executive officers as a group (consisting of 13 persons)
|
$2.1 million (1)
|
|
$0.4 million (2)
|
|
(1) |
During the year ended December 31, 2023, we paid each of our directors an annual fee of approximately $8,000 and an attendance
fee of $255 per meeting. These fees are included in the above amount. |
|
(2) |
The benefits amount includes expenses for automobiles and other benefits that we provide to certain of our executive officers.
|
As of December 31, 2023, options to purchase 375,156 ordinary shares
granted to our current directors and executive officers were outstanding under our equity incentive plans at a weighted average exercise
price of $6.49 per share.
For as long as we qualify as a foreign private issuer, we are not
required to comply with the proxy rules applicable to U.S. domestic companies, including the requirement to disclose information concerning
the amount and type of compensation paid to the chief executive officer, chief financial officer and the three other most highly compensated
executive officers, rather than on an aggregate basis. Nevertheless, a recent amendment to the regulations promulgated under the
Israeli Companies Law requires us to disclose the annual compensation of our five most highly compensated officers (or all the named executive
officers if there are less than five) on an individual basis, rather than on an aggregate basis, as was previously permitted for Israeli
public companies listed overseas. Under the regulations, this disclosure is required to be included in the notice of our annual
meeting of shareholders each year or in a public document that accompanies such notice, which we furnish to the SEC under cover of a Report
of Foreign Private Issuer on Form 6-K. The Israeli Companies Law regulations permit us to refer to a report filed pursuant to the
laws of the country in which our shares are listed for trading that includes the required information in lieu of its inclusion in the
notice of annual meeting. Because of that disclosure requirement under Israeli law, we are including such information in this annual
report, pursuant to the disclosure requirements of Form 20-F.
The table below reflects the compensation granted to our five most
highly compensated office holders during or with respect to the year ended December 31, 2023. All amounts reported in the table reflect
the cost to the company, as recognized in our financial statements for the year ended December 31, 2023.
Name of Officer |
|
Position of Officer |
|
Compensation for services (USD)(1)
|
|
|
|
|
|
Base salary |
|
|
Benefits
and
Perquisites
(2) |
|
|
Equity-
Based
(3)
|
|
|
Total compensation |
|
Yitzhak Nissan (4)
|
|
Chairman of the Board |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Eli Yaffe |
|
Chief Executive Officer |
|
|
|
|
|
|
311,045 |
|
|
|
|
|
|
|
|
|
Ron Freund |
|
Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
23,188 |
|
|
|
|
|
Yitzhak Zemach |
|
VP Operations |
|
|
|
|
|
|
|
|
|
|
26,728 |
|
|
|
|
|
Oriel Sallary |
|
Vice President of Worldwide Sales and Marketing |
|
|
113,793 |
|
|
|
|
|
|
|
6,609 |
|
|
|
|
|
|
(1) |
Cash compensation amounts denominated in NIS were converted into U.S. dollars at the
rate of NIS 3.69 per $1.00 (the average exchange rate in 2023). |
|
|
(2) |
Amounts reported in this column include benefits and perquisites, including those
mandated by applicable law. Such benefits and perquisites may include, to the extent applicable, bonuses, car related expenses, managers’
insurance and pension funds, payments to the National Insurance Institute, advanced education funds, medical insurance, vacation allowance
and other customary benefits. Bonuses represent accrued but not yet paid bonus payments for 2023, based on several criteria, including
revenues, profit, employees’ safety, yield and on time deliveries. |
|
|
(3) |
Represents the equity-based compensation expenses recorded in the company’s
consolidated financial statements for the year ended December 31, 2023 based on the options’ grant date fair value in accordance
with accounting guidance for equity-based compensation. |
|
|
(4) |
Paid to Nistec as management fees. |
|
C. Board Practices
Introduction
According to the Israeli Companies Law, the role of the board of
directors is to formulate a company’s policy and to supervise the chief executive officer’s exercise of his roles and operations.
According to our articles of association, our chief executive officer has the power to appoint our other executive officers who, together
with our chief executive officer, are responsible for our day-to-day management. The board of directors may exercise any power of
the company which was not assigned to another organ of the company by law or by the articles of association. The executive officers
have individual duties as determined by our chief executive officer and board of directors.
Election of Directors
Our articles of association provide for a board of directors consisting
of no less than three and no more than nine members or such other number as may be determined from time to time at a general meeting of
shareholders. Our board of directors is currently composed of seven directors.
Generally, at each annual meeting of shareholders, directors are
elected by a vote of the holders of a majority of the voting power represented and voting at such meeting. All the members of our
board of directors (except the external directors as detailed below) may be reelected upon completion of their term of office. Directors
(other than external directors) may be removed earlier from office by a resolution passed at a general meeting of our shareholders.
Our board of directors may temporarily fill vacancies in the board or add to their body until the next annual meeting of shareholders,
provided that the total number of directors will not exceed the maximum number permitted under our articles of association.
The board of directors of an Israeli public company is required
to determine that at least one or more directors will have “accounting and financial expertise,” as defined by Israeli Companies
Law regulations. Our board of directors determined, accordingly, that at least one director must have “accounting and financial
expertise.” Our board of directors has further determined that our external director, Mr. Gad Dovev, has the requisite “accounting
and financial expertise.”
We do not follow the requirements of the NASDAQ Stock Market Rules
with regard to the nomination process of directors, and instead, we follow Israeli law and practice, in accordance with which our board
of directors is authorized to recommend to our shareholders director nominees for election. See Item 16G. “Corporate Governance.”
Board Diversity
We are dedicated to ensuring equality and diversity in our Company.
Our Board of Directors has no specific policy on director diversity, but it reviews a diversity of viewpoints, backgrounds, experience,
accomplishments, education and skills when evaluating nominees. In addition, Nasdaq’s recently adopted Board Diversity Rule is a
disclosure standard designed to encourage a minimum board diversity objective for companies and provide stakeholders with consistent,
comparable disclosures concerning a listed company’s current board composition. Since August 2022, the Board Diversity Rule requires
a company that is a “foreign private issuer” (as defined in SEC rules) like Eltek to initially have, or explain why it does
not have, at least one diverse director. Our current board composition is in compliance with these requirements. Each term used above
and in the matrix below has the meaning given to it in Nasdaq Listing Rule 5605(f). The matrix below provides certain highlights of the
composition of our Board members based on self-identification as of December 31, 2023.
Board Diversity Matrix (As of December 31, 2023)
Country of Principal Executive Offices
|
Israel |
Foreign Private Issuer |
Yes |
Disclosure Prohibited under Home Country
Law |
No |
Total Number of Directors |
7 |
Part I: Gender Identity
|
Female |
Male |
Non-Binary |
Did Not Disclose
Gender
|
Directors |
2 |
5 |
0 |
0 |
Part II: Demographic
Background |
|
Underrepresented Individual in Home Country
Jurisdiction |
0 |
LGBTQ+ |
0 |
Did Not Disclose Demographic Background
|
7 |
External and Independent Directors
External directors.
Under the Israeli Companies Law, Israeli companies whose shares have been offered to the public are required to appoint at least two external
directors. A person may not be appointed as an external director if (i) the person is a relative of a controlling shareholder; (ii)
the person, or the person’s relative, partner, employer or an entity under that person’s control, has or had during the two
years preceding the date of appointment any affiliation with the company, or the controlling shareholder or its relative; (iii) in a company
that does not have a controlling shareholder, such person has an affiliation (as such term is defined in the Israeli Companies Law), at
the time of his appointment, to the chairman of the board of directors, chief executive officer, a shareholder holding at least 5% of
the share capital of the company or the chief financial officer; (iv) such person is an employee of the Israeli Securities Authority or
an Israeli stock exchange; and (v) such person’s relative, partner, employer, supervisor, or an entity he controls, has other than
negligible business or professional relations with any of the persons mentioned in subsection (ii) above, even if such relations are not
maintained on a regular basis. The term “relative” means a spouse, sibling, parent, grandparent, child or child, sibling
or parent of spouse or spouse of any of the above. The term “affiliation” includes an employment relationship, a material
business or professional relationship maintained on a regular and continuous basis, control and service as an office holder excluding
service as an external director of a company that is offering its shares to the public for the first time. In addition, no person
may serve as an external director if the person’s position or other activities create or may create a conflict of interest with
the person’s responsibilities as director or may otherwise interfere with the person’s ability to serve as director.
If, at the time an external director is appointed all members of the board of directors who are not the controlling shareholders or their
relatives, are of the same gender, then that external director must be of the other gender. A director of one company may not be
appointed as an external director of another company if a director of the other company is acting as an external director of the first
company at such time.
At least one of the external directors elected must have “accounting
and financial expertise” and any other external director must have “accounting and financial expertise” or “professional
qualification,” as such terms are defined by Israeli Companies Law regulations. We have determined that our external directors,
Mr. Gad Dovev and Ms. Ilana Lurie, have the requisite “accounting and financial expertise.”
External directors are elected by shareholders. The shareholders
voting in favor of their election must include at least a majority of the shares of the non-controlling shareholders (and those who do
not have a personal interest in the matter as a result of their relationship with the controlling shareholders) of the company voting
on the matter (not including abstaining votes). This majority approval requirement need not be met if the total shareholdings of
those non-controlling shareholders (and those who do not have a personal interest in the matter as a result of their relationship with
the controlling shareholders) voting against their election represent 2% or less of all of the voting rights in the company.
External directors serve for a three-year term, which may be renewed
for two additional three-year periods through one of the following mechanisms:
|
(i) |
the board of directors proposed the nominee and his appointment was approved by the shareholders in the manner required to appoint
external directors for their initial term; |
|
(ii) |
a shareholder holding 1% or more of the voting rights proposed the nominee, and the nominee is approved by a majority of the votes
cast by the shareholders of the company on the matter, excluding the votes of controlling shareholders and those who have a personal interest
in the matter as a result of their relationship with any controlling shareholder and excluding abstentions, provided that the aggregate
votes cast by shareholders who are not controlling shareholders and do not have a personal interest in the matter as a result of their
relationship with the controlling shareholders voted in favor of the reelection of the nominee constitute more than 2% of the voting rights
in the company, and provided further that at the time of such nomination or in the two years preceding such nomination, such external
director or his relative are neither the shareholder who proposed such nomination, or a shareholder holding 5% or more of the company's
issued share capital or voting power, in each case who, or whose controlling shareholder or any entity controlled by them (i) has business
relations with the company, or (ii) is a competitor of the company; or |
|
(iii) |
such external director nominates himself or herself for each such additional term and his or her election is approved at a shareholders
meeting by the same disinterested majority as required for the election of an external director nominated by a 1% or more shareholder
(as described above). |
Without derogating from the foregoing, under the Companies Regulations
(Relaxations for Companies Listed in a Foreign Stock Exchange), 5760-2000 (the “Relaxation Regulations”), a company whose
shares are traded on any of the foreign stock exchanges listed in Section 5A(c) of the Relaxation Regulations, such as the Company, may
extend an external director’s term of office for one or more additional three (3) year terms, if: (i) the company’s audit
committee and board of directors confirm that such extension is in the company’s best interest, given the external director’s
expertise and special contribution to the work of the board of directors and its committees; (ii) the extension is approved by the special
vote required under the Companies Law; and (iii) the external director’s overall term of office and the reasons of the audit committee
and board of directors for extending it are presented to the shareholders prior to their approval of such extension. In August 2023, the
Audit Committee and the Board of Directors have confirmed that extending Mr. Dovev’s term of office for an additional, fourth three
(3) year term, is in the best interest of the Company and its shareholders, for the following reasons: Mr. Dovev’s deep knowledge
of the Company, gained over his many years of service as an external director, such that he is intimately familiar with both the Company’s
past practices as well as its present strategy and affairs; Mr. Dovev’s extensive prior experience as a senior official of the Israeli
Ministry of Defense, specifically in charge of different aspects of procurement, by virtue of which he offers unique guidance for Board-level
decision-making with respect to one of the Company’s main type of clients – the defense sector, in Israel and abroad; and
Mr. Dovev’s faithful attendance of meetings of the Audit Committee and the Compensation Committee and the Board since his appointment
as external director.
External directors cannot be dismissed from office unless: (i)
the board of directors determines that the external director no longer meets the statutory requirements for holding the office, or that
the external director has breached the external director’s fiduciary duties and the shareholders vote, by the same majority required
for the appointment, to remove the external director after the external director has been given the opportunity to present his or her
position; (ii) a court determines, upon a request of a director or a shareholder, that the external director no longer meets the statutory
requirements of an external director or that the external director has breached his or her fiduciary duties to the company; or (iii) a
court determines, upon a request of the company or a director, shareholder or creditor of the company, that the external director is unable
to fulfill his or her duty or has been convicted of specified crimes. Each committee that is authorized to exercise powers that
are usually vested in the board of directors must include at least one external director and the audit committee and compensation committee
must each include all of the external directors. An external director is entitled to compensation as provided pursuant to Israeli
Companies Law regulations and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with
such service.
At the 2023 annual general meeting of shareholders, held on September
12, 2023, Mr. Gad Dovev was re-elected, for a fourth three-year term as an external director. At our 2021 meeting of shareholders held
on June 3, 2021, our shareholders re-elected Ms. Ilana Lurie for a second three-year term as an external director.
Independent Directors.
In general, NASDAQ Stock Market Rules require that the board of directors of a NASDAQ-listed company have a majority of independent directors
and its audit committee must have at least three members and be comprised only of independent directors, each of whom satisfies the respective
“independence” requirements of NASDAQ and the SEC. As permitted by NASDAQ home country rules, we do not maintain a majority
of independent directors on our Board, but instead we choose to follow Israeli law and practice which requires that we appoint at least
two external directors, as discussed above. Our Audit Committee however is comprised of three directors, all of whom are independent directors
under the requirements of the Israeli Companies Law, the NASDAQ and the SEC rules.
Chairman of the Board
Our articles of association provide that the chairman of the board
is appointed by the members of the board of directors. The chief executive officer (referred to as a “general manager”
under the Israeli Companies Law) or a relative of the chief executive officer may not serve as the chairman of the board of directors,
and the chairman or a relative of the chairman may not be vested with authorities of the Chief Executive Officer without shareholder approval
consisting of a majority vote of the shares present and voting at a shareholders meeting, provided that either (i) such majority includes
at least two-thirds of the shares held by all shareholders who are not controlling shareholders and do not have a personal interest in
such appointment, present and voting at such meeting; or (ii) the total number of shares of non-controlling shareholders and shareholders
who do not have a personal interest in such appointment voting against such appointment does not exceed two percent of the aggregate voting
rights in the company. Abstaining shareholders shall not be counted as part of the non-controlling shareholders, or shareholders with
no personal interest.
In addition, a person subordinated, directly or indirectly, to
the Chief Executive Officer may not serve as the chairman of the board of directors; the chairman of the board may not be vested with
authorities that are granted to those subordinated to the Chief Executive Officer; and the chairman of the board may not serve in any
other position in the company or a controlled company, but he may serve as a director or chairman of a subsidiary.
On December 29, 2016, our shareholders approved that our Chairman
of the Board would also serve as our Chief Executive Officer. In July 2018, Mr. Eli Yaffe was appointed Chief Executive Officer
and Mr. Nissan continues to serve as the Chairman of the Board of Directors of our company.
Committees of the Board of Directors
Audit Committee
Under the Israeli Companies Law, the board of directors of any
public company must establish an audit committee. The audit committee must consist of at least three directors, must include all
of the external directors and must have a majority of independent directors.
The audit committee may not include the chairman of the board of
directors, the controlling shareholder (or any of the controlling shareholder’s relatives), any director employed by the company
or by its controlling shareholder or by an entity controlled by the controlling shareholder, any director who regularly provides services
to the company or to its controlling shareholder or to an entity controlled by the controlling shareholder, and any director who derives
most of his or her income from the controlling shareholder. The chairman of the audit committee must be an external director.
A majority of the members of the audit committee constitutes a quorum, provided that the majority of the members present at the meeting
are independent directors (within the meaning of the Israeli Companies Law) and at least one external director is present at the meeting.
In addition, the NASDAQ Stock Market Rules require us to establish
an audit committee comprised of at least three members, all of whom must be independent directors, each of whom is financially literate
and satisfies the respective “independence” requirements of the SEC and NASDAQ and one of whom has accounting or related financial
management expertise at senior levels within a company.
Our audit committee meets at least once each quarter. Under
the Israeli Companies Law, the roles of the audit committee are (i) to identify deficiencies in the management of our business,
including in consultation with the internal auditor and our independent auditors, and to suggest appropriate courses of action to amend
such deficiencies; (ii) to define whether certain acts and transactions that involve conflicts of interest are material or and to define
whether transactions that involve interested parties are extraordinary or not, and to approve such transactions (which may be approved
according to certain criteria set out by our audit committee on an annual basis); (iii) to establish procedures to be followed in respect
of related party transactions with a controlling shareholder (where such are not extraordinary transactions), which may include, where
applicable, the establishment of a competitive process for such transaction, under the supervision of the audit committee, or individual,
or other committee or body selected by the audit committee, in accordance with criteria determined by the audit committee; (iv)
to determine whether to approve related party transactions, that are subject to the audit committee's approval according to the Israeli
Companies Law; (v) to determine procedures for approving certain related party transactions with a controlling shareholder, which having
been determined by the audit committee not to be extraordinary transactions, were also determined by the audit committee not to be negligible
transactions; (vi) in companies where the internal auditor's work plan is subject to Board of Directors approval, to examine and propose
revisions to the internal auditor's work plan before it is presented to the Board of Directors; (vii) to examine the performance of our
internal auditor and whether he is provided with the required resources and tools necessary for him to fulfill his role, considering,
among others, the company’s size and special needs, and to review his annual plan and approve it should the company's articles of
association require the approval of the Board for such plan; (viii) to oversee and approve the retention, performance and compensation
of our independent auditors and to establish and oversee the implementation of procedures concerning our systems of internal accounting
and auditing control; and (ix) to set procedures for handling of complaints made by company’s employees in connection with management
deficiencies and the protection to be provided to such employees.
The audit committee may consult from time to time with our independent
auditors and internal auditor with respect to matters involving financial reporting and internal accounting controls.
In the event the audit committee has discovered a material deficiency
in the company’s business operations, it must hold at least one meeting regarding such deficiency, at which the internal auditor
or the independent accountants must be present and in which office holders who are not members of the audit committee may not participate,
except for the presentation of their position.
Our audit committee consists of three members of our board of directors
who satisfy the respective requirements of the SEC, NASDAQ and Israeli law for the composition of the audit committee. Our audit
committee is currently composed of Messrs. Dovev (Chairman), Marmorstein and Ms. Lurie.
Compensation Committee
Effective December 2012, Israeli law requires our Board of Directors to appoint a compensation
committee which must be comprised of at least three directors, including all of the external directors, which shall be a majority of the
members of the compensation committee and one of whom must serve as chairman of the committee. However, subject to certain exceptions,
Israeli companies whose securities are traded on stock exchanges such as NASDAQ, and who do not have a controlling party, do not have
to meet this majority requirement; provided, however, that the compensation committee meets other Israeli Companies Law composition requirements,
as well as the requirements of the non-Israeli jurisdiction where the company’s securities are traded. Other than the external
directors, the rest of the members of the compensation committee shall be directors who will be compensated for their role as directors
only in accordance with Israeli Companies Law regulations applicable to the compensation of external directors, or amounts paid pursuant
to indemnification and/or exculpation contracts or commitments and insurance coverage.
On August 31, 2022, our shareholders approved an amended and restated
compensation policy for our company. The compensation policy must be approved every three years by our compensation committee, board
of directors and shareholders, voting with a special majority (in that order). The compensation policy is based on and references
certain matters and provisions set forth in the Israeli Companies Law, which include: (i) promoting our company’s goals, work plan
and policy with a long-term view; (ii) creating appropriate incentives for our company’s office holders, considering, among other
things, our company’s risk management policy; (iii) our company’s size and nature of operations; and (iv) with respect to
variable elements of compensation (such as annual cash bonuses), the office holder’s contribution to achieving company objectives
and maximization of our company’s profits, with a long-term view and in accordance with his or her position.
On September 12, 2023, our shareholders approved a second amended
and restated compensation policy for our company, required to render it more consistent with the Company’s written policy for recovering
incentive-based compensation paid to its current and former executive officers in the event that the Company must prepare an accounting
restatement due to its material noncompliance with any financial reporting requirements under securities laws (a “Clawback Policy”).
As required under the SEC’s final rule 10D-1, and the Nasdaq’s corresponding corporate governance listing rule 5608, which
came into effect on October 2, 2023, our board of directors adopted the Clawback Policy on August 3, 2023.
Our compensation committee is currently composed of Ms. Lurie and
Messrs. Dovev and Marmorstein.
Banking Committee
In March 2014, our Board of Directors established a banking committee,
which was authorized to adopt resolutions on behalf of the Board of Directors in respect of banking activities, including opening of new
accounts and signing credit agreements of up to $9 million. Our banking committee is currently composed of Mr. Nissan and Mr. Dovev.
Special Independent
Committee for M&A purposes
In November 2017, our Board of Directors established a Special
Independent Committee, separate and independent from our controlling shareholder, Mr. Nissan. The Special Independent Committee received
the Board’s mandate to examine and review any issue that may arise with respect to a possible consummation of an M&A transaction,
at the Special Independent Committee’s sole discretion, including, among other things, the authority to retain and consult with
financial and legal advisors, negotiate such transaction and recommend to our Board of Directors, which retains the authority on the decision
of final execution of such agreement. For the avoidance of any doubt, the Special Independent Committee may determine that the company
will not be party to an M&A Transaction. The Special Independent Committee is currently composed of Mr. Dovev, Ms. Lurie, Mr. Rubner
and Mr. Meltzer.
Internal Audit
The Israeli Companies Law requires the Board of Directors of a
public company to appoint an internal auditor nominated by the audit committee. The internal auditor must meet certain statutory
requirements of independence. The role of the internal auditor is to examine, among other things, the compliance of the company’s
conduct with applicable law and orderly business practice. In March 2016, we appointed Mr. Doron Cohen of Fahn Kanne as our internal auditor.
Directors’ Service Contracts
There are no arrangements or understandings between us and any
of our subsidiaries, on the one hand, and any of our directors, on the other hand, providing for benefits upon termination of their employment
or service as directors of our company or any of our subsidiaries. We note that the vesting of options granted to directors, as described
below, will stop at termination of their service to the Company.
Exculpation, Indemnification and Insurance of Directors and Officers
Exculpation of Office
Holders
The Israeli Companies Law provides that an Israeli company cannot
exculpate an office holder from liability with respect to a breach of his or her duty of loyalty. If permitted by its articles of
association, a company may exculpate in advance an office holder from his or her liability to the company, in whole or in part, with respect
to a breach of his or her duty of care. However, a company may not exculpate in advance a director from his or her liability to
the company with respect to a breach of his duty of care with respect to distributions.
Our articles of association allow us to exculpate any office holder
from his or her liability to us for breach of duty of care, to the maximum extent permitted by law, before or after the occurrence giving
rise to such liability. We provided an exemption letter, in the form approved by the Company's shareholders on October 17, 2013 to each
of our directors and officers, and agreed to provide the same to our future office holders.
Insurance of Office Holders
The Israeli Companies Law provides that a company may, if permitted
by its articles of association, enter into a contract to insure office holders in respect of liabilities incurred by the office holder
with respect to an act or omission performed in his or her capacity as an office holder, as a result of: (i) a breach of the office holder’s
duty of care to the company or to another person; (ii) a breach of the office holder’s duty of loyalty to the company, provided
that the office holder acted in good faith and had reasonable grounds to assume that his or her act would not prejudice the company’s
interests; and (iii) a monetary liability imposed upon the office holder in favor of another person.
Our articles of association provide that, subject to any restrictions
imposed by applicable law, we may procure, and/or undertake to procure, insurance covering any past or present or future office holder
against any liability which he or she may incur in such capacity, including insurance covering us for indemnifying such office holder,
to the maximum extent permitted by law.
Without derogating from the above, we may enter into a contract
to insure the liability of an office holder for an obligation imposed on such office holder in consequence of an act or omission done
in such office holder’s capacity as an office holder, in the following case: (i) expenses, including reasonable litigation expenses
and legal fees, incurred by the office holder as a result of a proceeding instituted against such office holder in relation to (A) infringements
that may result in imposition of financial sanction pursuant to the provisions of Chapter H'3 under the Israeli Securities Law, 5728-1968
(as amended), or the “Israeli Securities Law”, or (B) administrative infringements pursuant to the provisions of Chapter H'4
under the Israeli Securities Law or (C) infringements pursuant to the provisions of Chapter I'1 under the Israeli Securities Law; and
(ii) payments made to the injured parties of such infringement under Section 52ND(a)(1)(a) of the Israeli Securities Law.
On August 3 and August 20, 2023, our compensation committee and
board of directors approved a new D&O Policy, including the order of payment, for the benefit of the directors and officers of the
Company (including its controlling shareholder, in his capacity as chairman of our board of directors), currently serving and as may serve
from time to time. Our new D&O policy complies with all applicable limitations set forth in our amended and restated compensation
policy, which was previously approved by our compensation committee, board of directors and shareholders. In accordance with Section 1B1
of the Israeli Companies Regulations (Relaxations Regarding Interested-Party Transactions), 5760-2000 (the “IPT Regulations”),
such D&O policy requires only the approval of the Company’s compensation committee, provided that it is on market terms and
would not materially affect the company’s profitability, property or liabilities – as was indeed determined by our compensation
committee with respect to our new D&O policy. Furthermore, in accordance with Sections 1A1 and 1B(a)(5), the application of such D&O
policy to the Company’s CEO, as well as to the Company’s controlling shareholder, likewise requires only the approval of the
Company’s compensation committee and board of directors, provided that its terms are identical for all other directors and officers
of the Company – as was also determined by our compensation committee and board of directors.
Indemnification of Office
Holders
The Israeli Companies Law provides that a company may, if permitted
by its articles of association, indemnify an office holder for liabilities or expenses imposed on him or her, or incurred by him or her
concerning acts or omissions performed by the office holder in such capacity for: (i) a monetary liability imposed on the office holder
in favor of another person by any judgment, including a settlement or an arbitrator’s award approved by a court; (ii) reasonable
litigation expenses, including attorney’s fees, incurred by the office holder as a result of an investigation or proceeding instituted
against him or her by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment
against the office holder or the imposition of any monetary liability in lieu of criminal proceedings, or concluded without an indictment
against the office holder but with the imposition of a monetary liability on the office holder in lieu of criminal proceedings with respect
to a criminal offense that does not require proof of criminal intent; and (iii) reasonable litigation expenses, including attorneys’
fees, incurred by the office holder or which were imposed on him or her by a court, in an action instituted by the company or on the company’s
behalf, or by another person, against the office holder, or in a criminal charge from which the office holder was acquitted, or in a criminal
proceeding in which the office holder was convicted of a criminal offense which does not require proof of criminal intent.
The Israeli Companies Law provides that a company’s articles
of association may permit the company to indemnify an office holder following a determination to this effect made by the company after
the occurrence of the event in respect of which the office holder will be indemnified. It also provides that a company’s articles
of association may permit the company to undertake in advance to indemnify an office holder, except that with respect to a monetary liability
imposed on the office holder by any judgment, settlement or court-approved arbitration award, the undertaking must be limited to types
of events which the company’s board of directors deems foreseeable considering the company’s actual operations at the time
of the undertaking, and to an amount or standard that the board of directors has determined as reasonable under the circumstances.
Our articles of association provide that we may indemnify an office
holder retroactively for certain obligations or expenses imposed on such office holder in consequence of an act or omission done in such
office holder’s capacity as an officer in our company. These obligations and expenses include:
|
i. |
a monetary obligation imposed on the office holder in favor of another person pursuant to a judgment, including a judgment given
in settlement or an arbitrator's award that has been approved by a court; |
|
ii. |
reasonable litigation expenses, including advocates’ professional fees, incurred by the office holder pursuant to an investigation
or a proceeding commenced against the office holder by a competent authority and that was terminated without an indictment and without
having a monetary charge imposed on the office holder in exchange for a criminal procedure (as such terms are defined in the Israeli Companies
Law), or that was terminated without an indictment but with a monetary charge imposed on the office holder in exchange for a criminal
procedure in a crime that does not require proof of criminal intent or in connection with a financial sanction; |
|
iii. |
reasonable litigation expenses, including advocates’ professional fees, incurred by the office holder or which the office holder
is ordered to pay by a court, in proceedings filed against the office holder by the company or on its behalf or by another person, or
in a criminal indictment in which the office holder is acquitted, or in a criminal indictment in which the office holder is convicted
of an offence that does not require proof of criminal intent; |
|
iv. |
expenses, including reasonable litigation expenses and legal fees, incurred by an office holder as a result of a proceeding instituted
against such office holder in relation to (A) infringements that may result in imposition of financial sanction pursuant to the provisions
of Chapter H'3 under the Israeli Securities Law or (B) administrative infringements pursuant to the provisions of Chapter H'4 under the
Israeli Securities Law or (C) infringements pursuant to the provisions of Chapter I'1 under the Israeli Securities Law; and |
|
v. |
payments to an injured party of infringement under Section 52ND(a)(1)(a) of the Israeli Securities Law. |
Our articles of association also provide that we may undertake
to indemnify in advance an office holder, in accordance with the conditions set under applicable law, in respect of the obligations or
expenses specified in (i)-(v) above, provided that such undertaking is limited to types of events which in the board of directors’
opinion may be anticipated, in light of our company’s activities, at the time of granting the indemnity undertaking, and to an amount
or criteria which the board of directors determines is reasonable in the circumstances of the case, both of which are to be specified
in the indemnification undertaking.
According to our compensation policy, the total amount of indemnification
that our company undertakes towards all persons whom it has resolved to indemnify, jointly and in the aggregate, shall not exceed an amount
equal (i) 25% of the net equity of our company according to the audited or reviewed financial statement known at the time the request
for indemnification was submitted; or (ii) $3,000,000, whichever is greater.
On December 5, 2019, our shareholders approved an updated indemnification
agreement which was entered into with our directors and officers.
Limitations on Exculpation, Insurance and Indemnification
The Israeli Companies Law provides that neither a provision of
the articles of association permitting the company to enter into a contract to insure the liability of an office holder, nor a provision
in the articles of association or a resolution of the board of directors permitting the indemnification of an office holder, nor a provision
in the articles of association exempting an office holder from duty to the company shall be valid, where such insurance, indemnification
or exemption relates to any of the following: (i) a breach by the office holder of his duty of loyalty, except with respect to insurance
coverage or indemnification if the office holder acted in good faith and had reasonable grounds to assume that the act would not prejudice
the company; (ii) a breach by the office holder of his duty of care if such breach was committed intentionally or recklessly, unless the
breach was committed only negligently; (iii) any act or omission committed with intent to derive an unlawful personal gain; and (iv) any
fine or forfeiture imposed on the office holder.
Under the Israeli Companies Law, exculpation of, procurement of
insurance coverage for, and an undertaking to indemnify or indemnification of, an office holder (other than the chief executive officer)
must be approved by the company’s compensation committee and board of directors and, if such office holder is a director, also by
the company’s shareholders. Exculpation of, procurement of insurance coverage for, and an undertaking to indemnify or indemnification
of, the chief executive officer must be approved by the company’s compensation committee, board of directors and by a special majority
of the shareholders.
We have agreed to indemnify our office holders for certain liabilities
and expenses that may be imposed on them due to acts performed, or failures to act, in their capacity as office holders, including financial
liabilities imposed by judgments or settlements in favor of third parties, and reasonable litigation expenses imposed by a court in relation
to criminal charges from which the indemnitee was acquitted or criminal proceedings in which the indemnitee was convicted of an offense
that does not require proof of criminal intent, all subject to Israeli law and certain limitations in the agreements. The aggregate
amount we may pay our office holders pursuant to our indemnification undertaking may not exceed, jointly and in the aggregate, $2 million
but in any event not more than 25% of our company’s net equity. We currently maintain directors and officers liability insurance
with a per claim and aggregate coverage limit of $10 million. Under our current directors and officers liability insurance policy,
losses will be paid in accordance with the following order of priority: first, on behalf of officers and directors, for all loss that
they will be obligated to pay as a result of a claim made against them; thereafter, on our behalf, for all loss that an officer or director
will be obligated to pay as a result of a claim made against them, to the extent that we are required or permitted by law to indemnify
our officers and directors; and thereafter, on our behalf, for all loss that we will be obligated to pay as a result of a securities claim
made against us.
D. Employees
We consider our employees the most valuable asset of our company.
We offer competitive compensation and comprehensive benefits to attract and retain our employees. We believe that an engaged workforce
is key to maintaining our ability to innovate.
We are committed to providing a safe work environment for our employees
in compliance with applicable regulations. We have taken necessary precautions in response to the recent COVID-19 outbreak,
including offering employees flexibility to work from home and mandatory social distancing requirements in the workplace.
As of December 31, 2023, we employed 333 full-time employees in
Israel, of which 229 were employed in manufacturing services, 41 in process and product engineering, 28 in quality assurance and control,
16 in sales and marketing and 19 in finance, accounting, information service and administration.
As of December 31, 2022, we employed 294 full-time employees in
Israel, of which 196 were employed in manufacturing services, 36 in process and product engineering, 35 in quality assurance and control,
11 in sales and marketing and 16 in finance, accounting, information service and administration.
As of December 31, 2021, we employed 260 full-time employees in
Israel, of which 190 were employed in manufacturing services, 21 in process and product engineering, 23 in quality assurance and control,
10 in sales and marketing and 16 in finance, accounting, information service and administration.
In addition, Eltek USA, a wholly-owned Delaware subsidiary, employed
2 full-time employees as of December 31, 2023, 2 full-time employees as of December 31, 2022, and 3 full-time employees as of December
31, 2021.
Our relationships with our employees in Israel are governed by
Israeli labor law, extension orders of the Israeli Ministry of Economy and Industry and personal employment agreements. We are subject
to various Israeli labor laws, general collective bargaining agreements entered into, from time to time, between the Histadrut and the
Manufacturers Association, as well as specific and local agreements and arrangements. Such laws, agreements, and arrangements cover
the wages and employment conditions of our employees, including length of the workday, minimum daily wages for professional workers, contribution
to pension fund, insurance for work related accidents, procedures for dismissing employees, determination of severance pay, benefit programs
and annual leave. We generally provide our Israeli employees with benefits and working conditions beyond the minimums required by
law.
In the past, our employees have attempted to establish an employees’
union committee, which was later terminated.
Certain of our officers, key employees and other employees are
party to individual employment agreements. We have entered into a non-disclosure and non-competition agreement with some of our
executive officers. All of our officers and employees are subject to confidential and proprietary information provisions set forth
in our Code of Business Conduct and Ethics.
Pursuant to Israeli law, we are legally required to pay severance
benefits upon certain circumstances, including the retirement or death of an employee or the termination of employment of an employee
without due cause, equivalent to a one-month salary for each year of employment with the company. Most of our employees are covered
by pension plans providing customary benefits including retirement and severance benefits. Some of our employees are covered by
life and pension insurance policies providing similar benefits. We contribute 8.33% of base salaries to the employees’ pension
funds or life pension insurance policies to cover our liability for severance pay. Pursuant to Section 14 of the Israeli Severance
Pay Law, 5729-1963, if a company contributes to an employee’s pension fund or severance fund, then the employee is entitled only
to the severance amounts accumulated in such fund(s) upon resignation from the company or termination by the company, and the company
is not obligated to make additional payments to the employee upon termination of employment with the company.
With respect to pension benefits, we contribute between 6.5% to
7.5% of base salaries to the employees’ pension plans and 7.5% to those employees who have life insurance policies. The employees
who have pension plans contribute between 6% to 7% of base salaries to their pension plans, and the employees who have life insurance
policies contribute 6% of their base salaries to their policies. In addition, we contribute 8.33% for severance pay into the employees’
life insurance policies, pension plans or similar funds of their choice.
We also contribute between 1% to 7.5% of base salaries to certain
“professional advancement” funds for managers, engineers and certain others and such employees have to match one third of
such contribution, up to 2.5% of their base salaries.
Israeli employers and employees are required to pay predetermined
sums to the National Insurance Institute of Israel, which is similar to the United States Social Security Administration. Subject
to minimum thresholds, the employer contribution to the National Insurance Institute is at the rate of 7.6% of the salary (same in 2022)
and the employee contribution to the National Insurance Institute is at the rate of 12% of the salary (of which 5% relates to payments
for national health insurance), both of which are limited to a maximum monthly salary of NIS 49,000 (approximately $13,500) in 2023, NIS
47,500 (approximately $13,500) in 2022, and NIS 44,000 (approximately $13,800) in 2021. In the year ended December 31, 2023, our
aggregate payments as an employer to the National Insurance Institute amounted to approximately 5.2% of the salaries.
E. Share Ownership
Beneficial Ownership of Executive Officers and Directors
The following table sets forth certain information as of March 12, 2024, regarding the
beneficial ownership of our ordinary shares by our directors and executive officers and all of our executive officers and directors as
a group:
Name |
|
Number of Ordinary Shares Beneficially Owned |
|
|
Percentage of Outstanding Ordinary Shares (1)
|
|
Principal Shareholders |
|
|
|
|
|
|
Yitzhak Nissan (2)
|
|
|
3,456,820 |
|
|
|
51.6 |
% |
|
|
|
|
|
|
|
|
|
jhhsSenior Management and Directors |
|
|
|
|
|
|
|
|
Eli Yaffe (1), (3)
|
|
|
62,730 |
|
|
|
* |
|
Ron Freund (4) |
|
|
36,000 |
|
|
|
* |
|
Yitzhak Zemach (5)
|
|
|
15,500 |
|
|
|
* |
|
Oriel Sallary (6)
|
|
|
9,309 |
|
|
|
* |
|
Sagi Balter (7) |
|
|
12,084 |
|
|
|
* |
|
Shlomi Kisluk (8)
|
|
|
8,000 |
|
|
|
* |
|
Mordechai Marmorstein (9)
|
|
|
20,000 |
|
|
|
* |
|
David Rubner (10)
|
|
|
20,000 |
|
|
|
* |
|
Erez Meltzer (11)
|
|
|
30,000 |
|
|
|
* |
|
Revital Cohen-Tzemach (12)
|
|
|
11,750 |
|
|
|
* |
|
Gad Dovev (13) |
|
|
30,000 |
|
|
|
* |
|
Ilana Lurie (14)
|
|
|
20,000 |
|
|
|
* |
|
All executive officers and directors as a group (13 persons)
(15) |
|
|
3,732,193 |
|
|
|
55.7 |
% |
*Less than 1%
(1) The percentages shown are based on 6,704,830 ordinary
shares issued and outstanding as of March 12, 2024.
(2) Except for Mr. Nissan and Mr. Yaffe, none of our directors
or executive officers holds any of our ordinary shares. Mr. Nissan is the beneficial owner of 3,291,596 shares held by Nistec Golan, a
company controlled by him and holds 165,224 shares as an individual. The principal business address of Nistec Golan is 43 Hasivim Street,
Petach Tikva, Israel. Mr. Yaffe is the beneficial owner of 4,250 shares held by himself.
(3) The number of ordinary shares beneficially owned includes 58,480
ordinary shares subject to options that are currently exercisable or exercisable within 60 days of the date of this report.
(4) The number of ordinary shares beneficially owned includes 36,000
ordinary shares subject to options that are currently exercisable or exercisable within 60 days of the date of this report.
(5) The number of ordinary shares beneficially owned includes 15,500
ordinary shares subject to options that are currently exercisable or exercisable within 60 days of the date of this report.
(6) The number of ordinary shares beneficially owned includes 9,309
ordinary shares subject to options that are currently exercisable or exercisable within 60 days of the date of this report.
(7) The number of ordinary shares beneficially owned includes 12,084
ordinary shares subject to options that are currently exercisable or exercisable within 60 days of the date of this report.
(8) The number of ordinary shares beneficially owned includes 8,000
ordinary shares subject to options that are currently exercisable or exercisable within 60 days of the date of this report.
(9) The number of ordinary shares beneficially owned includes 20,000
ordinary shares subject to options that are currently exercisable or exercisable within 60 days of the date of this report.
(10) The number of ordinary shares beneficially owned includes
20,000 ordinary shares subject to options that are currently exercisable or exercisable within 60 days of the date of this report.
(11) The number of ordinary shares beneficially owned includes
30,000 ordinary shares subject to options that are currently exercisable or exercisable within 60 days of the date of this report.
(12) The number of ordinary shares beneficially owned includes
11,750 ordinary shares subject to options that are currently exercisable or exercisable within 60 days of the date of this report.
(13) The number of ordinary shares beneficially owned includes
30,000 ordinary shares subject to options that are currently exercisable or exercisable within 60 days of the date of this report.
(14) The number of ordinary shares beneficially owned includes
20,000 ordinary shares subject to options that are currently exercisable or exercisable within 60 days of the date of this report.
(15) The number of ordinary shares beneficially owned includes
282,305 ordinary shares subject to options that are currently exercisable or exercisable within 60 days of the date of this report.
2018 Share Incentive
Plan
Our 2018 share incentive plan authorized the grant of options to
purchase shares and restricted shares unites to officers, employees, directors and consultants of the company and its subsidiaries. Awards
granted under the plan to participants in various jurisdictions may be subject to specific terms and conditions for such grants as may
be approved by our board from time to time.
Each option granted under the plan is exercisable for a period
of ten years from the date of the grant of the option or the expiration dates of the option plan. The options primarily vest gradually
over four years of employment.
During 2021, 270,200 options were granted (including an adjustment
to options previously granted, to reflect the dilutive effect of the rights offering) under the plan and no options were exercised.
During 2022, 28,000 options were granted under the plan, and 9,321 options were exercised. During 2023, 151,000 options were granted under
the plan, and 171,015 options were exercised. As of December 31, 2023, options to purchase 375,156 ordinary shares were outstanding under
the plan, exercisable at an average exercise price of $6.49 per share.
In September 2018, our shareholders approved the grant of options
to purchase 60,857 ordinary shares to the CEO, effective as of, and exercisable at a price per share equal to the average daily closing
price of the ordinary shares during the 30 calendar days prior to, July 1, 2018. Following the rights’ offerings issued by the Company
in March 2019 and December 2020, these options are effectively exercisable into 78,580 ordinary shares. In June 2021, our shareholders
approved an additional grant of options to purchase 100,000 ordinary shares to the CEO, effective as of, and exercisable at a price per
share equal to the average daily closing price of the ordinary shares during the 30 calendar days prior to, December 29, 2020. In September
2023, our shareholders approved an additional grant of options to purchase 25,000 ordinary shares to the CEO, effective as of August 3,
2023.
In June 2021, our shareholders approved the grant of options to
purchase 20,000 ordinary shares to each of the directors (100,000 in the aggregate), including the external directors but excluding
Mr. Yitzhak Nissan, effective as of, and exercisable at a price per share equal to the average daily closing price of the ordinary shares
during the 30 calendar days prior to, September 6, 2021. In September 2023, our shareholders approved an additional grant of options to
purchase 10,000 ordinary Shares to each of the Company’s directors (50,000 in the aggregate), including the external directors,
but excluding Mr. Yitzhak Nissan and Ms. Revital Cohen-Tzemach, effective as of, and exercisable at a price per share equal to the average
daily closing price of the ordinary shares during the 30 calendar days prior to, October 6, 2023.
In March 2021, our Compensation Committee and Board of Directors
approved the grant of options to purchase 70,200 ordinary shares to our office holders (other than the CEO and directors) and employees.
In December 2021 and December 2022, our Compensation Committee and Board of Directors approved the grant of an additional 28,000 options
(in the aggregate) to our CFO. In August 2023, our Compensation Committee and Board of Directors approved the grant of an additional 76,000
options to our office holders (other than the CEO and directors) and employees.
In May 2023, we received a tax ruling from the Israeli tax authorities
for a tax ruling, which enables us, according to the 2018 plan, to reduce the exercise price of options granted before the December 19,
2022 dividend distribution by $0.17, which reflects the dividend payment per share, and likewise reduce the exercise price of options
granted before the December 23, 2023 dividend distribution by $0.22, which reflects the dividend payment per share.
F. |
Disclosure of a Registrant’s Action to Recover Erroneously Awarded Compensation. |
Not applicable.
ITEM 7. |
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
A. Major Shareholders
The following table sets forth certain information as of March
12, 2024 regarding the beneficial ownership by all shareholders known to us to own beneficially 5% or more of our ordinary shares:
Name |
|
Number of Ordinary Shares
Beneficially Owned (1)
|
|
|
Percentage
of Ownership (2)
|
|
Nistec Golan Ltd. (3)
|
|
|
3,291,596 |
|
|
|
49.1 |
% |
Yitzhak Nissan (3)
|
|
|
165,224 |
|
|
|
2.5 |
% |
___________
|
(1) |
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with
respect to securities. Ordinary shares relating to options or convertible notes currently exercisable or exercisable within 60 days
of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed
outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property
laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as
beneficially owned by them. |
|
(2) |
The percentages shown are based on 6,704,830 ordinary shares issued and outstanding as of March 12, 2024 |
|
(3) |
Based on a Schedule 13D/A filed on January 4, 2024. Nistec Golan is an Israeli private company controlled by Yitzhak Nissan. Accordingly,
Mr. Nissan may be deemed to be the beneficial owner of the ordinary shares held directly by Nistec Golan. |
Significant Changes in the Ownership of Major Shareholders
During 2022 and 2023 Nistec Golan and Mr. Nissan sold 609,092 ordinary
shares of the Company pursuant to a 10b5-1 plan.
Major Shareholders Voting Rights
Our principal shareholders do not have different voting rights
attached to their ordinary shares.
Record Holders
Based on the information provided to us by our transfer agent,
as of March 12, 2024, there were 9 holders of record of our ordinary shares, of which 6 record holders holding approximately 50.9% of
our ordinary shares had registered addresses in the United States. These numbers are not representative of the number of beneficial
holders of our shares nor are they representative of where such beneficial holders reside, since many of our ordinary shares were held
of record by brokers or other nominees (including one U.S. nominee company, CEDE & Co., which held approximately 50.8% of our outstanding
ordinary shares as of such date).
B. Related Party Transactions
On December 5, 2019 our shareholders approved the renewal and amendment
of a management agreement with Nistec Ltd. On June 3, 2021, the shareholders approved an additional renewal and amendment of a management
agreement with Nistec Ltd. effective January 1, 2022, for a period of 3 years. Under the terms of the amended management agreement, Mr.
Nissan serves as the Chairman of our Board of Directors. In that role, Mr. Nissan provides us with various enumerated services,
as follows: (a) coordination of the activities of our Board of Directors with respect to the development of the long term strategy
for Eltek; (b) guidance to our Board of Directors with respect to the implementation by management of its strategy, work plans and budget,
as shall be determined from time to time by our Board of Directors; (c) coordination of the activities of our Board of Directors with
respect to the regulation and implementation of proper corporate governance practices; (d) coordination of the activities of our
Board of Directors for the purpose of the approval of quarterly and annual financial statements and reports; (e) development and retention
of relations with current and future strategic investors; (f) general guidance and management of the activities of our Board of Directors;
(g) advancement of the our company’s efforts with respect to the realization of its business development strategy, including the
pursuit of mergers and acquisition opportunities; (h) coordination of the activities of our Board of Directors with respect to the definition
of strategic financial targets and in attaining such targets (i) provision of assistance to our company in cooperation with our CEO, regarding
our company’s dealings, communications and negotiations with the banks and non-banking financing institutions, including but not
limited to, assistance with respect to obtaining financing for our company’s business activities, and (j) business development services,
including assistance, in cooperation with our CEO, in the development and preservation of relationships with our company’s existing
and potential customers. Mr. Nissan will dedicate the appropriate attention, time and effort to our company in connection with the provision
of the enumerated services. The time dedicated by Mr. Nissan for the provision of such services will be as required by our company from
time to time, and in accordance with its needs.
In consideration for performing the above services, we pay Nistec
Ltd. a monthly fixed fee of NIS 90,000, plus applicable VAT. In addition, Mr. Nissan is entitled to the following compensation:
|
• |
Reimbursement of travel expenses (other than food and beverage expenses) while traveling internationally on behalf of our company,
provided that such reimbursement shall not exceed an aggregate amount of NIS 10,000 per calendar quarter. |
|
• |
Reimbursement of food and beverage expenses while traveling internationally on behalf of our company, against receipts, in accordance
with the Israeli Income Tax Regulations (Deduction of Certain Expenses), 5732-1972. |
Our Compensation Committee, Board of Directors and shareholders
at an Annual General Meeting resolved to approve the extension and amendment of the management agreement.
In September 2018, our shareholders approved:
|
i. |
The extension of the Amended PCB Purchase Procedure with Nistec Ltd.; |
Nistec purchases PCBs from our company solely to provide assembled
boards to its customers. Our sales to Nistec are based on our standard pricing, which may be subject to a discount of up to ten percent
(10%). Should the order be for imported PCBs, the quote reflects the actual price of such PCBs, plus a mark-up of at least twenty percent
(20%). Should the order be for PCBs that are being sold from excess inventory of an original order, the quote will reflect the standard
price of such PCBs, with a discount of up to fifty percent (50%) of the price actually paid for such PCBs in the original order (the “Excess
Inventory Discount”). The Excess Inventory Discount will apply only to orders from excess inventory of the first original order
of a specific PCB (i.e., should a second order of a specific PCBs generate any excess inventory and Nistec would like to purchase such
excess, the Excess Inventory Discount will not be applied to such purchase).
|
ii. |
The extension of the amended general engagement terms, processes and restrictions of the Soldering and Assembly Services Procedure with
Nistec Ltd.; |
We may acquire soldering services and/or purchasing services from Nistec. Nistec’s pricing for its
soldering services will be its standard pricing less a five percent (5%) discount. Nistec may charge for purchasing services in accordance
with the actual costs of the orders, plus a fourteen and a quarter (14.25%) commission, which reflects a five percent (5%) discount, as
compared to the commission charged to third parties by Nistec for similar services. Prices of services not subject to Nistec’s standard
pricing will be negotiated by the parties in good faith (without participation of Mr. Nissan or any of his relatives). Nistec standard
procedures govern manufacturer warranties and restrictions regarding defective assembled products. In addition to requesting Nistec to
provide us with a quote for soldering and assembly services, in the event that we require design and/or design services for production
of PCBs, we may ask Nistec to provide a quote for such services. Nistec may charge for design and/or design services in accordance with
its standard pricing for such services, less a five percent (5%) discount. Out purchases of services under the Soldering, Assembly and
Design Services Procedure may not exceed NIS 300,000 (approximately $93,000) per annum.
|
iii. |
The extension of the procedure under which we and Nistec Ltd. may jointly acquire certain services related to employees social
activities, marketing services and insurance. |
We may share with Nistec costs of insurance consulting and insurance
premiums in the event we determine that a joint insurance policy with Nistec will reduce our costs as compared to purchasing insurance
separately. Insurance expenditures will be divided between our companies as follows: (i) insurance consulting services costs will be divided
in proportion to the insurance premiums paid by our two companies in the preceding year; (ii) the joint insurance premiums will be divided
in the proportions indicated by the insurer for each of our two companies had they purchased the insurance separately. We will solicit
updated insurance proposals at least bi-annually. The decision to enter into such a joint insurance policy with Nistec will be subject
to the approval of our Audit Committee and our Board of Directors.
We may purchase social activities for the benefit of our employees
together with Nistec. The cost of such activities will be divided between us in accordance with the ratio of the number of our employees
and Nistec employees to whom the applicable activity was directed, regardless of actual participation.
We may purchase services together with Nistec. Marketing costs
will be divided between us as follows: (i) to the extent the portion of the marketing material applicable to our company can be quantified,
costs will be divided accordingly; (ii) in the event that such costs cannot be quantified, we and Nistec will each bear 50% of the marketing
costs.
In August 2022, the exculpation letter and the indemnification
letter granted to Mr. Yitzhak Nissan were further extended for an additional three (3) year period ending on December 31, 2025. In September
2023, our shareholders approved the grant of an exculpation letter and an indemnification letter to Ms. Revital Cohen-Tzemach, daughter
of Mr. Nissan, subject to her election by the shareholders to serve on the Board of Directors, for a three (3) year period, ending on
September 11, 2026.
On October 29, 2020, our shareholders approved, effective as of
August 1, 2020: (i) an increase in the gross monthly salary of Ms. Cohen-Tzemach, the daughter of Mr. Nissan, from NIS 18,000 to NIS 20,000;
and (ii) that Ms. Cohen-Tzemach will be entitled to three (3) additional vacation days per year, such that she will be entitled to 23
vacation days per year. Other than as described above, the terms of Ms. Cohen-Tzemach’s employment will remain the same, including
that Ms. Cohen-Tzemach shall be entitled to the use of a 7-seat company car, valued up to NIS 180,000, including all associated operation
and maintenance expenses. Ms. Cohen-Tzemach’s new position will be a special project manager and it was approved that our bonus
plan will also apply to her. The term of her employment agreement was extended until August 31, 2022. On October 29, 2020, the shareholders
approved a grant of a bonus of up to NIS 50,000 to Ms. Cohen-Tzemach, to cover her tuition, in accordance with our amended and restated
compensation policy. On June 3, 2021, our shareholders approved Ms. Cohen-Tzemach’s participation in the Company’s future
annual bonus plans for the years 2022 to 2024 (with the application of the annual bonus plan for the year 2024 being subject to the extension
of Ms. Cohen-Tzemach’s employment with the Company). Notwithstanding, due to the structure and discretion of the compensation committee
and board of directors in respect of the actual annual bonus amount, the grant to Ms. Cohen-Tzemach of the applicable amount for the year
2022 is also subject to our shareholders’ approval. On September 12, 2023, our shareholders approved the grant of an annual bonus
in the amount of NIS80,000 (approximately US$21,700) to Ms. Cohen-Tzemach under the Company’s annual bonus plan for the year 2022.
At the same time, the term of Ms. Cohen-Tzemach’s employment agreement was again extended until July 31, 2026, without modification
of its terms.
In September 2023, our shareholders approved (a) the grant of options
to purchase 8,000 ordinary shares to Ms. Cohen-Tzemach, effective as of, and exercisable at a price per share equal to the average daily
closing price of the ordinary shares during the 30 calendar days prior to, August 3, 2023; and (b) that the following determination be
made with respect to any and all options granted to Ms. Cohen-Tzemach’s on or before August 3, 2023 (the “Existing Options”):
so long as Ms. Cohen-Tzemach is continuously engaged by the Company as a member of the Board, and notwithstanding whether or not she is
also employed by the Company, (a) any and all unvested Existing Options shall continue to vest according to their respective vesting schedules,
as set forth in the applicable award letters; (b) any and all vested Existing Options that have not been previously exercised or expired,
shall remain exercisable until such time that Ms. Cohen-Tzemach ceases to serve on the Board, and for a period of 90 days thereafter (or
any other period as may be determined by the Board in accordance with the Option Plan and subject to our shareholders’ approval),
and (c) the grant of an annual bonus in the amount of NIS80,000 (approximately US$21,700) to Ms. Cohen-Tzemach under the Company’s
annual bonus plan for the year 2022 (the “2022 Bonus Plan”), consisting of a performance bonus in the amount NIS71,600 and
a personal-assessment bonus in an amount equal to thirty percent (30%) thereof, the sum of which was then reduced in accordance with the
aggregate bonus amount that Ms. Cohen-Tzemach was eligible to receive under the 2022 Bonus Plan, which was limited to four (4) gross monthly
salaries (while the total amount of the annual bonuses granted under the 2022 Bonus Plan was initially smaller than the total amount that
could be granted as annual bonuses to all senior employees participating in the 2022 Bonus Plan, which was limited to seven percent (7%)
of the Company’s pre-tax profit in the year 2022).
During the years 2017 to 2020 we received loans from Nistec or
Nistec Golan. All of these loans were repaid and as of December 31, 2023, we do not have any outstanding loans from Nistec or Nistec Golan.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. |
FINANCIAL INFORMATION |
A. Consolidated Statements and Other Financial
Information
See the consolidated financial statements, including the notes
thereto, and the exhibits listed in Item 18 hereof.
Legal Proceedings
From time to time we are involved in legal proceedings arising
from the operation of our business. Based on the advice of our legal counsel, management believes that except for the proceedings
discussed below, such current proceedings, if any, will not have a material adverse effect on our financial position or results of operations.
Employee Related Matters
Three of our employees filed lawsuits between May 2008 and November
2019, alleging that they had suffered personal injuries during their employment and they are seeking aggregate financial compensation
of approximately $121,000 for past damages and additional amounts for future lost income, pain and suffering as the court may determine.
Five other employees notified us between January 2011 and December 2019, that they allegedly suffered personal injuries during their employment
with the company, but have not filed a lawsuit. Of these five employees, two are seeking compensation of approximately $1.7 million and
the others did not state their claim amount. We submitted all of these claims to our insurance company, which informed us that it is reviewing
the statements of claim without prejudicing its rights to deny coverage.
During the period February 2019 through March 2023, three former
employees filed lawsuits seeking additional payments in connection with their employment and subsequent termination. The aggregate amount
claimed for the above mention matters is approximately $380,000. We recorded a provision according to our legal advisor's opinion.
Software License
A supplier of one of our software packages asked to conduct an
audit of our operation to verify that we are not in breach of any intellectual property rights he allegedly owns. We believe that
we have fully, diligently and timely complied with our obligation toward the supplier. We also believe that the supplier has no
right to conduct any audit of our products or services and such audit may cause us to breach confidentiality obligations to other entities.
If a claim is made and we are found to be in violation of such supplier’s intellectual property rights, we could be liable for compensation
and costs of an unknown amount. Such liability could have a material adverse effect on our business, financial condition and results
of operations.
Dividend Distribution Policy
On November 2022, our board of directors declared the Company’s
first cash dividend, in the amount of US$0.17 per share and approximately $1 million in the aggregate. The dividend was paid in US dollars
on December 19, 2022, to all of the Company’s shareholders of record as of December 12, 2022. In November 2023, our board of directors
declared another cash dividend in the amount of $0.22 per share and in the aggregate an amount of approximately $1.3 million. The dividend
was paid on December 21, 2023, in US dollars, to all of the Company’s shareholders of record as of December 13, 2023.
Prior to such distributions, we had never declared or paid any
cash dividends to our shareholders. Any future dividend policy will be determined by our board of directors and will be based
upon conditions then existing, including our results of operations, financial condition, current and anticipated cash needs, contractual
restrictions and other conditions.
In addition, the distribution of dividends is limited by the Israeli
Companies Law, according to which, a company may distribute dividends out of its profits provided that there is no reasonable concern
that such dividend distribution will prevent the company from paying all its current and foreseeable obligations, as they become due.
Notwithstanding the foregoing, dividends may be paid even if not out of profits, with the approval of a court, provided that there is
no reasonable concern that such dividend distribution will prevent the company from satisfying its current and foreseeable obligations,
as they become due. Profits, for purposes of the Israeli Companies Law, means the greater of retained earnings or earnings accumulated
during the preceding two years, after deducting previous distributions that were not deducted from the surpluses. In the event cash
dividends are declared, such dividends will be paid in NIS, and will be subject to applicable Israeli withholding taxes. For additional
information, see Item 10E. “Additional Information – Taxation – Taxation of Gains Upon Disposition of, and Dividends
Paid on, our Ordinary Shares.”
B. Significant Changes
None.
ITEM 9. |
THE OFFER AND LISTING |
A. Offer and Listing Details
Our ordinary shares are traded on the NASDAQ Capital Market under
the ticker symbol “ELTK.”
B. Plan of Distribution
Not applicable.
C. Markets
Our ordinary shares have been listed on the NASDAQ Stock Market
since our initial public offering on January 22, 1997.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expense of the Issue
Not applicable.
ITEM 10. |
ADDITIONAL INFORMATION |
A. Share Capital
Not applicable.
B. Memorandum and Articles
of Association
Set
out below is a description of certain provisions of our memorandum of association and articles of association and of the Israeli Companies
Law related to such provisions. This description is only a summary and does not purport to be complete and is qualified by reference
to the full text of the memorandum of association and articles of association, which are incorporated by reference as exhibits to this
Annual Report, and to Israeli law.
Purposes and Objects of the Company
We are registered with the Israeli Registrar of Companies and have
been assigned company number 52-004295-3. Section 2 of our memorandum of association provides that we were established for the purpose
of engaging in the business of developing, manufacturing, producing, vending, importing, exporting, supplying, distributing and dealing
in printed, multi-layer, flexible, thick film, hybrid and integrated circuits, components or portions thereof, processes for making the
same and related products. In addition, the purpose of our company is to perform various corporate activities permissible under
Israeli law.
The Powers of the Directors
Under the provisions of the Israeli Companies Law and our articles
of association, a director cannot vote on a proposal, arrangement or contract in which he or she is has personal interest in, nor be present
in the discussion relating to such transaction is considered. In addition, our directors’ compensation is approved through
special procedures prescribed in the Israeli Companies Law. In general, with respect to a director’s compensation, approval
is required by the (i) compensation committee; (ii) board of directors; and (iii) company’s shareholders with a regular majority
(in that order).
The authority of our directors to enter into borrowing arrangements
on our behalf is not limited, except in the same manner as any other transaction by us.
Under our articles of association, the service of directors in
office is not subject to any age limitation and our directors are not required to own shares in our company in order to qualify to serve
as directors.
Annual and Extraordinary Meetings of Shareholders
The board of directors must convene an annual general meeting of
shareholders at least once every calendar year, within 15 months of the last annual meeting. Depending on the matter to be voted
upon, notice of at least 21 days or 35 days prior to the date of the meeting is required. In addition, the board of directors must
convene a special general meeting of the shareholders upon the demand of any of: (1) two of the directors; (ii) 25% of the nominated directors;
(iii) one or more shareholders holding at least 5% of our company’s issued and outstanding share capital and at least 1% of the
voting power in the company; or (iv) one or more shareholders holding at least 5% of the voting power in our company.
The quorum required for a shareholders meeting consists of at least
two shareholders present in person or represented by proxy who hold or represent, in the aggregate, at least one third of the voting rights
of the issued share capital. A meeting adjourned for lack of a quorum is adjourned by seven business days, at the same time and
place, or any later time and place as the board of directors designate in a notice to the shareholders. The requisite quorum at
an adjourned general meeting will be: (i) if the original meeting was convened upon requisition by shareholders pursuant to the Israeli
Companies Law - the number of shareholders holding the minimum number of voting shares necessary to make such requisition, present in
person or by proxy; and (ii) in any other event - one or more shareholders, present in person or by proxy, holding at least one share.
We do not follow the requirements of the NASDAQ Stock Market Rules regarding the quorum at shareholder meetings. See Item 16G. “Corporate
Governance.”
Please refer to Exhibit 2.2 for Items 10.B.3, B.4, B.6, B.7, B.8,
B.9 and B.10.
C. Material Contracts
None.
D. Exchange Controls
Israeli law and regulations do not impose any material foreign
exchange restrictions on non-Israeli holders of our ordinary shares. Non-residents of Israel who purchase our ordinary shares will
be able to convert dividends, if any, thereon, and any amounts payable upon our dissolution, liquidation or winding up, as well as the
proceeds of any sale in Israel of our ordinary shares to an Israeli resident, into freely repatriable dollars, at the exchange rate prevailing
at the time of conversion, provided that the Israeli income tax has been withheld (or paid) with respect to such amounts or an exemption
has been obtained.
E. Taxation
The following is a discussion of Israeli and United States tax
consequences material to our shareholders. To the extent that the discussion is based on tax legislation which has not been subject
to judicial or administrative interpretation, the views expressed in the discussion might not be accepted by the tax authorities in question
or by court. The discussion is not intended, and should not be construed, as legal or professional tax advice and does not exhaust
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 ordinary
shares, including, in particular, the effect of any foreign, state or local taxes.
Israeli Tax Considerations
General Corporate Tax Structure
Israeli companies are generally subject to income tax on their
taxable income. The regular corporate tax rate in Israel has been 23% since 2018. However, the effective rate of tax payable by
a company which is qualified under Israeli law as an “Industrial Company” and/or which derives income from an “approved
enterprise,” “benefited enterprise,” “preferred enterprise” or “preferred technological enterprise”
(as further discussed below) may be lower. See this Item 10E. “Additional Information – Taxation – Tax Benefits
Under the Law for the Encouragement of Capital Investments, 5719-1959.”
Tax Benefits under the Law for the Encouragement of Industry (Taxes),
5729-1969
Pursuant to the Law for the Encouragement of Industry (Taxes),
5729-1969, or the Industry Encouragement Law, a company qualifies as an “Industrial Company” if it is a resident of Israel,
was incorporated in Israel and at least 90% of its income in any tax year (exclusive of income raising from certain governmental security
loans) is derived from an “Industrial Enterprise” it owns, which is located in Israel. An “Industrial Enterprise”
is defined for purposes of the Industry Encouragement Law as an enterprise whose principal activity in a given tax year is production.
We believe that we are currently an Industrial Company. An
Industrial Company is entitled to certain tax benefits, including a deduction of the purchase price of patents or the right to use a patent
or know-how used for the development or promotion of the Industrial Enterprise at the rate of 12.5% per annum, commencing the year in
which such rights were first exercised.
The tax laws and regulations dealing with the adjustment of taxable
income for local inflation provided that Industrial Enterprises, such as us, were eligible for special rates of depreciation deductions.
These rates vary in the case of plant and equipment. With respect to equipment, the applicable rates of depreciation are determined
according to the number of shifts in which the equipment is being operated and generally range from 20% to 40% on a straight-line basis,
a 30% to 50% on a declining balance basis for equipment first put into operation on or after June 1, 1989 (instead of the regular
rates which are applied on a straight-line basis). The applicable regulations are valid for equipment whose date of first operation
was not later than December 31, 2016.
Moreover, companies which own Industrial Enterprises that are approved
enterprises or benefited enterprises (see below) can choose, with respect to income deriving from such enterprises, between (a) the special
depreciation rates referred to above or (b) accelerated regular rates of depreciation applied on a straight-line basis in respect of property
and equipment, generally ranging from 200% (for equipment) to 400% (for buildings) of the ordinary depreciation rates during the first
five years of service of these assets, provided that the depreciation on a building may not exceed 20% per annum, multiplied by the applicable
adjustment rate.
Eligibility for benefits under the Industry Encouragement Law is
not contingent upon the prior approval of any Government agency. There can be no assurance that we will continue to so qualify, or will
be able to avail ourselves of any benefits under the Industry Encouragement Law in the future.
Tax Benefits under the Law for the Encouragement of Capital Investments,
5719-1959
General
Our production facility qualifies as a “benefited enterprise”
under the Law for the Encouragement of Capital Investments, 5719-1959, as amended in 2005, or the Investment Encouragement Law, which
provides certain tax benefits to investment programs of an “approved enterprise” or “benefited enterprise.”
Our benefited enterprise was converted from a previously approved enterprise program pursuant to the approval of the Israel Tax Authority
that we received in September 2006. As of yet, it was not necessary for us to utilize these tax benefits.
The Investment Encouragement Law stipulates certain criteria which
need be met with respect to investment programs carried out by an enterprise, in order for such an enterprise to be classified as a “benefited
enterprise.” Israeli resident companies which own benefited enterprise are generally classified as Benefited Companies. Benefited
Companies may claim tax benefits (as further discussed below) granted by the Investment Encouragement Law in its tax returns (and there
is no need to obtain prior approval to qualify for such benefits). There is no requirement to file reports with the Investment Center.
Audits are the responsibility of the Israeli Income Tax Authority as part of their tax audits. Companies may also approach the Israeli
Tax Authority for a pre-ruling regarding their eligibility for benefits under the Investment Encouragement Law.
A company that owns an approved enterprise is eligible for governmental
grants, but may elect to receive an alternative package comprised of tax benefits, referred to as the “previous alternative benefits
track”. The tax benefits of an approved enterprise include lower tax rates or no tax depending on the area and the track chosen,
lower tax rates on dividends and accelerated depreciation. In order to receive benefits in the grant track or the alternative benefit
track, the industrial enterprise must contribute to the economic independence of the Israeli economy, be competitive and contribute to
the gross local product in one of the manners stipulated in the Investment Encouragement Law. Tax benefits would be available, subject
to certain conditions (described below), to production facilities that generally derive more than 25% of their annual revenue from export,
or that do not derive 75% or more of their annual revenue in a single market.
Amendments to Investment Encouragement Law
In December 2010, the Israeli Parliament passed the Law for Economic
Policy for the Years 2011 and 2012 (Amended Legislation), 5771-2011, which prescribes, among other things, amendments to the Investment
Encouragement Law, effective as of January 1, 2011 (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
Encouragement Law), if certain criteria are met. The new tax benefits (described below) would be available, subject to certain conditions,
to production facilities that generally derive more than 25% of their annual revenue from export, or that do not derive 75% or more of
their annual revenue in a single market, or, to competitive facilities in the field of renewable energy. A “Preferred Company”
is defined in the amendment as either (i) a company incorporated in Israel and not wholly-owned by governmental entities; or (ii) a partnership
(a) that was registered under the Israeli Partnerships Ordinance; and (b) all of its partners are companies incorporated in Israel, which
are in general not transparent for Israeli tax purposes and that not all of them are fully owned by governmental entities and such companies
or partnerships own, among other conditions, Preferred Enterprises and are controlled and managed from Israel.
In accordance with the 2011 Amendment and further amendments, a
Preferred Company is entitled to reduced corporate tax with respect to income derived by it Preferred Enterprise (and subject to certain
conditions) at the rate of 16%, unless it is located in a certain development zone, in which case the rate will be 7.5%.
Under the amendments, dividends distributed out of income which
is generally attributed to a Preferred Enterprise are subject to withholding tax at the rate of 20% (or lower, under an applicable tax
treaty). However, upon distribution of a dividend attributed to income generated in Israel, to an Israeli company, no withholding
tax will apply.
The 2011 Amendment applies to income generated as of January 1,
2011. Under the transitional provisions of the 2011 Amendment, we may elect to irrevocably implement the 2011 Amendment to the Investment
Encouragement Law while waiving benefits provided under the Investment Encouragement Law as in effect prior to the 2011 Amendment or to
remain subject to the Investment Encouragement Law as in effect prior to the 2011 Amendment. We may elect to implement the 2011
Amendment by May 31 of any year, and such an election shall apply as of the tax year following the year on which the company's tax return
(and the election) was filed. Electing to implement the 2011 Amendment is irreversible.
We qualify for the status of a “Preferred Company”
pursuant to the 2011 Amendment. We are contemplating the implementation of the 2011 Amendment in future tax years.
In 2021, we have reversed the valuation allowance recorded in past
years due to our forecast that it is more likely than not that the Company will realize its deferred tax losses in the future.
The termination or substantial reduction of any of the benefits
available under the Investment Encouragement Law could have a material adverse effect on our future investments in Israel, and could adversely
affect our results of operations and financial condition.
Taxation of Gains Upon Disposition of, and Dividends Paid on, our Ordinary Shares
Taxation of Israeli Resident Shareholders
Israeli law imposes a capital gains tax on the sale of capital
assets. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is a portion of the total
capital gain that is equivalent to the increase of the relevant asset’s purchase price which is attributable to the increase in
the CPI between the date of purchase and the date of sale. Foreign residents who purchased an asset in foreign currency may request
that the inflationary surplus will be computed on the basis of the devaluation of the NIS against such foreign currency. The real
gain is the excess of the total capital gain over the inflationary surplus. The inflationary surplus accumulated from and after
December 31, 1993, is exempt from any capital gains tax in Israel while the real gain is taxed at the applicable rate discussed below.
Dealers in securities in Israel are taxed at regular tax rates applicable to business
income.
Subject to certain provisions relating to the linear calculation
method applicable to the determination of the capital gain tax pertaining to capital gains derived from the sale of assets, purchased
prior to January 1, 2003, or prior to January 1, 2012 (with respect to sale of assets or securities not listed in a stock exchange prior
to 1.1.2012), the tax rate on capital gains, including capital gain from the sale of securities listed on a stock exchange and on dividends,
is generally 25% for individuals and 30% for substantial individual shareholders (that are, generally, holders of 10% or more of the shares
of the company on the date of the sale of the shares or at any date during the 12 months period preceding such sale). The tax rate
for capital gains generated by corporations is 23% (since 2018). Dividends paid to an Israeli company by another Israeli company are not
subject to tax, unless received out of income derived from a benefited enterprise, or an approved enterprise, or stems from income derived
or accrued outside of Israel. In any event the applicable paying company and/or bank withholds at source income tax at the rate of 25%
or 30% in the case of a substantial individual shareholders.
If the shares were sold by Israeli residents, then (i) for the
period ending December 31, 2002 their sale would generally be tax exempt so long as (1) the shares were listed on a stock exchange, such
as, in our case, the NASDAQ Capital Market, which is recognized by the Israeli Ministry of Finance on December 31, 2002, and (2) we qualified
as an Industrial Company or Industrial Holding Company under the law for Industry Encouragement Law, at the relevant times as provided
by the Income Tax Ordinance [New Version], 5721-1961, which we believe we so qualified and (ii) for the period commencing January 1, 2003,
the sale of the shares would be, generally, subject to a 25% tax if sold by non-substantial individual shareholders and 30% tax if sold
by a substantial individual shareholders. The tax rate for corporate shareholders for the sale of the shares is 23% (since 2018).We
cannot provide any assurance that the Israeli tax authorities will agree with the determination that we qualified as an Industrial Company
at the relevant times.
Taxation of Non-Israeli Resident Shareholders
Under the convention between the United States and Israel concerning
taxes on income, Israeli capital gains tax will generally not apply to the sale, exchange or disposition of ordinary shares by a person
who qualifies as a resident of the United States. However, this exemption will not apply, among other cases, if the gain is attributable
to a permanent establishment of such person in Israel, or if the qualified U.S. resident holds, directly or indirectly, shares representing
10% or more of our voting power during any part of the 12-month period preceding the sale, exchange or disposition, subject to specified
conditions. In this case, the sale, exchange or disposition would be subject to Israeli tax, to the extent applicable under Israeli
domestic law. However, under the U.S.-Israel tax treaty, a U.S. resident generally would be permitted to claim a credit for the
Israeli tax against the U.S. federal income tax imposed on 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.
For residents of other countries, the purchaser of the shares may
be required to withhold capital gains tax on all amounts paid by it for the purchase of shares for the sale of our ordinary shares, for
so long as the capital gain from such a sale is not exempt from Israeli capital gains tax.
Notwithstanding the above, the capital gain from the sale of our
shares by non-Israeli residents would be tax exempt as long as our shares are listed on the NASDAQ Capital Market or any other stock exchange
recognized by the Israeli Ministry of Finance, and provided that certain other conditions are met. The most relevant conditions are as
follows: (i) the capital gain is not attributed to the foreign resident’s permanent establishment in Israel, and (ii) the shares
were acquired by the foreign resident after the company’s shares had been listed for trading on the foreign Exchange.
On the distribution of dividends other than bonus shares (stock
dividends) to individual Israeli residents shareholders or to non-Israeli shareholders, income tax applies at the rate of 25% or 30%,
as described above, or the lower rate payable with respect to dividends received out of income derived from a preferred or benefited enterprise
(see the Investment Encouragement Law), unless a double taxation treaty is in effect between Israel and the shareholder's country of residence
which provides for a lower tax rate in Israel on dividends. The Convention between the State of Israel and the Government of the
United States relating to relief from double taxation provides for a maximum tax of 25% on dividends paid to a resident of the United
States. As set forth above, dividends paid to an Israeli company by another Israeli company are not subject to corporate tax, unless
received out of income derived from a benefited enterprise, or an approved enterprise or unless the dividend stems from income produced
or accrued abroad.
Non-residents of Israel are subject to income tax on income accrued
or derived from sources in Israel. Such sources of income include passive income such as dividends, royalties and interest, as well
as non-passive income from services rendered in Israel. Distributions of dividends other than bonus shares or stock dividends, are
subject to income tax at the rate of 25% or 30% (for individuals), or 23% (for corporations in 2018 and 2019) pursuant to Israeli domestic
law as described above. However, under the Investment Encouragement Law, dividends generated by an approved enterprise or by our
benefited enterprise are, generally, taxed at the rate of 15%.
Pursuant to the Convention between the State of Israel and the
Government of the United States relating to relief from double taxation, the maximum tax rate on dividends paid to a holder of ordinary
shares who is a Treaty U.S. Resident will be 25%. However, dividends which are not generated by an approved enterprise will
generally be subject to Israeli tax at a rate of 12.5% if paid to a U.S. corporation which holds 10% of our voting power for a designated
period and provided that not more than 25% of our gross income for such period consists of certain types of dividends and interest. Notwithstanding
the foregoing, dividends distributed from income attributed to an approved enterprise are generally subject to a withholding tax rate
of 15% for such a U.S. corporation shareholder (which meets both conditions set forth above).
Subject to certain conditions, non-Israeli residents will be tax
exempt on capital gain derived from investments in Israeli companies without derogating from any other capital gain tax exemption applying
to non-Israeli resident under Israeli law or under any applicable double tax treaty.
In any event the applicable paying company and/or bank withholds
at source income tax at the rate of 25% or 30% in the case of a substantial individual shareholders.
United States Federal Income Taxation
The following is a general discussion of the material U.S. federal
income tax consequences of the acquisition, ownership and disposition of our ordinary shares. This description addresses only the U.S.
federal income tax considerations that may be relevant to U.S. Holders (as defined below) who hold our ordinary shares as capital assets.
This summary is based on the U.S. Internal Revenue Code of 1986, as amended, (the "Code") Treasury regulations promulgated thereunder,
judicial and administrative interpretations thereof and the U.S.-Israel Tax Treaty (the “Treaty”), all as in effect on the
date hereof and all of which are subject to change either prospectively or retroactively or to differing interpretations. There can be
no assurance that the U.S. Internal Revenue Service (“IRS”) will not take a different position concerning the tax consequences
of the acquisition, ownership or disposition of our ordinary shares or that such a position would not be sustained. This discussion does
not address all tax considerations that may be relevant to a U.S. Holder of ordinary shares. In addition, this description does not account
for the specific circumstances of any particular investor, such as:
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financial institutions or financial services entities; |
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certain insurance companies; |
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investors liable for alternative minimum tax; |
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regulated investment companies, real estate investment trusts, or grantor trusts; |
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dealers or traders in securities, commodities or currencies; |
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tax-exempt organizations; |
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certain former citizens or long-term residents of the United States; |
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non-resident aliens of the United States or taxpayers whose functional currency is not the U.S. dollar; |
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persons who hold ordinary shares through partnerships or other pass-through entities; |
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persons who acquire their ordinary shares through the exercise or cancellation of employee stock options or otherwise as compensation
for services; |
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direct, indirect or constructive owners of investors that actually or constructively own at least 10% of the total combined voting
power of our shares or at least 10% of our shares by value; or |
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investors holding ordinary shares as part of a straddle, appreciated financial position, a hedging transaction or conversion transaction.
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If a partnership or an entity treated as a partnership for U.S.
federal income tax purposes owns our ordinary shares, the U.S. federal income tax treatment of a partner in such a partnership will generally
depend upon the status of the partner and the activities of the partnership. A partnership that owns our ordinary shares and the partners
in such partnership should consult their tax advisors about the U.S. federal income tax consequences of holding and disposing of ordinary
shares.
This summary does not address the effect of any U.S. federal taxation (such as estate
and gift tax) other than U.S. federal income taxation. In addition, this summary does not include any discussion of state, local or non-U.S.
taxation.
For purposes of this summary the term “U.S. Holder” means a person that
is eligible for the benefits of the Treaty and is a beneficial owner of ordinary shares who is, for U.S. federal income tax purposes:
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an individual who is a citizen or a resident of the United States; |
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a corporation or other entity taxable as a corporation for United States federal income tax purposes, created or organized in or
under the laws of the United States or any political subdivision thereof; |
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an estate the income of which is subject to U.S. federal income taxation regardless of its source; or |
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a trust if the trust has validly elected to be treated as a U.S. person for U.S. federal income tax purposes or if (1) a court within
the United States is able to exercise primary supervision over the trust’s administration and (2) one or more U.S. persons have
the authority to control all of the substantial decisions of the trust. |
Unless otherwise indicated, it is assumed for the purposes of this
discussion that the Company is not, and will not become, a “passive foreign investment company” (“PFIC”) for U.S. federal
income tax purposes. See “—Passive Foreign Investment Companies” below.
Taxation of Distributions
Subject to the discussion below under the heading “—Passive
Foreign Investment Companies,” the gross amount of any distributions received with respect to our ordinary shares, including
the amount of any Israeli taxes withheld therefrom, will constitute dividends for U.S. federal income tax purposes when such distribution
is actually or constructively received, to the extent such distribution is paid out of our current and accumulated earnings and profits,
as determined for U.S. federal income tax purposes. Because we do not expect to maintain calculations of our earnings and profits
under U.S. federal income tax principles, it is expected that the entire amount of any distribution will generally be reported as dividend
income to you. Dividends are included in gross income at ordinary income rates, unless such dividends constitute "qualified dividend income,"
as set forth in more detail below. Distributions in excess of our current and accumulated earnings and profits would be treated as a non-taxable
return of capital to the extent of your adjusted tax basis in our ordinary shares and any amount in excess of your tax basis would be
treated as gain from the sale of ordinary shares. See “—Sale, Exchange or Other Disposition
of Ordinary Shares” below for a discussion of the taxation of capital gains. Our dividends would not qualify for the
dividends-received deduction generally available to corporations under Section 243 of the Code.
Dividends that we pay in NIS, including the amount of any Israeli
taxes withheld therefrom, will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect
on the day such dividends are received, regardless of whether the payment is in fact converted into U.S. dollars. A U.S. Holder who receives
payment in NIS and converts NIS into U.S. dollars at an exchange rate other than the rate in effect on such day may have a foreign currency
exchange gain or loss that would generally be treated as U.S.-source ordinary income or loss. U.S. Holders should consult their own tax
advisors concerning the U.S. tax consequences of acquiring, holding and disposing of NIS.
Subject to complex limitations, some of which vary depending upon
the U.S. Holder’s circumstances, any Israeli withholding tax imposed on dividends paid with respect to our ordinary shares, may
be a foreign income tax eligible for credit against a U.S. Holder’s U.S. federal income tax liability (or, alternatively, for deduction
against income in determining such tax liability). Israeli taxes withheld in excess of the applicable rate allowed by the Treaty (if any)
will not be eligible for credit against a U.S. Holder’s federal income tax liability. The limitation on foreign income taxes eligible
for credit is calculated separately with respect to specific classes of income. Dividends paid with respect to our ordinary shares
generally will be treated as foreign-source passive category income or, in the case of certain U.S. Holders, general category income for
U.S. foreign tax credit purposes. Further, there are special rules for computing the foreign tax credit limitation of a taxpayer who receives
dividends subject to a reduced tax rate. A U.S. Holder may be denied a foreign tax credit with respect to Israeli income tax withheld
from dividends received on our ordinary shares if such U.S. Holder fails to satisfy certain minimum holding period requirements or to
the extent such U.S. Holder’s position in ordinary shares is hedged. An election to deduct foreign taxes instead of claiming a foreign
tax credit applies to all foreign taxes paid or accrued in the taxable year. The rules relating to the determination of the foreign tax
credit are complex. You should consult with your own tax advisors to determine whether and to what extent you would be entitled
to this credit.
Subject to certain limitations (possibly including the PFIC rules
discussed below), “qualified dividend income” received by a non-corporate U.S. Holder may be subject to tax at the lower long-term
capital gain rates (currently, a maximum rate of 20%). Distributions taxable as dividends paid on our ordinary shares should qualify for
a reduced rate if we are a “qualified foreign corporation,” as defined in Code section 1(h)(11)(C). We will be a qualified
foreign corporation if either: (i) we are entitled to benefits under the Treaty or (ii) our ordinary shares are readily tradable on an
established securities market in the United States and certain other requirements are met. We believe that we are entitled to benefits
under the Treaty and that our ordinary shares currently are readily tradable on an established securities market in the United States.
However, no assurance can be given that our ordinary shares will remain readily tradable. The rate reduction does not apply unless certain
holding period requirements are satisfied, nor does it apply to dividends received from a PFIC (see discussion below), in respect of certain
risk-reduction transactions, or in certain other situations. U.S. Holders of our ordinary shares should consult their own tax advisors
regarding the effect of these rules in their particular circumstances.
Sale, Exchange or Other Disposition of Ordinary Shares
Subject to the discussion of the PFIC rules below, if you sell
or otherwise dispose of our ordinary shares (other than with respect to certain non-recognition transactions), you will generally recognize
gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other
disposition and your adjusted tax basis in our ordinary shares, in each case determined in U.S. dollars. Such gain or loss will generally
be capital gain or loss and will be long-term capital gain or loss if you have held the ordinary shares for more than one year at the
time of the sale or other disposition. Long-term capital gain realized by a non-corporate U.S. Holder is generally eligible for a preferential
tax rate (currently at a maximum of 20%). In general, any gain that you recognize on the sale or other disposition of ordinary shares
will be U.S.-source for purposes of the foreign tax credit limitation; losses will generally be allocated against U.S. source income.
Deduction of capital losses is subject to certain limitations under the Code.
In the case of a cash basis U.S. Holder who receives NIS in connection
with the sale or disposition of our ordinary shares, the amount realized will be based on the U.S. dollar value of the NIS received with
respect to the ordinary shares as determined on the settlement date of such exchange. A cash basis U.S. Holder who receives payment in
NIS and converts NIS into U.S. dollars at a conversion rate other than the rate in effect on the settlement date may have a foreign currency
exchange gain or loss, based on any appreciation or depreciation in the value of NIS against the U.S. dollar, which would be treated as
ordinary income or loss.
An accrual basis U.S. Holder may elect the same treatment of currency
exchange gain or loss required of cash basis taxpayers with respect to a sale or disposition of our ordinary shares that are traded on
an established securities market, provided that the election is applied consistently from year to year. Such election may not be changed
without the consent of the IRS. In the event that an accrual basis U.S. Holder does not elect to be treated as a cash basis taxpayer (pursuant
to the Treasury regulations applicable to foreign currency transactions), such U.S. Holder is required to calculate the value of the proceeds
as of the "trade date" and may have a foreign currency gain or loss for U.S. federal income tax purposes in the event of any difference
between the U.S. dollar value of NIS prevailing on the trade date and on the settlement date. Any such currency gain or loss generally
would be treated as U.S.- source ordinary income or loss and would be subject to tax in addition to the gain or loss, if any, recognized
by such U.S. Holder on the sale or disposition of such ordinary shares.
Passive Foreign Investment Companies
We believe that we were not a PFIC for U.S. federal income tax
purposes for the 2019 taxable year. However, since PFIC status depends upon the composition of our income and assets and the market value
of our assets from time to time, there can be no assurance that we will not be considered a PFIC for any future taxable year. If we were
a PFIC for any taxable year during which a U.S. Holder owned ordinary shares, certain adverse consequences could apply to the U.S. Holder.
Specifically, unless a U.S. Holder makes one of the elections mentioned below, gain recognized by the U.S. Holder on a sale or other disposition
of ordinary shares would be allocated ratably over the U.S. Holder’s holding period for the ordinary shares. The amounts allocated
to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount
allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate,
for that taxable year, and an interest charge would be imposed on the resulting tax liability. Further, any distribution in excess of
125% of the average of the annual distributions received by the U.S. Holder on our ordinary shares during the preceding three years or
the U.S. Holder’s holding period, whichever is shorter, would be subject to taxation as described immediately above. Certain elections
(such as a mark-to-market election or a QEF election) may be available to U.S. Holders and may result in alternative tax treatment. U.S.
Holders should consult their tax advisors as to the availability and consequences of a mark-to-market election or a QEF election with
respect to their ordinary shares.
In addition, if we were a PFIC for a taxable
year in which we pay a dividend or the prior taxable year, the favorable dividend rates discussed above with respect to dividends paid
to certain non-corporate U.S. Holders would not apply. If we were a PFIC for any taxable year in which a U.S. Holder owned our shares,
the U.S. Holder would generally be required to file annual returns with the IRS on IRS Form 8621.
Additional Tax on Investment Income
In addition to the income taxes described above, U.S. Holders that
are individuals, estates or trusts and whose income exceeds certain thresholds may be subject to a 3.8% Medicare contribution tax on net
investment income, which includes dividends and capital gains from the sale or exchange of our ordinary shares.
Backup Withholding and Information Reporting
Payments in respect of our ordinary shares may be subject to information
reporting to the IRS and to U.S. backup withholding tax at the rate (currently) of 24%. Backup withholding will not apply, however,
if you (i) fall within certain exempt categories and demonstrate the fact when required or (ii) furnish a correct taxpayer identification
number and make any other required certification.
Backup withholding is not an additional tax. Amounts withheld under
the backup withholding rules may be credited against a U.S. Holder’s U.S. tax liability. A U.S. Holder may obtain a refund of any
excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS.
U.S. citizens and individuals taxable as resident aliens
of the United States that (i) own “specified foreign financial assets” (as defined in Section 6038D of the Code and the regulations
thereunder) with an aggregate value in a taxable year in excess of certain thresholds (as determined under rules in Treasury regulations)
and (ii) are required to file U.S. federal income tax returns generally will be required to file an information report with respect to
those assets with their tax returns. IRS Form 8938 has been issued for that purpose. “Specified foreign financial assets”
include any financial accounts maintained by foreign financial institutions, foreign stocks held directly, and interests in foreign estates,
foreign pension plans or foreign deferred compensation plans. Under those rules, our ordinary shares, whether owned directly or through
a financial institution, estate or pension or deferred compensation plan, would be “specified foreign financial assets.” Under
Treasury regulations, the reporting obligation applies to certain U.S. entities that hold, directly or indirectly, specified foreign financial
assets. Penalties can apply if there is a failure to satisfy this reporting obligation. In addition, in the event a U.S. Holder that is
required to file IRS Form 8938 does not file such form, the statute of limitations on the assessment and collection of U.S. federal income
taxes of such U.S. Holder for the related tax year may not close until three years after the date that the required information is filed.
A U.S. Holder is urged to consult the U.S. Holder’s tax advisor regarding the reporting obligation.
Any U.S. Holder who acquires more than $100,000 of our ordinary
shares or holds 10% or more of our ordinary shares by vote or value may be subject to certain additional U.S. information reporting requirements.
The above description is not intended to constitute a complete
analysis of all tax consequences relating to acquisition, ownership and disposition of our ordinary shares. You should consult your tax
advisor concerning the tax consequences of your particular situation.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to certain of the reporting requirements of the
Exchange Act as applicable to “foreign private issuers” as defined in Rule 3b-4 under the Exchange Act. As a foreign
private issuer, we are exempt from certain provisions of the Exchange Act. Accordingly, our proxy solicitations are not subject
to the disclosure and procedural requirements of Regulation 14A under the Exchange Act, and transactions in our equity securities by our
officers and directors are exempt from reporting and the “short-swing” profit recovery provisions contained in Section 16
of the Exchange Act. In addition, we are not required under the Exchange Act to file quarterly reports and financial statements.
However, we file with the SEC an annual report on Form 20-F containing financial statements audited by an independent accounting firm.
We also submit to the SEC reports on Form 6-K containing (among other things) press releases and unaudited financial information.
We post our annual report on Form 20-F on our website promptly following the filing of our annual report with the SEC. The information
on our website is not incorporated by reference into this annual report.
The SEC maintains an Internet website that contains reports and
other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov.
We make our reports available on our internet website, free of charge, as soon as reasonably practicable after such material is electronically
filed with the SEC.
The documents concerning our company that are referred to in this
annual report may also be inspected at our offices located at 20 Ben Zion Gelis Street, Sgoola Industrial Zone, Petach Tikva 4910101,
Israel.
I. Subsidiary Information
Not applicable.
ITEM 11. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
|
We are exposed to a variety of market risks,
including foreign currency fluctuations and changes in interest rates affecting primarily the interest on short-term credit lines and
long-term loans.
Foreign Currency Exchange Risk
Our reporting currency is the dollar. Our revenues are primarily
denominated in the dollar, NIS and Euros, while our expenses are primarily denominated in NIS, dollars and Euros. As a result, the
NIS value of our dollar and Euro denominated revenues are negatively impacted by the depreciation of the dollar and the Euro against the
NIS. In addition, fluctuations in rates of exchange between NIS and other currencies may affect our operating results and financial
condition. The average exchange rate for the NIS against the dollar was approximately 9.7% higher in 2023 than 2022 and the average
exchange rate of the NIS against the Euro was 12.7% higher in 2023 than 2022, and in total, these changes had a positive impact on our
operating results in 2023. The average exchange rate for the NIS against the dollar was approximately 4.0% higher in 2022 than 2021
and the average exchange rate of the NIS against the Euro was 7.5% lower in 2022 than 2021, and in total, these changes had a positive
impact on our operating results in 2022. As of December 31, 2023, we estimate that a devaluation of 1% of the dollar against the
NIS would result in a decrease of approximately $262,000 in our operating income and devaluation
of 1% of the Euro against the NIS would not have a material impact on our operating and financial results.
If we were to determine that it is in our best interests to enter
into hedging transactions in the future in order to protect ourselves in part from currency fluctuations, we may not be able to do so,
or such transactions, if entered into, may not materially reduce the effect of fluctuations in foreign currency exchange rates on our
results of operations and may result in additional expenses.
Commodity Price Risk
Cost of raw materials is a significant component of our cost of
revenues. In 2023, the cost of raw materials used in production was $11.4 million compared to $10.7 million in 2022. A 1%
increase or decrease in the cost of raw materials used in production would increase or decrease our cost of raw materials by approximately
$114,000.
Credit Risk
We may be subject to significant concentrations of credit risk
consisting principally of cash and cash equivalents and trade accounts receivable. Cash and cash equivalents are deposited with
major financial institutions in Israel, Europe and the United States.
The risk of collection associated with trade receivables is reduced
by the geographical dispersion of our customer base. However, our business involves selling products to customers for whose credit we
do not have insurance coverage, and we are exposed to risk with respect to our receivables from them.
ITEM 12. |
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not applicable.
PART II
ITEM 13. |
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
None.
ITEM 14. |
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS |
None.
ITEM 15. |
CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our chief
executive officer and chief financial officer to allow timely decisions regarding required disclosure. Our management, including
our chief executive officer and chief financial officer, conducted an evaluation of our disclosure controls and procedures, as defined
under Exchange Act Rule 13a-15(e), as of the end of the period covered by this Annual Report on Form 20-F. Based upon that evaluation,
our chief executive officer and chief financial officer have concluded that, as of such date, our disclosure controls and procedures were
effective.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or
15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our company’s principal executive
and principal financial officers and effected by our company’s board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and procedures that:
|
• |
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
the assets of our company; |
|
• |
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of our company are being made only in accordance with
authorizations of management and directors of our company; and |
|
• |
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our company’s
assets that could have a material effect on our financial statements. |
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Our management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2023. In making this assessment, our management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that assessment,
our management concluded that as of December 31, 2023, our internal control over financial reporting is effective.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting
that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect,
our internal controls over financial reporting.
ITEM 16A. |
AUDIT COMMITTEE FINANCIAL EXPERT
|
Our board of directors has determined that Mr. Gad Dovev, an external
director, meets the definition of an audit committee financial expert, as defined by rules of the SEC. For a brief listing of Mr.
Dovev’s relevant experience, see Item 6A. “Directors, Senior Management and Employees - Directors and Senior Management.”
We have adopted a code of ethics that applies to our chief executive
officer and all senior financial employees of our company, including the chief financial officer and the comptroller. The code of
ethics is publicly available on our website. Written copies are available upon request. If we make any substantive amendment
to the code of ethics or grant any waivers, including any implicit waiver, from a provision of the codes of ethics, we will disclose the
nature of such amendment or waiver on our website.
ITEM
16C. |
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Independent Registered Public Accounting Firm Fees -
The following table sets forth, for the year ended December 31,
2023, the fees billed by our independent registered public accountants. Brightman Almagor Zohar & Co., a firm in the Deloitte Global
Network, who have served as our principal independent registered public accounting firm since December 2020.
All of such fees were pre-approved by our Audit Committee.
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Audit (1) |
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$ |
102,000 |
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$ |
98,000 |
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Audit Related Fees |
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$ |
13,500 |
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- |
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Tax (2) |
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$ |
6,000 |
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$ |
6,000 |
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All other Fees (3)
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$ |
5,000 |
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- |
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Total |
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$ |
126,500 |
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|
$ |
104,000 |
|
______________
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(1) |
Audit fees relate to audit services provided for each of the years shown in the table, including fees associated with the annual
audit, consultations on various accounting issues and audit services provided in connection with statutory or regulatory filings.
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|
(2) |
Tax fees relate to services performed regarding tax compliance. |
|
(3) |
Other fees are fees for professional services other than audit or tax related fees. |
Pre-Approval Policies and Procedures
Our audit committee has adopted a policy and procedures for the
pre-approval of audit and non-audit services rendered by our independent registered public accounting firm, Brightman Almagor Zohar &
Co., a firm in the Deloitte Global Network. Pre-approval of an audit or non-audit service may be given as a general pre-approval,
as part of the audit committee’s approval of the scope of the engagement of our independent auditor, or on an individual basis.
Any proposed services exceeding general pre-approved levels also require specific pre-approval by our audit committee. The policy
prohibits retention of the independent registered public accounting firm to perform the prohibited non-audit functions defined in Section
201 of the Sarbanes-Oxley Act or the rules of the SEC, and also requires the audit committee to consider whether proposed services are
compatible with the independence of the registered public accountants.
ITEM
16D. |
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
|
Not applicable.
ITEM
16E. |
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|
Neither we nor any affiliated purchaser has purchased any of our
securities during 2015.
ITEM
16F. |
CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
|
Not applicable.
ITEM 16G. |
CORPORATE GOVERNANCE |
Under NASDAQ Stock Market Rule 5615(a)(3), foreign private issuers,
such as our company, are permitted to follow certain home country corporate governance practices instead of certain provisions of the
NASDAQ Stock Market Rules. A foreign private issuer that elects to follow a home country practice instead of any of such NASDAQ
rules must submit to NASDAQ, in advance, a written statement from an independent counsel in such issuer’s home country certifying
that the issuer’s practices are not prohibited by the home country’s laws.
We have notified NASDAQ that we choose not to comply with the following
NASDAQ requirements, and instead follow Israeli law and practice in respect of such requirements:
|
• |
The requirement to maintain a majority of independent directors, as defined under the NASDAQ Stock Market Rules. Instead, we
follow Israeli law and practice which requires that we appoint at least two external directors, within the meaning of the Israeli Companies
Law, to our board of directors. We have the mandated three independent directors, within the meaning of the rules of the SEC and
NASDAQ, on our audit committee. See Item 6C. “Directors, Senior Management and Employees - Board Practices - External and
Independent Directors.” |
|
• |
The requirements regarding the directors’ nominations process. Under Israeli law and practice, our board of directors
is authorized to recommend to our shareholders director nominees for election. See Item 6C. –
“Directors, Senior Management and Employees - Board Practices - Election of Directors.” |
|
• |
The requirement regarding the quorum for any meeting of shareholders. Instead, we follow Israeli law and practice which provides
that, unless otherwise provided by a company’s articles of association, the quorum required for a general meeting of shareholders
is at least two shareholders present who hold, in the aggregate, 25% of the company’s voting rights. Our articles of association
provide that the quorum required for a shareholder meeting consists of at least two shareholders present in person or represented by proxy
who hold or represent, in the aggregate, at least 33% of the voting rights of the issued share capital. See Item 10B. “Additional
Information - Memorandum and Articles of Association- Annual and Extraordinary Meetings of Shareholders.” |
ITEM
16H. |
MINE SAFETY DISCLOSURE |
Not applicable.
ITEM 16I. |
DISCLOSURES REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
|
Not applicable.
ITEM16J. |
INSIDER TRADING POICIES |
Pursuant to applicable SEC transition guidance, the disclosure
required by Item 16J will only be applicable to our company from the fiscal year ending on December 31, 2024.
Cybersecurity
Risk Management and Strategy
Our Board recognizes the critical importance of maintaining the
availability of our data and computer systems which is essential to maintaining the trust and confidence of our business partners and
employees. The Audit Committee is responsible for reviewing our policies with respect to cybersecurity risks and relevant contingent liabilities
and risks that may be material to the Company, including risks from third parties and business partners.
We generally seek to address cybersecurity risks by implementing
security measures on our internal computer systems. These security measures include firewalls, intrusion prevention and detection systems,
anti-malware functionality and access controls, which are periodically evaluated by our IT manager.
Our Chief Information Officer (CIO) who holds over 25 years of
experience in information technology is responsible for implementing protection measures for our information systems from cybersecurity
threats and promptly responding to any cybersecurity incidents.
Our management has primary responsibility for our overall cybersecurity
risk management and supervises our internal information technology personnel. Our management is responsible for assessing and managing
our material risks from cybersecurity threats. The risk assessment occurs on an ongoing basis, or as business needs change, and covers
identification of risks that could act against the company's objectives as well as specific risks related to a compromise to the security
of data.
As of the date of this report, we have not identified risks from
known cybersecurity threats, including as a result of any prior cybersecurity incidents, that have materially affected us, including our
operations, business strategy, results of operations, or financial condition. We face risks from cybersecurity threats that, if realized,
are reasonably likely to materially affect us, including our operations, business strategy, results of operations, or financial condition.
See Part I, Item 3.D. “Risk Factors- Breaches of network or information technology security, natural disasters or terrorist attacks
could have an adverse effect on our business.”
ITEM
17. |
FINANCIAL STATEMENTS |
Not applicable.
ITEM
18. |
FINANCIAL STATEMENTS |
Consolidated Financial
Statements
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Reports of Independent Registered Public Accounting Firms |
F - 2 |
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Consolidated Balance Sheets |
F - 4-F - 5 |
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Consolidated Statements of Comprehensive Income (loss) |
F - 6 |
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Consolidated Statements of Changes in Shareholders’ Equity |
F - 7 |
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Consolidated Statements of Cash Flows |
F - 8-F - 9 |
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Notes to the Consolidated Financial Statements |
F - 10-F - 36 |
Index to Exhibits
Exhibit |
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Description |
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101.INS |
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Inline XBRL Instance Document. |
101.SCH |
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Inline XBRL Taxonomy Extension Schema Document. |
101.PRE |
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Inline XBRL Taxonomy Presentation Linkbase Document. |
101.CAL |
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Inline XBRL Taxonomy Calculation Linkbase Document. |
101.LAB |
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Inline XBRL Taxonomy Label Linkbase Document. |
101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document. |
104 |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
_____________________
(1) |
Filed as Exhibit 1.1 to our registration statement on Form F-1, registration number 333-229740, as amended,
and incorporated herein by reference. |
(2) |
Included in Exhibit 99.1 to our Report of Foreign Issuer on Form 6-K filed on September
12, 2013 and incorporated herein by reference. |
(3) |
Filed as Exhibit 2.1 to our registration statement on Form F-1, registration number
333-229740, as amended, and incorporated herein by reference. |
(4) |
Filed as Exhibit 2.2 to our Annual Report on Form 20-F for the year ended December
31, 2019, and incorporated herein by reference. |
(5) |
Included as Exhibit A to Exhibit 99.1 to our Report of Foreign Issuer on Form 6-K filed on September 6,
2017 and incorporated herein by reference. |
(6) |
Included as Exhibit A to Exhibit 99.1 to our Report of Foreign Issuer on Form 6-K filed on August 8, 2023
and incorporated herein by reference |
(7) |
Filed as Exhibit 4.13 to our Annual Report on Form 20-F for the year ended December 31, 2014, and incorporated
herein by reference. |
(8) |
Included as Exhibit A to Exhibit 99.1 to our Report of Foreign Issuer on Form 6-K filed on August 8, 2023
and incorporated herein by reference |
(9) |
Filed as Exhibit 8.1 to our Annual Report on Form 20-F for the year ended December 31, 2021, and incorporated
herein by reference. |
|
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* |
Filed herewith. |