INTRODUCTION
In this annual report (this “Annual
Report”), references to “we,” “us,” “our,” “our business,” “the Company,”
“Nova” and similar references refer to Nova Ltd. and, where appropriate, its consolidated subsidiaries.
This annual report contains estimates,
projections and other information concerning our industry and our business, as well as data regarding market research, estimates and forecasts
prepared by our management. Information that is based on estimates, forecasts, projections, market research or similar methodologies is
inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances that are assumed
in this information. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors,
including those discussed under the headings “Special Note Regarding Forward-Looking Statements” and Item 3.D. “Risk
Factors” in this Annual Report.
FORWARD
– LOOKING STATEMENTS AND RISK FACTORS SUMMARY
This Annual Report contains estimates
and forward-looking statements, principally in the sections entitled Item 3.D. “Key Information—Risk Factors,” Item
4. “Information on the Company,” and Item 5. “Operating and Financial Review and Prospects.” In some cases, these
forward-looking statements can be identified by words or phrases such as “may,” “might,” “will,” “could,”
“would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “seek,”
“believe,” “estimate,” “predict,” “potential,” “continue,” “contemplate,”
“possible” or similar words. Statements regarding our future results of operations and financial position, growth strategy
and plans and objectives of management for future operations, including, among others, expansion in new and existing markets, are forward-looking
statements.
Our estimates and forward-looking statements
are mainly based on our current expectations and estimates of future events and trends which affect or may affect our business, operations
and industry. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are
subject to numerous risks and uncertainties.
These forward-looking statements are
subject to a number of known and unknown risks, uncertainties, other factors and assumptions, including the risks described in Item 3.D
“Key Information—Risk Factors” and elsewhere in this Annual Report.
The below important factors and uncertainties,
among others, could cause actual results to differ materially from those described in these forward-looking statements. The below is also
a summary of the risk factors described in Item 3.D “Key Information – Risk Factors” of this Annual Report.
Risks Related
to Economic and External Risks
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Increased cybersecurity threats and more sophisticated computer crime could disrupt
our business. |
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We depend on international sales, which expose us to foreign political and economic
risks. |
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We are subject to laws and regulations that could restrict our operations such as
economic sanctions and export restrictions. |
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Changes in global trade policies and other factors beyond our control may adversely
impact our business, financial condition and results of operations. |
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We may be affected by instability in the global economy and by financial turmoil.
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Because we derive a significant portion of our revenues from sales in Asia, our
sales could be hurt by instability of Asian economies. |
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Our business is subject to risks related with doing business in China. |
Risks Related
to Technology and Intellectual Property
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Because of the technical nature of our business, our intellectual property is extremely
important to our business, and our inability to protect our intellectual property could harm our competitive position. |
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There has been significant litigation involving intellectual property rights in
the semiconductor and related industries, and similar litigation could force us to divert resources to defend against such litigation
or deter our customers from purchasing our systems. |
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We may incorporate open-source technology in some of our software and product, which
may expose us to liability and have a material impact on our product development and sales. |
Risks Related
to our Industry
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We operate in an extremely competitive market, and if we fail to compete effectively,
our revenues and market share will decline. |
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If we do not respond effectively and on a timely basis to rapid technological changes,
our ability to attract and retain customers could be diminished, which would have an adverse effect on our sales and ability to remain
competitive. |
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The ongoing consolidation in our industry may harm us if our competitors are able
to offer a broader range of products and greater customer support than we can offer or if our main suppliers cease delivery of important
component as a result of being acquired by a larger company. |
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The markets we target are cyclical and it is difficult to predict the length and
strength of any downturn or expansion period. |
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Our operations may be delayed or interrupted and our business could suffer if we
violate environmental, safety and health, or ESH, regulations. |
Risks Related
to our Operations
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Pricing and demand for our specific product lines could substantially reduce our
sales. |
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We depend on a small number of large customers, and the loss of one or more of them
could significantly lower our revenues. |
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Our inability to significantly reduce spending during a protracted slowdown in the
semiconductor industry could reduce our prospects of achieving continued profitability. |
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There can be no assurance that revenues from future products or product enhancements
will be sufficient to recover the development costs.
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New product lines that we may introduce in the future may contain defects, which
will require us to allocate time and financial resources to correct. |
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If any of our systems fail to meet or exceed our internal quality specifications,
we cannot ship them until such time as they have met such specifications. |
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Our dependence on a single manufacturing facility per product line magnifies the
risk of an interruption in our production capabilities. |
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Our lease agreements for our Manufacturing Facilities include provisions that exempt
the landlord and others from liability for damages to our Manufacturing Facilities. |
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Shipment changes or cancellation may render our backlog not a reliable indicator
of actual sales and financial results. |
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We may not be able to successfully complete and integrate current and/or future
acquisitions. |
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We depend on continuous cooperation with Process Equipment Manufacturers (“PEMs”)
to enable sales of our systems which are integrated with the process equipment. |
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Some of our commercial agreements with PEMs and customers may include exclusivity
provisions and limitations on the use of certain intellectual property which could limit or prevent future business relationships with
third parties. |
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We depend on a limited number of suppliers, and in some cases a sole supplier.
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The disclosure rules regarding the use of conflict minerals may affect our relationships
with suppliers and customers. |
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Our lengthy sales cycle increases our exposure to customer delays in orders, which
may result in obsolete inventory and volatile quarterly revenues. |
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Our inability to attract, recruit, retain highly skilled key personnel. |
Risks Related
to Our Incorporation and Location in Israel
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Conditions in Israel, including the recent attack by Hamas and other terrorist organization
from the Gaza Strip and Israel’s war against them, may adversely affect our business, our results of operations and our ability
to raise additional funds. |
Risks Related
to Our Indebtedness and Capital Structure
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Our convertible senior notes may impact our financial results, dilute existing shareholders,
and create downward pressure on the price of our ordinary shares. |
Risks Related
to Financial, Legal, Regulatory and Taxation Risks
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Currency fluctuations could harm our profit margins. |
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We received certain research and development grants, which could impose restrictions
on our ability to use technology developed under these programs. |
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Certain shareholders may control the outcome of matters submitted to a vote of our
shareholders, including the election of directors. |
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The market price of our ordinary shares may be affected by a limited trading volume
and may fluctuate significantly. |
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We may be classified as a “passive foreign investment company” for U.S.
income tax purposes, which could have significant and adverse tax consequences to U.S. shareholders. |
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The rights and responsibilities of our shareholders are governed by Israeli law
and differ in some respects from the rights and responsibilities of shareholders under U.S. law. |
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Our shares are listed for trade on more than one stock exchange. |
You should not rely on forward-looking
statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report primarily on
our current expectations and projections about future events and trends that we believe may affect our business, financial condition and
operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other
factors described in the section titled “Risk factors” and elsewhere in this Annual Report. Moreover, we operate in a very
competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict
all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report. The results,
events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances
could differ materially from those described in the forward-looking statements.
In addition, statements that “we
believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information
available to us as of the date of this Annual Report. While we believe that information provides a reasonable basis for these statements,
that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry
into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely
on these statements.
The forward-looking statements made in
this Annual Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking
statements made in this Annual Report to reflect events or circumstances after the date of this Annual Report or to reflect new information
or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations
disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking
statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.
OUR
FUNCTIONAL CURRENCY
Unless otherwise indicated, all amounts
herein are expressed in United States dollars (“U.S. dollars”, “dollars”, “USD”, “US$”
or “$”).
The currency of the primary economic
environment in which we operate is the U.S. dollar, since substantially all our revenues to date have been denominated in U.S. dollars
and over 50% of our expenses are in U.S. dollars or in New Israeli Shekels linked to the dollar. Transactions and balances denominated
in dollars are presented at their original amounts. Non-dollar transactions and balances have been re-measured into dollars as required
by the principles in ASC 830 Foreign Currency Matters. All exchange gains and losses from such re-measurement are included in the net
financial income when they arise.
PART I
Item 1. Identity of Directors, Senior Management and
Advisors
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
3A.
Selected Financial Data
[Reserved]
3B.
Capitalization and Indebtedness
Not applicable.
3C.
Reasons for the Offer and Use of Proceeds
Not applicable.
3D.
Risk Factors
You should carefully consider the risks
described below before making an investment decision. Additional risks not presently known to us or that we currently deem immaterial
may also impair our business operations. Our business, financial condition or results of operations could be materially and adversely
affected by any of these risks. The trading price and value of our ordinary shares could decline due to any of these risks, and you
may lose all or part of your investment. This Annual Report also contains forward- looking statements that involve risks and uncertainties.
Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this Annual Report.
Economic and External Risks
Increased information technology security threats and
more sophisticated computer crime, could disrupt our business.
Our global operations are linked by information systems, including telecommunications, the internet, our corporate intranet, network communications,
email and various computer hardware and software applications. In light of information technology security threats, we have
implemented network security measures and engaged the services of a cybersecurity experts to implement security policies and tools which
were reviewed and discussed by our audit committee and board of directors. In the current environment, there are numerous and evolving
risks with regards to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage,
employee malfeasance and human or technological error. High-profile security breaches at other companies and in government agencies have
increased in recent years, and security industry experts and government officials have warned about the risks of hackers and cyberattacks
targeting businesses such as ours. Computer hackers and others routinely attempt to breach the security of technology products, services
and systems, and to fraudulently induce employees, customers, sub-contractors, agents, distributors or others to disclose information
or unwittingly provide access to systems or data. In addition, some of our software and products utilize open-source technologies, which
may also be used by computer hackers for the purpose of cyber-attacks. Since the beginning of the war between Israel and Hamas which began
on October 7, 2023, Israeli and Israeli associated companies have become more frequently the target of cyberattacks. As such, the risk
of a cyberattack against our information technology systems and data security may become heightened. Furthermore, the increasingly
growing capabilities of artificial intelligence (“AI”) and its availability to public use and adopted, may be used to identify
vulnerabilities in our systems craft sophisticated cyberattacks.
Although we have invested in measures
to reduce these risks, such as creating a cybersecurity risk management program in place a cybersecurity incident response plan which
includes an incident response plan, we can provide no assurance that our current IT systems are fully protected against third-party intrusions,
viruses, hacker attacks, information or data theft or other similar threats. The cost and operational consequences of implementing, maintaining,
and enhancing further data or system protection measures could increase significantly to overcome increasingly intense, complex, and sophisticated
global cyber threats. Despite our best efforts, we are not fully insulated from data breaches and system disruptions and, accordingly,
we have experienced and expect to continue to experience actual or attempted cyberattacks of our IT networks. Although none of these actual
or attempted cyberattacks has had a material adverse effect on our operations or financial condition thus far, we cannot guarantee that
any such incidents will not have a material adverse effect on our operations or financial condition in the future. For instance, during
2020 and 2021, we experienced a few fraud attempts involving instructions given by a fraudster to third parties working with the Company,
and in one of these attempts a financial institution used by the Company for certain financial transactions, wired out Company funds without
Company’s authorization. Although almost all of such funds have been retrieved in full by the Company, there is no assurance that
such events, at a larger scale, will not happen in the future. Any material breaches of cybersecurity or media reports of perceived security
vulnerabilities to our systems or those of the Company’s third parties, even if no breach has been attempted or occurred, could
cause us to experience reputational harm, loss of customers and revenue, regulatory actions and scrutiny, sanctions or other statutory
penalties, litigation, liability for failure to safeguard our customers’ information, or financial losses that are either not insured
against or not fully covered through any insurance maintained by us. Any of the foregoing may have a material adverse effect on our business,
operating results and financial condition.
Furthermore,
we are in the advanced stages of replacing
our current enterprise resource planning system (“ERP”) with a new one, which requires significant investment of human and
financial resources. We cannot ensure the transition and implementation of the new ERP will be seamless, without experiencing any disruptions
to our operations, including, delays, increased costs or other unforeseen difficulties. In turn, these disruptions could adversely affect
our ability to manage our business and to appropriately forecast and report our results.
As such, our tools and servers are vulnerable
to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems and tools located at our
facility, at cloud services or at customer sites, or could be subject to system failures or malfunctions for other reasons. Increased
information technology security threats and more sophisticated computer crime pose a risk to the security of our systems and networks
and the confidentiality, availability and integrity of our data or customer data. Cybersecurity attacks could also include attacks targeting
the security, integrity and/or reliability of the hardware and software installed in our products. System failures or malfunctioning could
disrupt our operations and our ability to timely and accurately process and report key components of our financial results.
We are dependent on international sales, which expose us to foreign political
and economic risks that could impede our revenue stream.
Our principal customers are located in
Taiwan, South Korea, China and the United States, and we produce our products in Israel, the United States and Germany. International
operations expose us to a variety of risks that could seriously impact our financial condition and impede our revenue stream including:
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instability in political or economic conditions, including but not limited to inflation,
recession, foreign currency exchange restrictions and devaluations, restrictive governmental controls on the movement and repatriation
of earnings and capital, and actual or anticipated military or political conflicts, particularly in emerging markets; Rising inflation
and elevated U.S. budget deficits and overall debt levels, including as a result of federal pandemic relief and stimulus legislation and/or
economic or market and supply chain conditions, can put upward pressure on interest rates and could be among the factors that could lead
to higher interest rates in the future. Higher interest rates could adversely affect our overall business or reduce our liquidity.
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intergovernmental conflicts or actions, including but not limited to armed conflict,
trade wars and acts of terrorism or war, including current war between Russia and the Ukraine; and |
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interruptions to the Company’s business with its largest customers, distributors
and suppliers resulting from but not limited to, strikes, shortage in raw materials and subcomponents due to geopolitical situation and
financial instabilities. For instance, trade restrictions, changes in tariffs and import and export license requirements could adversely
affect our ability to sell our products in the countries adopting or changing those restrictions, tariffs or requirements. This could
reduce our sales by a material amount. |
All of these risks could result in increased costs or decreased
revenues, either of which could have a materially adverse effect on our profitability.
We are subject to laws and regulations that could restrict
our operations including economic sanctions and export restrictions.
Our business is subject to certain laws and restrictions
based on countries with which we conduct business.
Specifically, starting 2018 and to date,
the U.S. Department of Commerce has taken actions to restrict exports to several Chinese based semiconductor manufacturers which have
been added to the U.S. EAR (export administration regulations) Entity List. These manufacturers have acquired and continue to acquire
several of our metrology solutions. Due to the abovementioned export restrictions, our U.S. subsidiary is currently restricted from shipping
tools or parts or provide any form of service to such customers, until it is cleared to resume by the appropriate authorities.
In addition, in 2020 the U.S. Department
of State introduced restrictions on exporting to customers who are suppliers to Huawei, which is a Chinese based electronics supplier.
In
October 2022, the U.S. Department of Commerce introduced additional restrictions that have limited the ability of our U.S. Subsidiary
to serve a small portion of the available Chinese market. As part of these restrictions, in addition to the Entity List, the U.S. Department
of Commerce has also restricted shipment of products used for certain advanced technology nodes, including products that use artificial
intelligence and advanced computing products. Consequently, our U.S. subsidiary is required to obtain
certification/license in order to ship to certain Chinese entities, which are known to have or are known to plan to have, certain advanced-nodes
manufacturing or development abilities (as those are defined in the regulations). The
new restrictions also apply to shipments of high-power advanced chips to China (as those are defined in the regulations), by any entity.
These new restrictions also impose personal liability on any “U.S. Person” with
“knowledge” that any item shipped, transmitted or transferred will be used for certain advanced nodes and/or high-powered
chips development or production.
In October 2023, the U.S. Department
of Commerce issued two new rules further restricting China’s ability to obtain advanced computing chips, develop and maintain supercomputers,
and manufacture advanced semiconductors, and added several new Chinese entities to the Entity List. In November 2023, the U.S. Department
of Commerce also partially suspended some of the licenses granted by it concerning certain Chinese customers as recipients.
In some cases, the abovementioned export
restrictions might also be applicable to the products which we export from countries other than the US, either by international arrangements
made between countries, as updated from time to time, imposing export limitation and supervisory duties, or by limitations on re-export
of certain U.S. origin items.
Since the introduction of each of these
restrictions, we have put in place processes to ensure compliance with these restrictions. While we continue to monitor new sanctions
and restrictions that could arise, any potential violations of such laws whether U.S. or other jurisdictions, could have an adverse impact
on our reputation, business, results of operations and financials.
New
export control regulations have also been introduced in other jurisdictions, including China on
items related to gallium and germanium; Japan on advanced semiconductor-manufacturing equipment; and the Netherlands on certain advanced
semiconductor manufacturing equipment.
While certain additional export administration
regulations issued in the different jurisdictions currently do not have a direct effect on us, these may have an adverse effect on the
semiconductor manufacturing sector in China and reduce the demand for metrology equipment from this sector and therefore to indirectly
affect our sales in China.
Changes in global trade policies and other factors beyond our control may
adversely impact our business, financial condition and results of operations.
The international environment in which
we operate is affected by inter-country trade agreements and tariffs. As a result of recent revisions in the U.S. administrative policy
there are, and may be additional, changes to existing trade agreements, greater restrictions on free trade and significant increases in
tariffs on goods imported into the United States. Future actions of the U.S. administration and that of foreign governments, including
China, with respect to tariffs or international trade agreements and policies remains currently unclear.
The escalation of a trade war, tariffs,
retaliatory tariffs or other trade restrictions on products and materials either exported by us to China or raw materials imported by
us from China may significantly impede our ability to provide our solutions and service our customers in China or other effected locations.
Such developments may result in a decrease in demand for our products and technologies as well as delays in payments from our customers.
Furthermore, other governmental action related to tariffs or international trade agreements, changes in U.S. social, political, regulatory
and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories
and countries, where our customers are located, could adversely affect our business, financial condition, operating results and cash flows.
We may be affected by instability in the global economy and by financial
turmoil.
There is an inherent risk, based on the
complex relationships among China, Japan, Korea, Taiwan, and the United States, that political, diplomatic and national security influences
might lead to trade disputes, impacts and/or disruptions, in particular those affecting the semiconductor industry. This would adversely
affect our business with China, Japan, Korea, and/or Taiwan and perhaps the entire Asia Pacific region or global economy. A significant
trade dispute, impact and/or disruption in any area where we do business could have a materially adverse impact on our future revenue
and profits. Instability in the global markets and in the geopolitical environment in many parts of the world, including current war between
Russia and the Ukraine, as well as other disruptions may continue to put pressure on global economic conditions. In the event global economic
and market conditions, or economic conditions in key markets, remain uncertain or deteriorate further, we may experience material impacts
on our business, operating results, and financial condition.
The Russia – Ukraine conflict could affect our
business.
The ongoing war between Russia and Ukraine
has impacted not only the global economy but the global energy markets as well, in particular the European energy market. Following our
recent acquisition of a German subsidiary, we are experiencing the effects of the increasing prices for energy supplies. This could result
in increased operating expenses in Germany, in the expense of shipping materials to and from our various facilities, and wellbeing of
our employees with respect to the energy crisis in Europe and the inability to heat buildings etc. Since the Russian invasion of Ukraine,
the cost for liquefied natural gas has more than doubled, this could lead to further energy price increase, causing global market disruption
and volatilities in supply chain. The high volatility of energy prices could have a negative effect on our acquisition in Germany, and
our business expansion in other regions, which may adversely affect our financial condition and operating results.
Current market conditions, including inflation and
recessionary pressures could affect our growth and profitability.
The recent inflation, geopolitical issues,
increase in energy costs, increases in interest rates, unstable global conditions and changes in currency exchange rates have led to global
economical instability. Such changes, and their impact on the global macro-economic environment, can impact our business, operating results,
and financial condition.
Because we derive a significant portion of our revenues
from sales in Asia, our sales could be hurt by instability of Asian economies.
A number of Asian countries have experienced
political and economic instability. For instance, Taiwan and China have had a number of disputes, as have North and South Korea, and Japan
has for a number of years experienced significant economic instability. Additionally, the Asia-Pacific region is susceptible to the occurrence
of natural disasters, such as earthquakes, cyclones, tsunamis and flooding. We have subsidiaries in Taiwan, South Korea, China and Japan
and we have significant customers in Taiwan, South Korea and China. An outbreak of hostilities or other political upheaval, economic downturns
or the occurrence of a natural disaster in these or other Asian countries would likely harm the operations of our customers in these countries,
causing our sales to suffer.
Our business is subject to the risks associated with
doing business in China.
Our results of operations, financial
conditions, and prospects are subject to a significant degree to economic, political and legal developments in China including government
control over capital investments or changes in tax regulations that are applicable to us. China’s economy differs from the economies
of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth
rate and control of foreign exchange, and allocation of resources. As one of our subsidiaries is located in China, our business is subject
to the risks associated with doing business in China, including:
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trade protection measures, such as tariff increases, and import and export licensing
and control requirements; |
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potentially negative consequences from changes in tax laws; |
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difficulties associated with the Chinese legal system, including increased costs
and uncertainties associated with enforcing contractual obligations in China; |
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historically, lower protection of intellectual property rights; |
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changes and volatility in currency exchange rates; |
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unexpected or unfavorable changes in regulatory requirements; and |
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local preference of emerging local competitors in China. |
Our business could be disrupted by catastrophic events.
The occurrence of unforeseen or catastrophic
events such as terrorist attacks, extreme terrestrial or solar weather events or other natural disasters, emergence of a pandemic, or
other widespread health emergencies (or concerns over the possibility of such an emergency), could create economic and financial disruptions,
and could lead to operational difficulties that could impair our ability to manage our business.
Risks related to technology and intellectual property
Because of the technical nature of our business, our
intellectual property is extremely important to our business, and our inability to protect our intellectual property could harm our competitive
position.
Our continued success depends upon our
ability to protect our core technology and intellectual property. We therefore have an extensive program devoting resources to seeking
patent protection for our inventions and discoveries that we believe will provide us with competitive advantages. Our patents, utility
models and patent applications principally cover various aspects of optical measurement systems and methods, integrated process control
implementation concepts, and optical, opto-mechanical and mechanical design. In addition, our patents and applications cover various aspects
of X-ray based measurement systems and methods, including process control implementation concepts, X-ray energy sources, electron optics
and detection, vacuum systems and equipment integration. Additionally, our chemical metrology equipment requires coverage of various elements
and sub-systems performing various types of chemical analysis of the process chemicals and semiconductor wet process control – including
electrodeposition, wet etch and clean and CMP sectors.
We cannot assure that:
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pending patent applications will be approved; or |
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any patents will be broad enough to protect our technology, will provide us with
competitive advantages or will not be challenged or invalidated by third parties. We also cannot assure that others will not independently
develop similar products, duplicate our products or, if patents are issued to us, design around these patents. Furthermore, because patents
may afford less protection under foreign law than is available under U.S. law, we cannot assure that any foreign patents issued to us
will adequately protect our proprietary rights. |
In addition, a number
of the patents which relating to our main-stream products have already expired or are expected to be expired in the coming years. Such
expiration may add significant competition to our tools in this area, which may lead to a decrease in our incomes. In addition, not all
our patents provide coverage in all territories we operate in, and thus in some territories there is less coverage on some product lines.
In addition to patent protection, we
also rely upon trade secret protection, employee and third-party nondisclosure agreements and other intellectual property protection methods
to protect our confidential and proprietary information. Despite these efforts, we cannot be certain that others will not otherwise gain
access to our trade secrets or disclose our technology.
Additionally, as part of our long-term
technological collaboration, we are engaged with joint development activities with some of our strategic customers and vendors as well
as with research institutes. These activities impose some limitations on the joint intellectual property developed as part of these programs.
Furthermore, we may be required to institute
legal proceedings to protect our intellectual property. If such legal proceedings are resolved adversely to us, our competitive position
and/or results of operations could be harmed. For additional information on our intellectual property, see “Item 4B. Business Overview
— Intellectual Property” in this Annual Report.
There has been significant litigation involving intellectual
property rights in the semiconductor and related industries, and similar litigation involving our Company could force us to divert resources
to defend against such litigation or deter our customers from purchasing our systems.
We have been, and may in the future be,
notified of allegations that we may be infringing intellectual property rights possessed by others. In addition, we may be required to
commence legal proceedings against third parties, which may be infringing our intellectual property, in order to defend our intellectual
property. In the future, protracted litigation and expense may be incurred to defend ourselves against alleged infringement of third-party
rights or to defend our intellectual property against infringement by third parties. Adverse determinations in that type of litigation
could:
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result in our loss of proprietary rights; |
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subject us to significant liabilities, including triple damages in some instances;
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require us to seek licenses from third parties, which licenses
may not be available on reasonable terms or at all; or |
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prevent us from selling our products. |
Any litigation of this type, even if
we are ultimately successful, could result in substantial cost and diversion of time and effort by our management, which by itself could
have a negative impact on our profit margin, available funds, competitive position and ability to develop and market new and existing
products. For additional information on our intellectual property, see “Item 4B. Business Overview — Intellectual Property”
in this Annual Report.
We may incorporate open-source technology in some of
our software and products, which may expose us to liability and have a material impact on our product development and sales.
In order to leverage big data and distributed
computing, some of our software and products utilize open-source technologies. These technologies may be subject to certain open-source
licenses, including but not limited to the General Public License, which, when used or integrated in particular manners, impose certain
requirements on the subsequent use of such technologies, and pose a potential risk to proprietary nature of products. In the event that
we have or will in the future, use or integrate software that is subject to such open source licenses into or in connection with our products
in such ways that will trigger certain requirements of these open source licenses, we may (i) be required to include certain notices and
abide by other requirements in the absence of which we may be found in breach of the copyrights owned by the creators of such open source
technologies; and/or (ii) be required to disclose our own source code or parts thereof to the public, which could enable our competitors
to eliminate some or any technological advantage that our products may have over theirs. Any such requirement to disclose our source code
or other confidential information related to our products, and the failure to abide by license requirement resulting in copyright
infringement, could materially adversely affect our competitive position and impact our business results of operations and financial condition.
Furthermore, we are using third-party AI technologies or software, which may introduce significant risks to our cybersecurity as these
could spread vulnerabilities, defects viruses, ransomware or malware through our products and/or services across our supply chain and
operations.
Risks related to our industry
We operate in an extremely competitive market, and
if we fail to compete effectively, our revenues and market share will decline.
Although the market for process control
systems used in semiconductor manufacturing is currently concentrated and characterized by relatively few participants, the semiconductor
capital equipment industry is intensely competitive. We compete mainly with Onto Innovation Inc., and KLA Corp., which manufacture and
sell CD, thin films and chemical metrology and process control systems. In addition, we compete with process equipment manufacturers (“PEMs”),
such as ASML Holdings N.V., LAM Research, and Applied Materials Inc., which develop (or might as well acquire companies which develop)
in-situ sensors and metrology products. Established companies, both domestic and foreign, compete with our product lines, and new competitors
enter our market from time to time, including the recent emergence of local competitors in China. Some of our competitors have greater
financial, engineering, manufacturing and marketing resources than we do. If a particular customer selects a competitor’s capital
equipment, we expect to experience difficulty in selling our solution to that customer for a significant period of time. A substantial
investment is required by the customers to evaluate, test, select and integrate capital equipment into a production line. As a result,
once a manufacturer has selected a particular vendor’s capital equipment, we believe that the manufacturer generally relies upon
that equipment for the specific production line application and frequently will attempt to consolidate its other capital equipment requirements
with the same vendor. Accordingly, unless our systems offer performance or cost advantages that outweigh a customer’s expense of
switching to our systems, it will be difficult for us to achieve significant sales from that customer once it has selected another vendor’s
system for an application. We believe that our ability to compete successfully depends on a number of factors both within and outside
of our control, including:
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the contribution and value our solutions bring to our customers; |
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our product innovation, quality and performance; |
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our global technical service and support; |
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the return on investment (ROI) of our equipment and its cost of ownership;
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the breadth of our product line; |
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our success in developing and marketing new products; and |
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the extendibility of our products. |
If we fail to compete in a timely and
cost-effective manner against current or future competitors, our revenues and market share will decline.
If we do not respond effectively and on a timely basis
to rapid technological changes, our ability to attract and retain customers could be diminished, which would have an adverse effect on
our sales and ability to remain competitive.
The semiconductor manufacturing industry
is characterized by rapid technological changes, new product introductions and enhancements and evolving industry standards. Our ability
to remain competitive and generate revenue will depend in part upon our ability to develop new and enhanced systems at competitive prices
in a timely and cost-effective manner and to accurately predict technology transitions. Because new product development commitments must
be made well in advance of sales, new product decisions must anticipate the future demand for products. If we fail to correctly anticipate
future demand for products, our sales and competitive position will deteriorate. In addition, the development of new technologies, new
product introductions or enhancements by our competitors could cause a decline in our sales or loss of market acceptance of our existing
products.
The ongoing consolidation in our industry may harm
us if our competitors are able to offer a broader range of products and greater customer support than we can offer or if our main suppliers
cease delivery of important component as a result of being acquired by a larger company.
We believe that the semiconductor capital
equipment market has undergone consolidation over the last few years. For example, Lam Research Corporation acquired Novellus Systems
Inc. in 2016 and Coventor in 2017; Thermo Fisher Scientific Inc. acquired FEI Company, Inc. in 2016; ASML Holdings N.V. acquired Hermes
Microvision Inc. in 2016 and Berliner Glas Group in 2020; KLA Corporation acquired Orbotech Ltd. in 2019 and ECI Technology in 2022; and
Nanometrics Inc. and Rudolph Technologies, Inc. merged in 2019. We believe that similar acquisitions and business combinations involving
our competitors, our customers, and our suppliers and the PEMs may occur in the future. These acquisitions could adversely impact our
competitive position by enabling our competitors and potential competitors to expand their product offerings and customer services, which
could provide them an advantage in meeting customers’ needs, particularly with those customers that seek to consolidate their capital
equipment requirements with a smaller number of vendors. The greater resources, including financial, marketing, intellectual property
and support resources, of competitors involved in these acquisitions could allow them to accelerate the development and commercialization
of new competitive products and the marketing of existing competitive products to their larger installed bases. Accordingly, such business
combinations and acquisitions by competitors and/or customers could jeopardize our competitive position. In addition, an acquisition of
a major supplier by a larger company may lead to a cease delivery of components that are important to the delivery of our products and
will require us to invest resources to find alternative sources.
The markets we target are cyclical and it is difficult
to predict the length and strength of any downturn or expansion period.
The semiconductor capital equipment market
and industries, which are cyclical, experienced steep downturns and upturns in the last two decades. While in recent years, we saw more
stable capital investment patterns overall, in 2023, there was a downturn in the capital equipment market and we cannot predict the timing
of the market recovery or of potential future downturns and how these may impact our business.
Our operations may be delayed or interrupted, and our business could suffer
if we violate environmental, safety and health, or ESH regulations.
Some of our activities require the use
of various gases, chemicals, hazardous materials and other substances such as solvents and sulfuric acid which may have an impact on the
environment. We are subject to ESH regulations, and a failure to manage the use, storage, transportation, emission, discharge, recycling
or disposal of raw materials or to comply with these ESH regulations could result in (i) regulatory penalties, fines and other legal liabilities,
(ii) suspension of production or delays in operation and capacity expansion, (iii) a decrease in our sales, (iv) an increase in pollution
cleaning fees and other operation costs, or (v) damage to our public image, any of which could harm our business. In addition, as ESH
regulations are becoming more comprehensive and stringent, we may incur a greater amount of capital expenditures in technology innovation
and materials substitution in order to comply with such regulations, which may adversely affect our results of operations.
Operational risks
Because substantially most of our current sales are
dependent on few specific product lines, factors that adversely affect the pricing and demand for these product lines could substantially
reduce our sales.
We are currently dependent on few process
control product lines. We expect these product lines to continue to account for a substantial portion of our revenues in the coming years.
As a result, factors adversely affecting the pricing of, or demand for, these product lines, such as competition and technological change,
could significantly reduce our sales.
We depend on a small number of large customers, and
the loss of one or more of them could significantly lower our revenues.
Like our peers serving the semiconductor
market, our customer base is highly concentrated among a limited number of large customers. We anticipate that our revenues will continue
to depend on a limited number of major customers, although the companies considered to be our major customers and the percentage of our
revenue represented by each major customer may vary from period to period. As a result of our customer concentration, our financial performance
may fluctuate significantly from period to period based, among others, on exogenous circumstances related to our clients. For example,
it is possible that any of our major customers could terminate its purchasing relationship with us or significantly reduce or delay the
amount of orders for our products, purchase products from our competitors, or develop its own alternative solutions internally. The loss
of any one of our major customers would adversely affect our revenues. Furthermore, if any of our customers become insolvent or have difficulties
meeting their financial obligations to us for any reason, we may suffer losses. For more information regarding our sales by major customers
as percentage of our total sales, see Note 15 to our consolidated financial statements contained elsewhere in this Annual Report.
Our inability to significantly reduce spending during
a protracted slowdown in the semiconductor industry could reduce our prospects of achieving continued profitability.
Historically, we have derived all our
revenues, and we expect to continue to derive practically all of our revenues, from sales of our products and related services to the
semiconductor industry. Our business depends in large part upon capital expenditures by semiconductor manufacturers, which in turn depend
upon the current and anticipated demand for semiconductors. The semiconductor industry has experienced severe and protracted cyclical
downturns and upturns. Cyclical downturns, as those we have experienced in the past, including the slowdown in 2023, may cause material
reductions in the demand for the products and services that we offer, and may result in a decline in our sales. In addition, our ability
to significantly reduce expenses during such cyclical downturn may be limited because of:
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our continuing need to invest in research and development; |
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our continuing need to market our new products; and |
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our extensive ongoing customer service and support requirements worldwide.
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Furthermore,
in recent years, we increased our leased facilities and related investments and our operating expenses. In the event of a global recession
or certain other economic conditions forcing the Company to materially reduce its expenses, portions of such facilities may be rendered
obsolete. As a result, we may have difficulty achieving continued profitability during a protracted
slowdown.
There can be no assurance that revenues from future
products or product enhancements will be sufficient to recover the development costs or to ensure the sale of inventory related to these
products.
We must continue to make significant
investments in research and development in order to introduce new products and technologies, or to enhance the performance, features and
functionality of our existing products, to keep pace with the competitive landscape and to satisfy customer demands. Substantial research
and development costs are typically incurred before we confirm the technical feasibility and commercial viability of a new product, and
not all development activities result in commercially viable products. There can be no assurance that revenues from future products or
product enhancements will be sufficient to recover the development costs associated with such products or enhancements. In addition, we
cannot be sure that these products or enhancements will receive market acceptance or that we will be able to sell these products at prices
that are favorable to us. Our business will be seriously harmed if we are unable to sell our products at favorable prices or if the market
in which we operate does not accept our products. In addition, in some cases, we accumulate inventories based on sales forecasts. If such
sales forecasts are not materialized, we might need to write-off the related inventory, which will increase our losses.
New product lines that we may introduce in the future
may contain defects, which will require us to allocate time and financial resources to correct.
Our new product lines may contain defects
when first introduced. If there are defects, we will need to divert the attention of our personnel from our ongoing product development
efforts to address the detection and correction of the defects. We cannot provide assurances that we will not incur any costs or liabilities
or experience any lags or delays in the future. Moreover, the occurrence of such defects, whether caused by our products or the products
of another vendor, may result in significant customer relations problems and adversely affect our reputation and may impair the market
acceptance of our products.
If any of our systems fail to meet or exceed our internal
quality specifications, we cannot ship them until such time as they have met such specifications. If we experience significant delays
or are unable to ship our products to our customers as a result of our internal processes or for any other reason, our business and reputation
may be adversely affected.
Our products are complex and require
technical expertise to design and manufacture. Various problems occasionally arise during the manufacturing process that may cause delays
and/or impair product quality. We actively monitor our manufacturing processes to ensure that our products meet our internal quality specifications.
Any significant delays stemming from the failure of our products to meet or exceed our internal quality specifications, or for any other
reasons, would delay our shipments. Shipment delays could be harmful to our business, revenues and reputation in the industry.
Our dependence on a single manufacturing facility per
product line magnifies the risk of an interruption in our production capabilities.
As of the date of this Annual Report,
we have one main manufacturing facility for our Optical CD and Raman technology-related product lines, which is located in Weizmann Science
Park, Rehovot, Israel, one main manufacturing facility for our XPS and secondary ion mass spectrometry (“SIMS”) technology
related product lines, which is located in Fremont, CA, US, and two manufacturing facilities for our Chemical Metrology product lines,
which are located in Pliezhausen and Bad Urach, Germany (the "Manufacturing Facilities"). In the first half of 2025, following the planned
completion of construction of our new manufacturing and laboratories facilities in Bad Urach, Germany, we plan to relocate all our German
manufacturing and laboratories facilities to Bad Urach, Germany. These Manufacturing Facilities include special clean manufacturing jigs
and/or room environments, which are customized to our needs. In addition, most of our ongoing inventories, including our main warehouse
and work in process, are located in these Manufacturing Facilities. Although we adopted measures to protect these Manufacturing Facilities
and inventories, such as implementing a disaster recovery plan which includes potential usage of laboratory facilities in all major sites,
any event affecting any of our Manufacturing Facilities, including natural disaster, labor stoppages or armed conflict, may disrupt or
indefinitely discontinue our manufacturing capabilities and could significantly impair our ability to fulfill orders and generate revenues,
thus negatively impacting our business.
Our lease agreements for our Manufacturing Facilities
include provisions that exempt the landlord and others from liability for damages to our Manufacturing Facilities.
Pursuant to the lease agreements for
our Manufacturing Facilities, the landlord and anyone on its behalf, and additional tenants are exempt from any liability for direct or
consequential damages to our Manufacturing Facilities, except in the event of willful misconduct. While we have obtained insurance policies
against certain damages, the aforementioned exemption of liability could compromise our ability to recover the full amount of such damages,
and consequently we may incur substantial costs upon the occurrence of such damages.
Because shipment dates may be changed and some of our
customers may cancel or delay orders with little or no penalty, and since we encounter difficulties in collecting cancellation fees from
our customers, our backlog may not be a reliable indicator of actual sales and financial results.
We schedule production of our systems
based upon order backlog and customer forecasts. We include in backlog only those orders received from the customers in which a delivery
date has been specified. In general, our ability to rely on our backlog for future forecasting and planning is limited because shipment
dates may be changed, some customers may cancel or delay orders with little or no penalty, and our ability to collect cancellation fees
from customers is not assured. Thus, our backlog may not be a reliable indicator of actual sales and financial results and this may affect
the accuracy of our forecasts.
We may not be successful in our efforts to complete
and integrate current and/or future acquisitions, which could disrupt our current business activities and adversely affect our results
of operations or future growth.
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Any acquisition may involve many risks, including the risks of: |
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diverting management’s attention and other resources from our ongoing business
concerns; |
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entering markets in which we have no direct prior experience; |
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improperly evaluating new services, products and markets; |
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being unable to maintain uniform standards, controls, procedures and policies;
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failing to comply with governmental requirements pertaining to acquisitions of local
companies or assets by foreign entities; |
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being unable to integrate new technologies or personnel; |
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incurring the expenses of any undisclosed or potential liabilities; and |
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the departure of key management and employees.
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If we are unable to successfully complete or integrate our
future acquisitions, our ability to grow our business or to operate our business effectively could be reduced, and our business, financial
condition and operating results could suffer. Even if we are successful in completing acquisitions, we cannot assure that we will be able
to integrate the operations of the acquired business without encountering difficulty regarding different business strategies with respect
to marketing and integration of personnel with disparate business backgrounds and corporate cultures. Further, in certain cases, mergers
and acquisitions require special approvals, or are subject to scrutiny by the local authorities, and failing to comply with such requirements
or to receive such approvals, may prevent or limit our ability to complete the acquisitions as well as expose us to legal proceedings
prior or following the consummation of such acquisitions. In some cases, such proceedings, if initiated, may conclude in a requirement
to divest portions of the acquired business.
We depend on continuous cooperation with Process Equipment
Manufacturers (“PEMs”) to enable sales of our systems which are integrated with the process equipment, and the loss of PEMs
as business partners could harm our business.
We believe that sales of systems which
are integrated with the process equipment will continue to be an important source of our products revenues. Sales of such integrated systems,
which include Optical CD integrated metrology and chemical metrology, depend upon the ability of PEMs to sell semiconductor equipment
products that are able to integrate with these metrology systems. If our PEMs are unable to sell such products, if they choose to focus
their attention on products that do not integrate our systems, or if they choose to develop their own metrology solutions, our business
could suffer. If we were to lose our PEMs as business partners for any reason, our inability to realize sales from such systems could
significantly harm our business. In addition, we may not be able to develop or market such new systems, which could slow or prevent our
growth.
Some of our commercial agreements with PEMs and customers
may include exclusivity provisions and limitations on the use of certain intellectual property. Such limitations may prevent us from engaging
in certain business relationships with third parties, and may limit our ability to use certain elements of our intellectual property.
As a result, our ability to introduce new products in relevant markets might be affected.
Some of our commercial agreements with
PEMs and customers may include exclusivity provisions, which prevent us from engaging in certain business relationships with third parties.
In addition, some of our commercial agreements with PEMs also include limitations on the use of certain joint intellectual property. These
exclusivity obligations and limitations are often used as a tool to promote the development and the penetration of innovative new solutions,
and are usually limited in terms of scope and length. When considering whether to enter into any such exclusivity arrangements or accepting
such limitations, we usually take into consideration the terms of the exclusivity (e.g., length and scope), the expected benefit to the
Company, and the risks and limitations associated with such exclusivity or limiting undertakings. Exclusivity obligations or limitation
of use relating to certain parts of our technology and products may affect our ability to commercialize our products, engage in potentially
beneficial business relationships with third parties (including by means of a merger or acquisition), or introduce new products into relevant
markets, which could slow or prevent our growth.
We depend on a limited number of suppliers, and in
some cases a sole supplier. Any disruption, delay or termination of these supply channels may adversely affect our ability to manufacture
our products and to deliver them to our customers.
We purchase components, subassemblies
and services from a limited number of suppliers and occasionally from a single or a sole source. Disruption or termination of these sources
could occur (due to several factors, including, but not limited to, supplier capacity limitations, low availability of raw materials,
bankruptcy, work stoppages due to a pandemic, or other reasons, acts of war, terrorism, fire, earthquake, energy shortages, flooding or
other natural disasters), and these disruptions could have at least a temporary adverse effect on our operations. Although we generally
maintain an inventory of critical components used in the manufacture and assembly of our systems, such supplies may not be sufficient
to avoid potential delays that could have an adverse effect on our business.
In addition, an acquisition of a major
supplier by a larger company may lead to a cease delivery of components that are important to the delivery of our products and will require
us to invest resources to find alternative sources.
To date, we have not experienced any
material disruption or termination of our supply sources where replacement material has not been found and qualified.
A prolonged inability on our part to
obtain components included in our systems on a cost-effective basis could adversely impact our ability to deliver products on a timely
basis, which could harm our sales and customer relationships.
The disclosure rules regarding the use of conflict
minerals may affect our relationships with suppliers and customers.
The Securities and Exchange Commission,
or SEC, requires certain disclosure by companies that use conflict minerals in their products, with substantial supply chain verification
requirements in the event that the materials come from, or could have come from, the Democratic Republic of the Congo or adjoining countries.
These rules and verification requirements may impose additional costs on us and on our suppliers, and limit the sources or increase the
prices of materials used in our products. Among other things, this rule could affect sourcing at competitive prices and availability in
sufficient quantities of certain minerals used in the manufacture of components that are incorporated into our products. In addition,
the number of suppliers who provide conflict-free minerals may be limited, and there may be material costs associated with complying with
the disclosure requirements, such as costs related to the process of determining the source of certain minerals used in our products,
as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. We
may not be able to sufficiently verify the origins of the relevant minerals used in components manufactured by third parties through the
procedures that we implement, and we may encounter challenges to satisfy those customers who require that all of the components of our
products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so. While we have created
processes and procedures designed to enable compliance to these rules, if in the future we are unable to certify that our products are
conflict free, we may face challenges with our customers, which could place us at a competitive disadvantage and harm our reputation.
Increased attention to ESG matters and conservation
measures may adversely impact our business or that of our manufacturers.
In June 2022, the SEC published a proposed
climate disclosure rule, subject to which we would be required to disclose certain climate-related information such as governance of climate-related
risks and relevant risk management processes that could affect us, a climate related financial statements matrix and more. While the proposed
rule has yet to be finalized and we cannot predict the ultimate scope and impact this will have on our business, if finalized, it would
likely result in additional legal, accounting and financial compliance and increased general and administrative expenses. Moreover, this
could result in increased management time and attention to ensure we are compliant with the regulations and expectations.
Though the disclosure is currently
voluntary we published our first Environmental, Social, and Governance (ESG) Insight Review in April 2023, in which we provided details
on our strategy and principles to practices associated with climate change, human capital and diversity, governance, sustainability, diversity
of our board and other Company policies. Any standards we may set for ourselves or a failure to meet these standards, could negatively
impact our reputation.
Despite our measures and attempts,
it is possible that our shareholders and/or customers may not be satisfied with our ESG Plan or the speed of its adoption.
Our lengthy sales cycle increases our exposure to customer
delays in orders, which may result in obsolete inventory and volatile quarterly revenues.
Sales of our systems depend, in significant
part, upon our customers adding new manufacturing capacity or expanding existing manufacturing capacity, both of which involve a significant
capital commitment. We may experience delays in finalizing sales while a customer evaluates and approves an initial purchase of our systems.
Our sales cycle for new customers, products or applications, may take longer than twelve (12) months to complete. During this time, we
may expend substantial funds and management effort, but fail to make any sales. Lengthy sales cycles subject us to a number of significant
risks, including inventory obsolescence and fluctuations in operating results, over which we have limited control.
Due to intense competition for highly skilled personnel,
we may fail to attract, recruit, retain and develop qualified employees, which could materially and adversely impact our business, financial
condition and results of operations.
We compete in a market that involves
rapidly changing technological and regulatory developments that require a wide-ranging set of expertise and intellectual capital. In order
for us to successfully compete and grow, we must attract, recruit, retain and develop the necessary personnel who can provide the needed
expertise across the entire spectrum of our intellectual capital needs. While we have a number of our key personnel who have substantial
experience with our operations, we must also develop and exercise our personnel to provide succession plans capable
of maintaining continuity in the midst of the inevitable unpredictability of human capital. Our principal research and development
activities are conducted from our headquarters in Israel and our subsidiaries in the U.S and Germany, and we face significant competition
for suitably skilled developers in these regions. The high-tech industry in Israel, the U.S. and other territories we operate in has experienced
significant levels of employee attrition and is currently facing a severe shortage of skilled human capital. We may encounter higher attrition
rates in the future, particularly if Israel continues to experience strong economic growth. We may not succeed in recruiting additional
experienced or professional personnel, retaining current personnel or effectively replacing current personnel who depart
with qualified or effective successors. Many of the companies with which we compete for experienced personnel have greater resources
than us.
Our effort to retain and develop personnel
may also result in significant additional expenses, which could adversely affect our profitability. There can be no assurance that qualified
employees will continue to be employed or that we will be able to attract and retain qualified personnel in the future. Failure to retain
or attract qualified personnel could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Incorporation and Location
in Israel
Conditions in Israel, including the recent attack by Hamas and other terrorist organizations
from the Gaza Strip and elsewhere in the region, and Israel’s war against them, may adversely affect our business, our results of
operations and our ability to raise additional funds.
We
are incorporated under the laws of the State of Israel, and many of our employees, including certain management members, operate from
our offices that are located in Rehovot, Israel. In addition, most of our officers and directors are residents of Israel. Accordingly,
our business and operations are directly affected by economic, political, geopolitical and military conditions in Israel. Since the establishment
of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its neighboring countries and terrorist organizations
active in the region. These conflicts have involved missile strikes, hostile infiltrations and terrorism against civilian targets in various
parts of Israel, which have negatively affected business conditions in Israel.
In October 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 Israeli population and industrial centers located along Israel’s border with the Gaza Strip and in other
areas within the State of Israel. These attacks resulted in extensive deaths, injuries and kidnapping of civilians and soldiers. Following
the attack, Israel’s security cabinet declared war against Hamas and a military campaign against these terrorist organizations commenced
in parallel to their continued rocket and terror attacks.
The intensity and duration of Israel’s
current war against Hamas is difficult to predict, as are such war’s economic implications on the Company’s business and operations
and on Israel’s economy in general. These events may be intertwined with wider macroeconomic indications of a deterioration of Israel’s
economic standing that may involve a downgrade in Israel's credit rating by rating agencies (such as the recent downgrade by Moody’s
of its credit rating of Israel from A1 to A2, as well as the downgrade of its outlook rating from “stable” to “negative”),
which may have a material adverse effect on the Company and its ability to effectively conduct its operations.
In connection with the Israeli security
cabinet’s declaration of war against Hamas and possible hostilities with other organizations, several hundred thousand Israeli military
reservists were drafted to perform immediate military service. Although many of such military reservists have since been released, they
may be called up for additional reserve duty, depending on developments in the war in Gaza and along Israel's other borders. Certain of
our employees and consultants in Israel, in addition to employees of our service providers located in Israel, have been called, and additional
employees may be called, for service in the current or future wars or other armed conflicts with Hamas as well as the other pending or
future armed conflicts in which Israel is or may become engaged, and such persons may be absent for an extended period of time. As a result,
our operations may be disrupted by such absences, which disruption may materially and adversely affect our business and results of operations.
Additionally, the absence of employees of our Israeli suppliers and contract manufacturers due to their military service in the current
or future wars or other armed conflicts may disrupt their operations, which in turn may materially and adversely affect our ability to
deliver or provide products and services to customers.
Following the attack by Hamas on Israel’s
southern border, Hezbollah in Lebanon also launched missile, rocket, drone and shooting attacks against Israeli military sites, troops
and Israeli towns in northern Israel. In response to these attacked, the Israeli army has carried out a number of targeted strikes on
sites belonging to Hezbollah in southern Lebanon. It is possible that the hostilities with Hezbollah will escalate, and that other terrorist
organizations, including Palestinian military organizations in the West Bank, as well as other hostile countries, such as Iran, will join
the hostilities. Such hostilities may include terror and missile attacks. In the event that our facilities are damaged as a result of
hostile actions, or hostilities otherwise disrupt our ongoing operations, our ability to deliver or provide products and services in a
timely manner to meet our contractual obligations towards customers and vendors could be materially and adversely affected. Our commercial
insurance does not cover losses that may occur as a result of events associated with war and terrorism. Although the Israeli government
currently covers the reinstatement value of certain direct damages that are caused by terrorist attacks or acts of war, we cannot assure
you that such government coverage will be maintained or that it will sufficiently cover our potential damages. Any losses or damages incurred
by us could have a material adverse effect on our business.
In addition, some countries around the
world restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with
Israel and Israeli companies if hostilities in Israel or political instability in the region continue or increase. These restrictions
may limit materially our ability to sell our products and provide our services to companies and customers in these countries. In addition,
there have been increased efforts by countries, activists, and organizations to cause companies and consumers to boycott Israeli goods
and services. In addition, in January 2024 the International Court of Justice, or ICJ, issued an interim ruling in a case filed
by South Africa against Israel in December 2023, making allegations of genocide amid and in connection with the war in Gaza, and ordered
Israel, among other things, to take measures to prevent genocidal acts, prevent and punish incitement to genocide, and take steps to provide
basic services and humanitarian aid to civilians in Gaza. There are concerns that companies and businesses will terminate, and may have
already terminated, certain commercial relationships with Israeli companies following the ICJ decision. The foregoing efforts, by countries,
activists and organizations, particularly if they become more widespread, may materially and adversely impact our ability to sell and
provide our products and services outside of Israel.
Furthermore, following Hamas’ attack
on Israel and Israel’s security cabinet declaration of war against Hamas, the Houthi movement, which controls parts of Yemen, launched
a number of attacks on marine vessels traversing the Red Sea, which marine vessels were thought to either be in route towards Israel or
to be partly owned by Israeli businessmen. The Red Sea is a vital maritime route for international trade traveling to or from Israel.
As a result of such disruptions, we may experience in the future delays in supplier deliveries, extended lead times, and increased cost
of freight, increased insurance costs, purchased materials and manufacturing labor costs. The risk of ongoing supply disruptions may result
in delayed deliveries of our products and may also have adverse impact on economic conditions in Israel.
Finally, political conditions within
Israel may affect our operations, Israel has held five general elections between 2019 and 2022, and prior to October 2023, the Israeli
government pursued extensive changes to Israel’s judicial system, which sparked extensive political debate and unrest. In response
to such initiative, many individuals, organizations and institutions, both within and outside of Israel, voiced concerns that the proposed
changes may negatively impact the business environment in Israel including due to reluctance of foreign investors to invest or transact
business in Israel, as well as to increased currency fluctuations, downgrades in credit rating, increased interest rates, increased volatility
in security markets and other changes in macroeconomic conditions. To date, these initiatives have been substantially put on hold. If
such changes to Israel’s judicial system are again pursued by the government and approved by the parliament, this may have an adverse
effect on our business, our results of operations and our ability to raise additional funds, if deemed necessary by our management and
board of directors.
Risks Related to Our Indebtedness and Capital
Structure
Our convertible senior notes due 2025 (“Convertible
Senior Notes”) may impact our financial results, result in the dilution of existing shareholders, create downward pressure on the
price of our ordinary shares, and restrict our ability to take advantage of future opportunities.
In October 2020, we closed an offering
of $200 million aggregate principal amount of 0% Convertible Senior Notes due 2025 in a private offering to qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as amended, of which all Convertible Senior Notes remains outstanding as of December
31, 2023. The Convertible Senior Notes affect our earnings per diluted share figures, as procedures under the Accounting Standards Update
(“ASU”) 2020-06 require that we include in our calculation of earnings per diluted share the number of ordinary shares
into which the Convertible Senior Notes are convertible. See also Note 10 to our consolidated financial statements contained elsewhere
in this Annual Report.
The Convertible Senior Notes may
be converted, under the conditions, during the periods and at the premium specified in the Convertible Senior Notes, into cash and our
ordinary shares, if any (subject to our right to pay cash in lieu of all or a portion of such shares). If our ordinary shares are issued
to the holders of the Convertible Senior Notes upon conversion, there will be dilution to our shareholders’ equity and the market
price of our ordinary shares may decrease due to the additional selling pressure in the market. Any downward pressure on the price of
our ordinary shares caused by the sale or potential sale of ordinary shares issuable upon conversion of the Convertible Senior Notes could
also encourage short sales by third parties, creating additional downward pressure on our share price.
Furthermore, the indenture for the Convertible
Senior Notes prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our
obligations under the Convertible Senior Notes. These and other provisions in the indenture could deter or prevent a third party from
acquiring us even when the acquisition may be favorable.
We currently anticipate that we will
be able to rely on and to implement certain clarifications from the applicable Tax Authorities, with respect to the administration of
our Israeli withholding tax obligations in relation to considerations to be paid to the holders of the Convertible Senior Notes upon their
future conversion and settlement as well as other related tax aspects. Unexpected failure to ultimately obtain such anticipated clarifications
from the Israeli Tax Authorities (“ITA”) could potentially result in increased Israeli
withholding tax gross-up costs.
We may not have the ability to raise the funds necessary
to settle conversions of the Convertible Senior Notes, if we are obligated to settle such conversions, in whole or in part, in cash, repurchase
the Convertible Senior Notes upon a fundamental change or repay the Convertible Senior Notes in cash at their maturity, and our future
debt may contain limitations on our ability to pay cash upon conversion or repurchase of the Convertible Senior Notes.
Holders of the Convertible Senior Notes
have the right, under the indenture governing the Convertible Senior Notes to require us to repurchase all or a portion of their
Convertible Senior Notes upon the occurrence of a fundamental change before the applicable maturity date, at a repurchase price equal
to 100% of the principal amount of such Convertible Senior Notes to be repurchased, plus accrued and unpaid interest, if any. Moreover,
we will be required to repay the Convertible Senior Notes in cash at their maturity, unless earlier converted, repurchased or redeemed.
We may not have enough available cash or be able to obtain financing at the time we are required to make such repurchases of the Convertible
Senior Notes and/or repay the Convertible Senior Notes upon maturity and/or settle conversions of the Convertible Senior Notes (should
we elect to settle such conversions, in whole or in part, in cash or should we be required to settle such conversions, in whole or in
part, in cash, if in the future we irrevocably elect to settle the conversions in cash, in whole or in part).
Our ability to repurchase or to pay cash
upon conversion of Convertible Senior Notes may be limited by law, regulatory authority or agreements governing our future indebtedness.
Our failure to repurchase the Convertible Senior Notes at a time when the repurchase is required by the indenture or to pay cash upon
conversion of the Convertible Senior Notes when required or at maturity as required by the indenture would constitute a default under
the indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing
our future indebtedness. If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods,
we may not have sufficient funds to repay the indebtedness and repurchase the Convertible Senior Notes or to pay cash upon conversion
of the Convertible Senior Notes or at maturity.
Financial, legal, regulatory and taxation risks
Because most of our revenues are generated in U.S.
dollars, but a significant portion of our expenses is incurred in currencies other than U.S. dollars, and mainly New Israeli Shekels and
Euro, our profit margin may be seriously harmed by currency fluctuations.
We generate most of our revenues in U.S. dollars, but incur a significant portion of our expenses in currencies other than U.S. dollar,
and mainly New Israeli Shekel (commonly referred to as NIS) and Euro. Starting January 1, 2019, in accordance with ASC 842 of lease accounting
standard, we are required to present a significant NIS linked liability related to our operational leases in Israel. In addition, on January
25, 2022, we acquired ancosys GmbH (hereinafter: “ancosys”) which operation is mainly Euro based. As a result, we are exposed
to risk of devaluation of the U.S. dollar in relation to the NIS, Euro and other currencies. In such event, the dollar cost of our operations
in countries other than the U.S. will increase and our dollar measured results of operations will be adversely affected. During 2023,
the U.S. dollar revaluated against the NIS by 3.1%, after being revaluated by approximately 1.8% in the previous three years, and devaluated
against the Euro by 3.6%, after being revaluated by approximately 5.2% in the previous three years. We cannot predict the future trends
in the rate of devaluation or revaluation of the U.S. dollar against the NIS and the Euro, and our cost of operations could be adversely
affected by such trends.
We are subject to various regulations and standards
relating to data privacy and security. Failure to comply any applicable privacy, security, data protection laws, regulations, standards
or other requirement could have an adverse effect on our business prospects, results of operations, and financial condition.
The regulatory framework for privacy
and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. In particular, in the
European Union, the General Data Protection Regulation (the “GDPR”) imposes more stringent data protection requirements and
provides for greater penalties for noncompliance. For example, we collect, use, maintain and otherwise process certain personal data about
candidates and employees. Our ability to collect, use, maintain or otherwise process personal data has been, and could be further, restricted
by existing and new laws and regulations relating to privacy and data collection and protection, including the GDPR.
Additionally, the uncertainty created
by these laws and regulations can be compounded when services hosted in one jurisdiction are directed at users in another jurisdiction.
For instance, European data protection rules may apply to companies which are not established in the European Union (“EU”)
(this is the so-called extraterritorial scope of the GDPR). The GDPR has an even wider territorial scope and contains significant penalties
for non-compliance. The GDPR, among other things, imposes requirements to provide detailed and transparent disclosures about how personal
data is collected and processed, grants rights for data subjects to access, delete or object to the processing of their personal data,
provides for a mandatory breach notification to supervisory authorities (and in certain cases, affected individuals) of certain data breaches,
sets limitations on the retention of personal data and outlines significant documentary requirements to demonstrate compliance through
policies, procedures, training and audits. To further complicate matters in Europe, to date, supervisory authorities in the member states
have some flexibility when implementing European Directives and certain aspects of the GDPR, which can lead to diverging national rules.
European supervisory authorities have been very active in terms of enforcing data protection rules, including with respect to cookie-related
matters.
Additionally, recent legal developments
in EU have created complexity and uncertainty regarding transfers of personal data from the EEA to the United States and other non-adequate
jurisdictions. The EU-U.S. Data Privacy Framework (EU-U.S. DPF), the UK Extension to the EU-U.S. Data Privacy Framework (UK Extension
to the EU-U.S. DPF), and the Swiss-U.S. Data Privacy Framework (Swiss-U.S. DPF) were developed to facilitate transatlantic commerce by
providing U.S. organizations with reliable mechanisms for personal data transfers to the United States from the European Union / European
Economic Area, the United Kingdom (and Gibraltar), and Switzerland that are consistent with EU, UK, and Swiss law. On July10, 2023, the
European Commission adopted its adequacy decision for the EU-U.S. DPF. The adequacy decision concludes that the United States ensures
an adequate level of protection – compared to that of the EU - for personal data transferred from the EU to US companies participating
in the EU-U.S. DPF. The effective date of the Swiss-U.S. DPF principles implementation is July 17, 2023. On October 12, 2023, the UK Extension
to the EU-U.S. DPF, known as the UK-US Data Bridge, took effect, allowing the transfers of personal data from the United Kingdom (UK)
to the US without the need of having additional mechanism or safeguards in place. Companies can also rely on other mechanisms for their
cross-border transfers, including the standard contractual clauses (a standard form of contract approved by the European Commission as
an adequate personal data transfer mechanism (“SCCs”). The Court of Justice of the European Union (“CJEU”)
made clear that reliance on SCCs alone may not necessarily be sufficient in all circumstances. The CJEU's decision also cast doubt over
the effectiveness of the SCCs. The European Data Protection Board, which subsequently issued a revised set of SCCs for organizations to
utilize, released their comments on the supplementary measures that can be used to ensure a sufficient level of data protection when transferring
personal data. The comments indicated that organizations need to perform a data transfer impact assessment to evaluate the legal regime
applicable in the destination country, in particular applicable surveillance laws and rights of individuals, and that additional measures
and/or contractual provisions may need to be put in place. However, the nature of these additional measures is currently uncertain.
Similarly, there have been laws and regulations
adopted throughout the United States and Israel that impose obligations in areas such as privacy, in particular protection of personal
data and implementing adequate cybersecurity measures to protect such data. The most prominent to which we are exposed is the California
Privacy Rights Act (CPRA), which became effective as of January 1, 2023, and imposes additional obligations such as expanding the current
data privacy compliance requirements under the CCPA. The CPRA has established a regulatory agency to enforce these privacy acts. Additional
U.S. states have implemented, or are in the process of implementing, similar new laws or regulations (for example, the Virginia Consumer
Data Protection Act (VCDPA) that became effective in January 1, 2023, the Colorado Privacy Act (CPA) which became effective as of July
1, 2023, Connecticut Data Privacy Act (CDPA) which became effective on July 1, 2023 Utah Consumer Privacy Act (UCPA) which is subject
to take effect on December 31, 2023) that impose new privacy rights and obligations. More generally, some observers have noted that the
CCPA, CPRA, VCDPA, CPA, CDPA and UCPA could mark the beginning of a trend toward more stringent United States federal privacy legislation,
which could increase our potential liability and adversely affect our business.
The Cyberspace Administration of China
created uncertainty by publishing the Personal Information Protection Law, which came into force on June 1, 2023. For the outbound data
transfer before the effective date, the law included a rectification period of six months ending on December 1, 2023 (inclusive). This
law imposes more stringent data protection requirements, restricts cross-border data transfers, and imposes significant fines for non-compliant
conduct.
In addition, failure to comply with the
Israeli Privacy Protection Law 1981 and its regulations, as well as the guidelines of the Israeli Privacy Protection Authority, may expose
us to administrative fines, civil claims (including class actions) and, in certain cases, criminal liability. Current pending legislation
may result in a change to the current enforcement measures and sanctions.
There have also been privacy bills enacted
in other countries around the world which have introduced new or expanded privacy, security, cyber-security and artificial intelligence
requirements and we expect that legislation will continue to evolve in the coming years. For example, the rising adoption of AI and Generative
AI in daily operations and products poses additional and new risks, including, without limitation, data privacy and security risks, intellectual
property infringement, ownership issues and/or confidentiality issues. Threats include potential data leaks, social engineering attacks,
and decision-making based on manipulated information. Growing regulatory requirements for information security and data protection add
to the challenge. Moreover, attackers leverage AI as both a tool and exploit vulnerabilities in AI systems. Therefore, it is difficult
to determine whether and how such existing laws and regulations will apply to and impact the internet and our business.
Any inability to adequately address
privacy and security concerns or comply with applicable privacy and data security laws, rules and regulations could have an adverse effect
on our business prospects, results of operations and/or financial position.
We participate in government programs under which we
receive research and development grants. Some of these programs imposed restrictions on our ability to use the technologies developed
under these programs. The reduction or termination of these programs would increase our costs.
Until the end of 2016, we received royalty-bearing
grants from the Israel Innovation Authority, or IIA (formerly known as the Office of the Chief Scientist of the Ministry of Economy and
Industry, or the OCS), for the financing of certain of our research and development programs that meet specified criteria. Starting 2018,
we have participated only in IIA royalty free grant programs.
In addition, through the years, we participated
in consortia which are either solely managed and funded by the IIA, or are jointly funded by the EU commission and the National Innovation
Authorities of the participating companies, i.e. The Israel Innovation Authority can jointly fund Nova Ltd. participation and the BMBF
(The German National Innovation Authority) can jointly fund Nova Measuring Instruments Gmbh (which since 2023, also began participating
in consortia which were submitted under the KDT JU routes, which are part of Horizon Europe, Nova Ltd. is also participating in European
only funded/managed consortia. To maintain our eligibility for these programs, we must continue to meet certain conditions.
Some of these programs also restrict
our ability to manufacture particular products and transfer particular technology, which were developed as part of the local Innovation
Authority funding agent (i.e., the IIA in Israel and the BMBF in Germany) programs, outside of the country in which these were manufactured.
The restrictions associated with these programs may require obtaining approval of the research and development committee nominated
by the IIA or BMBF for certain actions and transactions and pay additional payments to the IIA or BMBF. Approval to manufacture products,
which their development was partially funded by the local Innovation Authority funding agent, the country they are manufactured in or
consent to the transfer of technology, if requested, might not be granted and if granted, may increase our financial liabilities to the
respected Innovation Authority. In addition, if we fail to comply with certain restrictions associated with formerly received funding
from IIA or BMBF, we may be subject to criminal charges.
We may be further exposed to risks related to the receipt of funding from other governments
or governmental agencies in connection with strategic development programs, under which we receive funding. Under such strategic development
programs, governments and governmental agencies typically have the right to terminate the program’s funding at any time. In addition,
a project may be terminated by a mutual agreement, if the parties determine that the project's goals or milestones are not being achieved.
As a result, there is no assurance that these sources of external funding will continue to be available to us in the future. Moreover,
under the terms of certain governmental funding programs in which we receive funding, the applicable granting agency has the right to
audit the costs that we incur, directly and indirectly, in connection with such programs. Any such audit could result in modifications
to, or even termination of, the applicable governmental funding program. Any adverse finding resulting from any such audit could lead
to penalties (financial or otherwise), termination of funding programs, suspension of payments or other adverse consequences to our ability
to receive governmental funding. In addition, obligations related to grants received from the IIA grants bear an annual interest which
are linked to the U.S. dollar. Pursuant to the latest IIA regulations, grants received until January 1, 1999, bear no interest. Grants
received before June 30, 2017, bear an annual interest rate that applied at the time of the approval of the applicable IIA file, and that
interest rate will apply to all of the funding received under that IIA approval. Grants received from the IIA after June 30, 2017, bear
an annual interest rate based on the 12-month London Interbank Offered Rate, or LIBOR, until December 31, 2023, and as of January 1, 2024,
bear an annual interest rate based on the 12-month Secured Overnight Financing Rate, or the SOFR, or at an alternative rate published
by the Bank of Israel, with the addition of 0.72%. Grants approved after January 1, 2024 will bear the higher of (i) the 12 months SOFR
interest rate, plus 1%, or (ii) a fixed annual interest rate of 4%.
The application of tax laws is subject to interpretation
and if tax authorities challenge our methodologies or our analysis of our tax rates it could result in an increase to our worldwide effective
tax rate and cause us to change the way we operate our business.
The application of the tax laws of various
jurisdictions to our international business activities (as well as to entities which we acquired) is subject to interpretation and also
depends on our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The
tax authorities of the jurisdictions in which we (and entities we acquired) operate may challenge our methodologies for valuing developed
technology or intercompany arrangements, including the transfer pricing, or determine that the manner in which we (and the entities we
acquired) operate the business does not achieve the expected tax consequences, which could result in tax and penalty payments and in an
increase of our worldwide effective tax rate, and could adversely affect our financial position and results of operations.
A certain degree of judgment is required
in evaluating our tax positions and determining our provision for income taxes. In the ordinary course of business, there are many transactions
and calculations for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected
by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where
we have higher statutory rates, by changes in foreign currency exchange rates or by changes in the relevant tax, accounting and other
laws, regulations, principles and interpretations. As we operate in numerous taxing jurisdictions, the application of tax laws can be
subject to diverging and sometimes conflicting interpretations by tax authorities of these jurisdictions. It is not uncommon for tax authorities
in different countries to have conflicting views. In addition, tax laws are dynamic and subject to change as new laws are passed and new
interpretations of the law are issued or applied. For example, the work being carried out by the OECD on base erosion and profit shifting
as a response to increasing globalization of trade could result in changes in tax treaties or the introduction of new legislation that
could impose an additional tax on businesses. As a result of changes to laws or interpretations, our tax positions could be challenged,
and our income tax expenses could increase in the future.
For instance, if tax authorities in any
of the countries in which we operate were to successfully challenge our transfer prices, they could require us to reallocate our income
to reflect transfer pricing adjustments, which could result in an increased tax liability to us. In addition, if the country from which
the income was reallocated did not agree with the reallocation asserted by the first country, we could become subject to tax on the same
income in both countries, resulting in double taxation. If tax authorities were to allocate income to a higher tax jurisdiction, subject
our income to double taxation or assess interest and penalties, it could increase our tax liability, which could adversely affect our
financial position and results of operations.
The enactment of legislation implementing changes in
taxation of international business activities, the adoption of other corporate tax reform policies, or changes in tax legislation or policies
could impact our future financial position and results of operations.
There can be no assurance that our effective
tax rate for the year ended December 31, 2023 will not change over time as a result of changes in corporate income tax rates or other
changes in the tax laws the jurisdictions in which we operate. Any changes in tax laws could have an adverse impact on our financial results.
Corporate tax reform, base-erosion efforts and tax transparency continue to be high priorities in many tax jurisdictions where we have
business operations. As a result, policies regarding corporate income and other taxes in numerous jurisdictions are under heightened scrutiny
and tax reform legislation is being proposed or enacted in a number of jurisdictions. For example, the Inflation Reduction Act of 2022
signed into law in the United States on August 16, 2022 among other changes, introduced a 15% corporate minimum tax on certain corporations
and a 1% excess tax on certain stock repurchases by certain corporations.
In addition, there is
growing pressure in many jurisdictions and from multinational organizations such as the Organization for Economic Cooperation and Development
(OECD) and the EU to amend existing international taxation rules in order to align the tax regimes with current global business practices.
Specifically, in October 2015, the OECD published its final package of measures for reform of the international tax rules as a product
of its Base Erosion and Profit Shifting (BEPS) initiative, which was endorsed by the G20 finance ministers. Many of the initiatives in
the BEPS package required and resulted in specific amendments to the domestic tax legislation of various jurisdictions and to existing
tax treaties. We continuously monitor these developments. Although many of the BEPS measures have already been implemented or are currently
being implemented globally (including, in certain cases, through adoption of the OECD’s “multilateral convention” (to
which Israel is also a party) to effect changes to tax treaties which entered into force on July 1, 2018 and through the European Union’s
“Anti Tax Avoidance” Directives), it is still difficult in some cases to assess to what extent these changes our tax liabilities
in the jurisdictions in which we conduct our business or to what extent they may impact the way in which we conduct our business or our
effective tax rate due to the unpredictability and interdependency of these potential changes. In January 2019 the OECD announced further
work in continuation of the BEPS project, focusing on two “pillars”. On October 8, 2021, 136 countries approved a statement
known as the OECD BEPS Inclusive Framework, which builds upon the OECD’s continuation of the BEPS project. The first pillar is focused
on the allocation of taxing rights between countries for in-scope large multinational enterprises (with revenue in excess of Euro 20 billion
and profitability of at least 10%) that sell goods and services into countries with little or no local physical presence. The second pillar
is focused on developing a global minimum tax rate of at least 15 percent applicable to in-scope multinational enterprises (with revenue
in excess of Euro 750 million). Israel is one of the 136 jurisdictions that has agreed in principle to the adoption of the global minimum
tax rate. Given these developments, it is generally expected that tax authorities in various jurisdictions in which we operate may increase
their audit activity and may seek to challenge some of the tax positions we have adopted. It is difficult to assess if and to what extent
such challenges, if raised, might impact our effective tax rate. On December 15, 2022, Council of the EU unanimously adopted the EU Directive
on Global Minimum Tax. Thus, it is now expected that the second Pillar rules will be enacted by EU member states by December, 31
2023 effective for fiscal years beginning on or after that date.
Changes in certain tax benefits under the Israeli Capital
Investment Encouragement Law may increase our ETR.
Starting 2017, we made an election to
receive Tax benefits under Israeli “Economic Efficiency Law” as a “Preferred Technological Enterprise”. While
we believe that we meet the statutory conditions to entitle us to such benefits there can be no assurance that the tax authorities in
Israel will concur to our position in general and for each specific year separately. Should it be determined that we have not, or do not
meet such conditions, the benefits received would be cancelled. We would also be required to pay increased taxes or refund any benefits
previously received, adjusted to the Israeli consumer price index and interest, or other monetary penalty.
For additional information regarding
Approved and Benefited Enterprise, Preferred Enterprise and Preferred Technological Enterprise see, “Item 10E. Taxation –
Israeli Taxation” in this Annual Report.
It should be noted that the Israeli government may reduce
or eliminate the above-mentioned benefits in the future, inter-alia, in light of or as a response to the OECD or the “two Pillars”
initiatives. The termination or reduction of these grants or tax benefits could harm our financial condition and results of operations,
and result in significantly higher tax payment. In addition, if we increase our activities outside Israel due to, for example, future
acquisitions or outsourcing of manufacturing or development activities, these activities generally will not be eligible for inclusion
in Israeli grants or tax benefit programs. Accordingly, our effective corporate tax rate could increase significantly in the future.
We experience quarterly fluctuations in our operating
results, which may adversely impact our share price.
Our quarterly operating results within
a specific year can fluctuate significantly. A principal reason is that we derive a substantial portion of our revenue from the sale of
a relatively small number of systems to a relatively small number of customers. As a result, our revenues and results of operations for
any given quarter may decrease due to factors relating to the timing of orders, the timing of shipments of systems, and the timing of
recognizing these revenues. Furthermore, our quarterly results are affected by the cyclical nature of the semiconductor capital equipment
market and industries.
We also have a limited ability to predict
revenues for future quarterly periods and, as a result, face risks of revenue shortfalls. If the number of systems we actually ship, and
thus the amount of revenues we are able to record in any particular quarter, is below our expectations, the adverse effect may be magnified
by our inability to adjust spending quickly enough to compensate for the revenue shortfall.
Some of our contracts and arrangements potentially
subject us to the risk of significant or non-limited liability.
We produce highly complex optical, mechanical
and electronic components and, accordingly, there is a risk that defects may occur in any of our products. Such defects can give rise
to significant costs, including expenses relating to recalling products, replacing defective items, writing down defective inventory and
loss of potential sales. In addition, the occurrence of such defects may give rise to product liability and warranty claims, including
liability for damages caused by such defects.
In our commercial relationship with customers,
we attempt to negotiate waivers of consequential and indirect damages arising from damages for loss of use, loss of product, loss of revenue
and loss of profit caused by our products. Similarly, with respect to our commercial relationship with subcontractors and suppliers, we
attempt to negotiate arrangements which do not include a limitation of liabilities and limitation of consequential and indirect damages.
However, some contracts and arrangements we are bound by, expose us to product liability claims resulting in personal injury or death,
up to an unlimited amount, and the incurrence of the risk of material penalties for consequential or liquidated damages. Additionally,
under such contracts and arrangements, we may be named in product liability claims even if there is no evidence that our products caused
the damage in question, and such claims could result in significant costs and expenses relating to attorneys’ fees and damages.
In addition, such contracts and arrangements
may include non-limited liability provisions for infringement of a third party’s intellectual property rights in connection with
our products.
Although we have not incurred in the
past any material penalties for consequential or liquidated damages, we may incur such penalties in the future. Such penalties for consequential
or liquidated damages may be significant (and so is the legal process conducted in connection with such penalties) and could negatively
affect our financial condition or results of operations.
A large number of our ordinary shares continue to be
owned by a relatively small number of shareholders, whose future sales of our shares, if substantial, may depress our share price.
If our principal shareholders sell substantial
amounts of our ordinary shares, including shares issued upon the exercise of outstanding options or warrants, the market price of our
ordinary shares may fall. For additional information on our major shareholders, see “Item 7A – Major Shareholders” in
this Annual Report.
Certain shareholders may control the outcome of matters
submitted to a vote of our shareholders, including the election of directors.
To the best of our knowledge, approximately
40% of our outstanding ordinary shares are cumulatively held by five of our shareholders. As a result, and although we are currently not
aware of any voting agreement between such shareholders, if these shareholders voted together or in the same manner, they would have the
ability to control the outcome of corporate actions requiring an ordinary majority vote of shareholders as set in the Company’s
Amended and Restated Articles of Association. Even if these shareholders do not vote together, each one of them may have the ability to
influence the outcome of corporate actions requiring the vote of shareholders as set in the Company’s Amended and Restated Articles
of Association. For additional information on our major shareholders, see “Item 7A – Major Shareholders” in this
Annual Report.
The market price of our ordinary shares may be affected
by a limited trading volume and may fluctuate significantly.
In the past, there has been a limited
public market for our ordinary shares and there can be no assurance that an active trading market for our ordinary shares will continue.
An absence of an active trading market could adversely affect our shareholders’ ability to sell our ordinary shares in short time
periods. Our ordinary shares have experienced, and are likely to experience in the future, significant price and volume fluctuations,
which could adversely affect the market price of our ordinary shares without regard to our operating performance.
In addition, the price of our ordinary
shares could also be affected by possible sales of our ordinary shares by investors who view our convertible senior notes as a more attractive
means of equity participation in our company, and by hedging and arbitrage trading activity that such investors may engage in.
We manage our available
cash through various bank institutions and invest large portions of our cash reserves in bank deposits. The bankruptcy of one of the banks
in which or through which we hold or invest our cash reserves, might prevent us to access that cash for an uncertain period of time.
We manage our available
cash through various bank institutions and invest large portions of our cash reserves in bank deposits. As of December 31, 2023, a large
portion of our cash reserves were invested in bank institutions, of which approximately 8% (from total cash reserves and investment portfolio)
was invested in one bank institution in Israel. The bankruptcy of one of the bank institutions in which we hold our cash reserves or through
which we invest our cash reserves, might prevent us to access that cash for an uncertain period of time.
Our investment portfolio may be adversely affected
by market conditions and interest rates.
We maintain substantial balances of liquid
investments, for purposes of financing our operations and acquisitions. Our marketable securities totaled $408 million as of December
31, 2023. The performance of the capital markets affects the values of funds that are held in marketable securities. These assets are
subject to market fluctuations and various developments, including, without limitation, rating agency downgrades that may impair their
value. We generally buy and hold our portfolio positions, while minimizing credit risk by setting limits for minimum credit rating and
maximum concentration per issuer. Our investments consist primarily of government and corporate debentures, which are primarily fixed-income
securities.
Although we believe that we generally
adhere to conservative investment guidelines, the continuing turmoil in the financial markets may result in impairments of the carrying
value of our investment assets. In addition, as our investment portfolio is invested primarily in fixed-income securities it is affected
by changes in interest rates. Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic
and international economic and political conditions. Any significant decline in our financial income or the value of our investments as
a result of the changes in interest rates and interest rate expectations of the financial markets, deterioration in the credit rating
of the securities in which we have invested, or general market conditions, could have an adverse effect on our results of operations and
financial condition. We classify our investments as available-for-sale. Changes in the fair value of investments classified as available-for-sale
are not recognized as income during the period, but rather are recognized as other comprehensive income, or OCI, which is a separate component
of equity until realized. Realized losses in our investments portfolio may adversely affect our financial position and results.
We may fail to maintain effective internal control
over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.
The Sarbanes-Oxley Act of 2002 imposes
certain duties on us and our executives and directors. Our efforts to comply with the requirements of Section 404 (Assessment of Internal
Control), which started in connection with our Annual Report on Form 20-F for the fiscal year ended December 31, 2007, have resulted in
increased general and administrative expense and a diversion of management time and attention, and we expect these efforts to require
the continued commitment of resources. Section 404 of the Sarbanes-Oxley Act of 2002 requires (i) management’s annual review and
evaluation of our internal control over financial reporting and (ii) an attestation report issued by an independent registered public
accounting firm on our internal control over financial reporting, in connection with the filing of our Annual Report on Form 20-F for
each fiscal year. We have documented and tested our internal control systems and procedures in order for us to comply with the requirements
of Section 404. While our assessment of our internal control over financial reporting resulted in our conclusion that as of December 31,
2023, our internal control over financial reporting was effective, we cannot predict the outcome of our testing in future periods. If
we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that
we have effective internal controls over financial reporting. Failure to maintain effective internal control over financial reporting
could result in investigation or sanctions by regulatory authorities, and could have a material adverse effect on our operating results,
investor confidence in our reported financial information, and the market price of our ordinary shares.
Provisions of our Amended and Restated Articles of
Association and Israeli law may delay, prevent or make difficult an acquisition of Nova, which could prevent a change of control and negatively
affect the price of our ordinary shares.
Israeli corporate law regulates mergers,
requires tender offers for acquisitions of shares above specified thresholds, for special approvals for transactions involving directors,
officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. Furthermore, Israeli
tax considerations may make potential transactions unappealing to us or to some of our shareholders. See Exhibit 2.1 to this Annual Report,
“Description of the Securities” incorporated by reference to Exhibit 2.1 to the Company’s Annual Report on Form 20-F
filed with the Securities and Exchange Commission on March 1, 2022. For a more detailed discussion regarding some anti-takeover effects
of Israeli law.
These provisions of Israeli law may delay,
prevent or make difficult an acquisition of Nova, which could prevent a change of control and therefore depress the price of our shares.
The rights and responsibilities of our shareholders
are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.
We are incorporated under Israeli law.
The rights and responsibilities of holders of our ordinary shares are governed by our Amended and Restated Articles of Association and
by the Israeli Companies Law, 1999 (the “Companies Law”). These rights and responsibilities differ in some respects from the
rights and responsibilities of shareholders in typical U.S. corporations. In particular, pursuant to the Companies Law each shareholder
of an Israeli company has to act in good faith in exercising his or her rights and fulfilling his or her obligations toward the company
and other shareholders and to refrain from abusing his power in the company, including, among other things, in voting at the general meeting
of shareholders and class meetings, on amendments to a company’s articles of association, increases in a company’s authorized
share capital, mergers, and transactions requiring shareholders’ approval under the Companies Law. In addition, a controlling shareholder
of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or who has
the power to appoint or prevent the appointment of a director or officer in the company, or has other powers toward the company has a
duty of fairness toward the company. However, Israeli law does not define the substance of this duty of fairness. Because Israeli corporate
law has undergone extensive revision in recent years, there is little case law available to assist in understanding the implications of
these provisions that govern shareholder behavior.
Any shareholder with a cause of action against us as
a result of buying, selling or holding our ordinary shares may have difficulty asserting a claim under U.S. securities laws or enforcing
a U.S. judgment against us or our officers, directors or Israeli auditors.
We are organized under the laws of the
State of Israel, and we maintain most of our operations in Israel. Most of our officers and directors as well as our Israeli auditors
reside outside of the United States and a substantial portion of our assets and the assets of these persons are located outside the United
States. Therefore, if you wish to enforce a judgment obtained in the United States against us, or our officers, directors and auditors,
you will probably have to file a claim in an Israeli court. Additionally, you might not be able to bring civil actions under U.S. securities
laws if you file a lawsuit in Israel. We have been advised by our Israeli counsel that Israeli courts generally enforce a final executory
judgment of a U.S. court for liquidated amounts in civil matters after a hearing in Israel. If a foreign judgment is enforced by an Israeli
court, it will be payable in Israeli currency. However, payment in the local currency of the country where the foreign judgment was given
will be acceptable, subject to applicable foreign currency restrictions.
Our shares are listed for trade on more than one stock
exchange, and this may result in price variations.
Our ordinary shares are listed for trading
on the Nasdaq Global Select Market and on the Tel Aviv Stock Exchange Ltd., or TASE. This may result in price variations. Our ordinary
shares are traded on these markets in different currencies, U.S. dollars on the Nasdaq Global Select Market and New Israeli Shekels on
the TASE. These markets have different opening times and close on different days. Different trading times and differences in exchange
rates, among other factors, may result in our shares being traded at a price differential on these two markets. In addition, market influences
in one market may influence the price at which our shares are traded on the other.
Our business could be negatively affected as a result
of actions of activist shareholders, and such activism could impact the trading value of our securities.
In recent years, certain Israeli issuers
listed on United States exchanges have been faced with governance-related demands from activist shareholders, as well as unsolicited tender
offers and proxy contests. Although as a foreign private issuer we are not subject to U.S. proxy rules, responding to these types
of actions by activist shareholders could be costly and time-consuming, disrupting our operations and diverting the attention of management
and our employees. Such activities could interfere with our ability to execute our strategic plan. In addition, a proxy contest for the
election of directors at our annual meeting would require us to incur significant legal fees and proxy solicitation expenses and require
significant time and attention by management and our board of directors. The perceived uncertainties due to these potential actions of
activist shareholders also could affect the market price and volatility of our securities.
We may be classified as a “passive foreign investment
company” for U.S. income tax purposes, which could have significant and adverse tax consequences to U.S. shareholders.
Generally, if for any taxable year 75%
or more of our gross income consists of specified types of passive income, or, on average, at least 50% of our assets are held for the
production of, or produce, passive income, we may be characterized as a passive foreign investment company (a “PFIC”) for
U.S. federal income tax purposes. Classification of Nova as a PFIC could result in adverse U.S. tax consequences to our U.S. shareholders,
such as ineligibility for any preferential tax rates on capital gains or on dividends, interest charges on certain taxes treated as deferred,
and additional reporting requirements under U.S. federal income tax laws and regulations. If we are a PFIC, it may be possible for U.S.
holders of our ordinary shares to mitigate certain of these consequences by making an election to treat us as a “qualified electing
fund” under Section 1295 of the Internal Revenue Code of 1986, as amended (the “Code”) or a “mark-to-market election”
under Section 1296 of the Code. U.S. shareholders should consult with their own U.S. tax advisors with respect to the U.S. tax consequences
of investing in our ordinary shares.
We believe that for our 2023 taxable
year we were not a PFIC. Nonetheless, because the determination of whether we are, or will be, a PFIC for a taxable year depends on the
application of complex U.S. federal income tax rules, which are subject to various interpretations, there is a risk that we were a PFIC
in 2023. Absent one of the elections referenced above, if we are a PFIC for any taxable year during which a U.S. holder holds our ordinary
shares, we generally will continue to be treated as a PFIC with respect to such U.S. holder in all succeeding years regardless of whether
we cease to meet the PFIC tests in one or more subsequent years. Currently we expect that we will not be a PFIC in 2024 or subsequent
years. However, PFIC status is determined based on our assets and income over the course of each taxable year, and is dependent on a number
of factors, including the value of our assets, the trading price of our ordinary shares and the amount and type of our gross income. Therefore,
there can be no assurances that we will not become a PFIC for the 2024 taxable year, or any future year, or that the Internal Revenue
Service will not challenge any determination made by us concerning our PFIC status. For a discussion on how we might be characterized
as a PFIC and related tax consequences, please see the section of this Annual Report entitled “Taxation - U.S. Taxation –
Passive Foreign Investment Companies.” Investors should consult their own tax advisors regarding all aspects of the application
of the PFIC rules to our ordinary shares.
If a United States person is treated as owning at least
10% of our shares, such holder may be subject to adverse U.S. federal income tax consequences.
If a United States person is treated
as owning (directly, indirectly or constructively) at least 10% of the value or voting power of our shares, such person may be treated
as a “United States shareholder” with respect to each “controlled foreign corporation” in our group. Because our
group includes one or more U.S. subsidiaries, certain of our non-U.S. subsidiaries will be treated as controlled foreign corporations
(regardless of whether we are or are not treated as a controlled foreign corporation). A United States shareholder of a controlled foreign
corporation may be required to annually report and include in its U.S. taxable income its pro rata share of the controlled foreign corporation’s
“Subpart F income”, “global intangible low-taxed income” and investments in U.S. property, whether or not such
controlled foreign corporation makes any distributions. An individual that is a United States shareholder with respect to a controlled
foreign corporation generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a United States
shareholder that is a U.S. corporation. A failure to comply with these reporting obligations may subject you to significant monetary penalties
and may prevent the statute of limitations with respect to your U.S. federal income tax return for the year for which reporting was due
from starting. We cannot provide any assurances that we will assist investors in determining whether any of our current or future non-U.S.
subsidiaries are treated as a controlled foreign corporation or whether such investor is treated as a United States shareholder with respect
to any of such controlled foreign corporations or furnish to any United States shareholders information that may be necessary to comply
with the aforementioned reporting and tax paying obligations. The Internal Revenue Service provided limited guidance on situations in
which U.S. shareholders may rely on publicly available information to comply with their reporting and tax paying obligations with respect
to foreign-controlled CFCs. A United States investor should consult their own advisors regarding the potential application of these rules
to its investment in the shares.
Item 4. Information
on the Company
4.A
History and Development of the Company
Nova Ltd. was incorporated in May 1993
under the laws of the State of Israel. We commenced operations in October 1993 to design, develop and produce integrated process control
systems for use in the manufacture of semiconductors, also known as integrated circuits or chips.
In April 2000, we conducted an initial
public offering and our shares were listed for trading on the Nasdaq stock exchange.
In June 2002, we listed our shares on
the TASE, pursuant to legislation which enables Israeli companies whose shares are traded on certain stock exchanges outside of Israel
to be registered on the TASE, while reporting, in substance, in accordance with the provision of the relevant foreign securities law applicable
to the Company.
Until 2008, most of our products were
sold to process equipment manufacturers such as Applied Materials, Inc. and Ebara Corp., which later sold these products to semiconductor
manufacturers. Since then, we have changed our business model, selling substantially all of our products directly to semiconductor manufacturers.
Through this process, which has also enabled us to introduce to these customers additional products and features, we have improved our
products gross margins and net profitability.
In April 2015, we acquired ReVera Inc.,
a privately held company headquartered in Santa Clara, California, which develops, manufactures and sells stand-alone metrology tools
for measurements of thin-films and composition applications in the semiconductor industry, and on December 31, 2017, we merged ReVera
into its parent company, Nova Measuring Instruments, Inc.
On July 25, 2021, we changed the legal
name of our Company from Nova Measuring Instruments Ltd. to Nova Ltd. to match the Company’s
long-term strategy. The Company has retained its NVMI ticker symbol and its Process Insight® tagline
In January 2022, we acquired ancosys,
a privately held company with headquarters in Pliezhausen Germany which is a leading provider of chemical analysis and metrology solutions
for advanced semiconductor manufacturing, supporting both frontend and backend semiconductor manufacturing. On June 26, 2023, ancosys
merged into its parent company, Nova measuring instruments GmbH.
At the end of 2023, we had six direct
fully owned subsidiaries, in the U.S., Taiwan, Korea, China, Japan and Germany.
Our headquarter office is located in Israel at 5 David Fikes
St., 10th Floor, Rehovot.
Our website address is www.novami.com,
and our telephone number is +972-73-229-5600. We use our website as a means of disclosing material non-public information. Such disclosures
will be included on our website in the “Investors” sections. Accordingly, investors should monitor such sections of our website,
in addition to following our press releases and SEC filings. Information contained on, or that can be accessed through, our website does
not constitute a part of this Annual Report and is not incorporated by reference herein. We have included our website address in this
Annual Report solely for informational purposes. Our SEC filings are available to you on the SEC’s website at http://www.sec.gov.
This site contains reports and other information regarding issuers that file electronically with the SEC. The information on that website
is not part of this Annual Report and is not incorporated by reference herein.
Our agent for service of process in the
United States is Nova Measuring Instruments Inc., which maintains its principal offices at 3342 Gateway Blvd, Fremont, CA 94538. It’s
telephone number is 1-408-510-7400.
4.B
Business Overview
Our Company
Nova is a leading innovator and key provider
of metrology solutions for advanced process control used in semiconductor manufacturing. Nova delivers continuous innovation by providing
high-performance metrology solutions for effective process control throughout the semiconductor fabrication process. We bring pioneering
metrology solutions to semiconductors process control, by industrializing lab and research-grade technologies and developing emerging
metrology solutions. Nova’s product portfolio, deployed at the world’s largest integrated-circuit manufacturers, combines
high-precision hardware and cutting-edge software, and provides its customers with deep insight into the development and production of
the most advanced semiconductor devices. Nova’s capability to deliver innovative Optical, X-ray, SIMS and Chemical analysis technology
solutions enables its customers to improve performance, enhance product yields and accelerate time to market.
Nova’s market offering is driven
by three product divisions: The Dimensional Metrology Division (DMD) which is responsible for optical technology-based metrology solutions
(integrated and standalone), the Materials Metrology Division (MMD) which is responsible for X-ray and SIMS (Secondary Ion Mass Spectrometry)
based solutions, and the Chemical Metrology Division (CMD) which is responsible for chemical metrology and replenishment solutions. The
corporate units, such as marketing, next generation technology, human resources, finance and global business group, support all three
divisions. This structure allows the company to focus management attention on each product line separately, and to facilitate the integration
of additional businesses or technologies in the future.
Our Market
Semiconductor Industry and the Metrology Market
The semiconductor manufacturing process
starts with a flat silicon disc known as a silicon wafer upon which integrated circuits are constructed. To construct the integrated circuits,
a series of layers of thin films that act as conductors, semiconductors or insulators are applied. During the manufacturing process, these
film layers are subjected to processes which remove and add portions of the film, create circuit patterns and perform other functions.
The semiconductor manufacturing process requires numerous precise steps and strict control of equipment performance and process sequences.
Tight process control can be achieved through monitoring silicon wafers and measuring relevant parameters before’ during or after
each process step, with metrology tools.
The demand for our metrology systems
is driven by capital equipment spending of the semiconductor manufacturers, which is in turn driven by the worldwide demand for semiconductor
components embedded in technology devices. Industry data indicates worldwide demand for semiconductors will continue to grow, driven by
the growing adoption artificial intelligence and internet of things (“IoT”) applications, advanced network infrastructure,
automotive, and green energy solutions, as well as network and data centers constructed to support the influx of data.
The growing investment in advanced technology
nodes introduces growing complexity and new challenges into the semiconductor manufacturing process, as manufacturers are continuously
pushed to improve performance and cost to gain competitive advantage. In a climate of constant growth, suppliers and manufacturers are
asked to constantly come up with new products with greater functionality, better performance at lower prices. As a result, many new complex
materials, advanced structures and processes are being introduced into the semiconductor manufacturing ecosystem. An environment of growing
complexity in chip design and manufacturing set favorable business conditions for process control demand.
Over the past several years we saw growing
demand for trailing node capacity, driven by the growing need for IoT and sensors that do not require leading edge technologies. This
trend is expected to continue in coming years and to increase the demand for metrology and process control solutions.
In addition, we are seeing a rapid growth
in investments in advanced packaging production lines, driven by the heightened need for high-performance, high-intensity devices to support
the increase in computing power required by AI-related applications. New architectures are emerging in the advanced packaging space, designed
to enable a swift leap in performance rather than wait for the next generation of chip architecture.
The Semiconductor Manufacturing Process
Semiconductors devices typically consist
of transistors, memory cells or other components connected by an intricate system of circuitry on silicon wafers. Integrated circuit manufacturing
involves many individual steps, some of which are repeated several times, through which numerous copies of an integrated circuit are formed
on a single silicon wafer. Because semiconductor specifications are extremely tight, and integrated circuits are becoming more complex,
the process steps are constantly monitored, and critical parameters are measured at each step using metrology equipment. Key process steps,
such as Deposition, Photolithography, Etch and Chemical-Mechanical Planarization, rely on metrology systems to monitor film thickness,
uniformity, and critical dimensions and material characteristics, to ensure the correct result has been achieved.
The measurements taken by metrology systems
during the manufacturing process help ensure process uniformity and help semiconductor manufacturers avoid costly rework and misprocessing,
therefore increasing efficiency, yield and time to market.
The Need for Effective Process Control and Metrology
Tools
Several technical and operational trends
within the semiconductor manufacturing industry are strengthening the need for more effective process control and metrology solutions.
These trends include:
• Smaller
IC Devices. The development of advanced smaller features means a larger numbers of integrated circuits per wafer. As feature geometries
decrease, the manufacturing process tolerances decreases as well, and manufacturing yield becomes increasingly sensitive to processing
deviations and defects. In addition, the increased complexity means higher chance of error during manufacturing, leading to additional
inline monitoring and metrology steps.
• Transition
to 3D Device. The transition to ever more complex 3D Integration technology, in order to improve performance, requires complex fabrication
and as a result more sophisticated metrology solutions to be capable of measuring critical dimensions and materials properties in these
3D structures.
•
Faster Time to Market. The accelerating rate of obsolescence of technology
and the faster ramp to yield required by customers makes early achievement of high manufacturing yields a critical component of profitability
and metrology has a critical role in achieving these demanding results.
• Materials
Engineering. In order to overcome limitations in the continued shrink of transistor dimensions, which are used to improve performance,
leading manufacturers are introducing new novel materials to IC production. New materials introduction requires new processing and metrology
solutions in the atom level and thus represents a challenging development for the semiconductor manufacturing industry. It also represents
a growing demand for tighter materials control and therefore increasing demand for Materials Metrology solutions to control parameters
such as composition, stress, ultra-thickness, crystallization and more.
•
New Manufacturing Steps. Multiple Lithography technologies including multi-patterning
and E-Beam are increasing the number of Etch and CMP process steps and EUV poses unique metrology challenges.
• Foundry
Model. The rising investment needed for leading edge semiconductor process development and production, as well as the proliferation of
different types of devices, lead to manufacturing increasingly being outsourced to foundries. A foundry typically runs several different
processes and makes numerous different semiconductor product types in one facility. Since Foundries are running multiple products at the
same time, the need for process control and metrology is increasing in order to qualify multiple devices on the same wafer at the same
high process quality.
• Advanced
Memory Technology (SSD). Memory manufacturers are going through technology evolution and build vertical devices to manage layers of NAND
Memory. Such a complex device that can hold up to hundreds of thin high aspect ratio vertical layers requires significant changes in the
manufacturing process. These changes require also many more steps to control through different Metrology solutions and increase the overall
process control intensity for these High Aspect Ratio evolving structures.
• Advanced
Packaging. The evolution in packaging to high-end performance packaging technologies such as flip chip, fan out, 2.5D and 3D packaging
is driven by the need for enhanced performance with higher I/O density and smaller pitch. The advanced packaging business growth is propelled
by AI automotive, 5G and HPC-related applications. Capital investment for High-End Performance Packaging represents a significant part
of the total packaging CAPEX and is shifting from OSATs to Integrated Device Manufacturers and Foundries as the production and process
control requirements are becoming similar to Front-End Fabs. These trends are increasing the TAM for process control and metrology solutions
that Nova delivers to the packaging market.
In order to address the continuous increasing
costs and challenges associated with these trends, semiconductor manufacturers must improve manufacturing procedures, production yields
and time to market. Beyond improving the technology, introducing new process steps and innovative fabrication capabilities, Semiconductors
manufacturers must tighten the control over the process and therefore must increase the Metrology intensity as well as introduce new innovative
Metrology solutions. These new solutions will allow manufactures to overcome new challenges in dimensions, materials and chemical engineering.
The Semiconductor Market – Update
According to Gartner forecasts, semiconductor
revenues are expected to grow by 18% in 2024, following a decline of 11% in 2023. WFE (Wafer Fab Equipment) is expected to decline by
4% in 2024, following a decline of 8% in 2023 (Gartner Forecast Semiconductor Wafer Fab Equipment, Worldwide, Q423 Update, published December
2023).
According to research reports, future demand drivers for semiconductors include AI,
smart sensors, internet-of-things industrial devices, green energy, automotive, data center and cloud infrastructure, and other electronic
equipment.
Products
& Technologies
Our product portfolio includes a complete
set of metrology platforms suited for dimensional, films, materials and chemical metrology measurements for process control across multiple
semiconductor manufacturing process steps including lithography, Etch, CMP, deposition, electrochemical plating and advanced packaging.
Our offering is comprised of several key product lines, spanning multiple technologies and addressing key challenges in semiconductor
process control, from R&D to High-Volume-Manufacturing.
Our strategy to offer holistic and diversified
portfolio supports the industry’s frequent transitions, establishing the advantages and unique value we bring to our customers.
With the introduction of new technologies and products, we cover a wider variety of applications, which increase our served and available
markets and footprint in the semiconductor manufacturing market.
|
Technology |
Product Line |
Key applications |
Product families |
|
• Broadband
Spectrophotometry
• Scatterometry
• Spectral
Reflectometry
• Imaging
and Image Processing |
Dimensional Optical CD Integrated Metrology |
Critical Dimensions
Thin films
|
Nova i Platform
Nova Astera |
|
Dimensional Optical CD Stand-Alone Metrology |
Nova T-platform
Nova MMSR |
|
• Spectral
Interferometry |
Nova Prism |
|
• X-Ray
Photoelectron Spectroscopy
• X-Ray
Fluorescence |
X-Ray
Materials
Metrology |
Thin film
Composition
|
Nova VeraFlex |
|
• Secondary
Ion Mass Spectrometry |
SIMS Materials
Metrology |
Composition depth-profiling
|
Nova Metrion |
|
• Raman
Spectroscopy |
Optical Materials Metrology |
Strain
Crystallinity
|
Nova Elipson |
|
• Computational
Modeling for Metrology Platforms |
Physical modeling (Modeling Software Solutions) |
|
Nova MARS |
|
• Machine
Learning
• Advanced
Algorithms |
Mathematical modeling algorithms (Software solutions) |
|
Nova FIT |
|
• Big
Data Analytics
• High
Power Computing |
Fleet Management (Software solutions) |
|
Nova FM
Nova HPC
QED |
|
• Titration
– various types
• CVS,
CPVS, PCGA
• Spectrophotometry
• HPLC
• Dynamic
Surface Tension
• pH,
conductivity, density
|
Chemical Process Control – Analysis and Replenishment |
Electroplating process applications in interconnect, advanced packaging, and PCB markets |
Nova Ancolyzer
Nova Ancoscene
Nova Ancoflex |
|
• Solid
dosing
|
Metal Replenishment
|
Powder dosing specialty metal oxide materials for electroplating applications |
Nova DMR |
About the product lines
Our product portfolio of composed from 4 major product
lines.
Nova’s integrated
metrology (IM) - Integrated platforms that enable advanced process control (APC) required for the
most advanced logic and memory technology nodes. Nova’ IM solutions offer fast metrology with high productivity, targeting manufacturing
of advanced logic and memory device technologies. Integrated metrology systems are directly integrated with manufacturing process equipment
and provide semiconductor manufacturers with effective and efficient process control by measuring wafers within the process environment.
This family of products allows within-wafer and within-die variation control. Enriched with Nova’s advanced modeling, machine learning
and algorithmic solutions, Nova’s integrated metrology provides enhancements in metrology accuracy, precision, and tool matching.
Nova’s stand-alone
metrology platforms are utilized to characterize critical dimensions such as width, shape and profile
with high precision and accuracy and are used in multiple areas of the fabrication process such as photolithography, etch, CMP and deposition
steps. Nova’s stand-alone platforms are targeted for critical dimensions (CD) and thin films measurements at the most advanced logic
and memory technology nodes across all semiconductor leading customers. The expression “stand-alone metrology” generically
describes free standing metrology equipment, located in line, i.e., next to the processing equipment measuring wafer samples in a station
of its own. Nova’s stand-alone metrology product line is comprised of several platforms, ranging from normal channel only to multiple
channels of information in one tool. Nova’s unique channels of information enables high metrology performance combined with high
productivity. When incorporating Nova’s advanced suite of modeling and machine learning solutions, the Optical CD stand-alone platform
provides cutting-edge performance for critical dimensions (CD) and thin films measurements of the most complex layer stacks and 3D structures.
Some of Nova’s hardware products,
mainly as related to Dimensional Metrology, are combined with our suite of advanced algorithms and software modeling solutions. Nova’s
software modeling solutions combine top notch algorithms in the field of Artificial Intelligence and machine learning. Nova’s suite
of software modeling products is comprised of Nova MARS physical and geometrical modeling and Nova FIT data driven machine learning modeling
solutions. These solutions are supported by Nova HPC, a computational management layer, which also serves as the foundation for Nova’s
Centralized Fleet Management and Control. Our comprehensive software modeling portfolio provides customers with a complete modeling and
application development solution designed for complex 3D and HAR structures in the most advanced logic and memory technology nodes:
|
• |
Nova MARS - Nova MARS software package is a multi-channel metrology modeling engine
designed for the most advanced 3D structures in advanced process nodes of semiconductor manufacturing. It is a complete modeling solution
for scatterometry and spectral interferometry models’ development, material characterization and recipe optimization which is crucial
for facing increasing challenges in semiconductor metrology. The Nova MARS also injects physical and process related knowledge to solve
complex structures. |
|
• |
Nova FIT - Nova FIT modeling suite complements traditional modeling of Optical Critical
Dimensions by machine learning and data driven algorithmic solutions. The algorithmic suite works in conjunction with Nova MARS physical
modeling engine and Nova’s Fleet Management solution to improve metrology performance, speed up time to solution and expand metrology
envelope for enriched process control. Nova FIT embeds advanced machine learning and big data architecture into optical modeling, enhancing
the way customers utilize metrology measurement data to tighten process windows, avoid process excursions and improve yield. |
|
• |
Nova’s Centralized Fleet Management and Control - Nova’s Fleet Management
and Performance Monitoring Center simplify the management and enhance the productivity of Nova tools in the fabrication site. The platform’s
ability to process and analyze large amounts of fleet and metrology data using advanced data analytic tools provides our customers with
intelligent and predictive insights on tool performance and process trends. |
|
• |
Nova HPC - The Nova HPC is a High-Performance Computing solution, which is designed
to accelerate Nova MARS and Nova FIT work processes. Nova HPC significantly expedites application development by accelerating library-building,
real time regression and recipe-setting processes. Its advanced computing hardware design enables optimization of Nova’s proprietary
algorithm performance, thus enabling the most calculation-demanding application development. |
Materials are considered the next frontier
in advancing integrated circuits beyond dimensional and architectural scaling. The growing usage of complex and novel materials in advanced
technology nodes has increased the demand for metrology solutions that can measure materials properties, In Line and In Die, with high
precision and accuracy. Nova’s materials metrology offering utilizes powerful X-Ray, Raman and SIMS technologies that have been
optimized to provide the automation, speed and reliability required in today’s advanced semiconductor production environment. As
part of Nova’s strategic plan, Nova intends to increase its focus on the evolving materials engineering market. The demand to precisely
characterize and control materials composition, thickness, stress and more, is growing in advanced Memory and Logic nodes and requires
innovative metrology solutions. Our Nova Elipson, Metrion and VeraFlex platforms aim to provide such capabilities.
|
• |
VeraFlex- Nova’s VeraFlex combines enhanced XPS (X-Ray photoelectron spectroscopy)
capability with an optional unique low energy XRF (X-Ray fluorescence) channel to address logic and memory device fabrication challenges.
This innovative inline technology is a surface-sensitive quantitative spectroscopic technique that is used to determine the elemental
composition and thickness of thin films. |
|
• |
Nova Metrion -
Nova Metrion - targets process control of 3D logic and
memory semiconductor devices. The technology enables advanced materials profile measurements by bringing secondary ion mass spectrometry
(SIMS) into semiconductor production lines on both monitor and product wafer. The Nova Metrion provides quantitative and actionable results
on depth profiling of compositional information with high-depth resolution and precision. |
|
• |
Nova Elipson - Nova Elipson utilizes Raman spectroscopy, a vibrational spectroscopy
technique, to detect multiple material properties such as strain, crystallinity, phases, grain size and composition. The combination of
a small spot and high speed of this non-destructive, optical method makes it a metrology of choice for both memory and logic applications.
|
Nova offers a market-leading portfolio
of advanced, open and flexible chemical metrology platforms for backend wafer-level packaging, TVC, front-end dual-damascene, and
PCB and IC-Substrate process steps.
The growing number of interconnect steps
that require plating at the front-end of the process as well as the substantial increase in the number of organic alloys and compounds
used in advanced packaging are increasing the need for advanced chemical metrology solutions. Furthermore, the higher material costs,
and tighter environmental regulations are driving up the cost of operations and increasing the need for manufacturers to perform chemical
process control on more elements and with increasing intensity. Our portfolio helps manufacturers ensure high-quality electroplating processes
by carrying out chemical analysis and replenishment in real time.
|
• |
Nova AncoScene– the Nova AncoScene is an industry-standard chemical metrology
solution for damascene copper and cobalt plating interconnects applications, qualified by leading global manufacturers for operation in
advanced nodes production processes. The solution supports a continuously growing range of copper and cobalt baths and applications and
offers a fully automated analysis of bath components, overall plating performance, excursions, trends alarms and warnings, and overall
process control. |
|
• |
Nova Ancolyzer – the ancolyzer is a fully automated online chemical metrology
platform designed with the most flexible architecture for advanced packaging processes. Nova’s ancolyzer offers superior analytical
performance and supports a wide variety of analytical techniques for process control. The platform’s flexible and scalable architecture
is configured to the specific process analysis and replenishment requirements. The platform’s superior accuracy and precision are
coupled with uncompromising reliability and the highest availability. |
|
• |
Nova DMR – the Nova DMR offers economical replenishment of metals in a plating
bath. This significantly extends the bath chemicals’ lifetime and improves the plater utilization. DMR provides fully automatic
powder container docking for uninterrupted operation and eliminates the constant increase in bath volume, reducing the need for bleed
and feed or full bath dump. Thus, reducing environmental impact and minimizing operational risks and costs. The platform integrates with
Nova Ancolyzer and can directly connect to any process tools. |
|
• |
Nova AncoFlex - Nova AncoFlex™ is an industry-standard fully automated inline
chemical metrology solution for copper PCB and IC-substrate production processes. The solution supports a continuously growing range of
copper baths and applications and provides excellent lifetime monitoring of bath composition and performance. The platform combines reported
and controlled accuracy and precision with uncompromising reliability and the highest availability. |
Our Customers, Sales and Marketing
Our sales and marketing strategy is based
mostly on direct sales channels where we engage with our customers from the early stages of process development, to address their challenges
in the development phase, and later on support their technology transition to high volume production. We seek to establish and maintain
tight cooperative relationships with our customers by consistently providing them with a high level of service, support and new capabilities.
We have a global network of sales and marketing, customer service and applications support offices worldwide. Our teams are empowered
by frequent trainings, remote support options, online resources and rich marketing collateral.
We serve all leading manufacturers in
the logic, foundry, memory and packaging sectors of the integrated circuit manufacturing industry. Our customers are located across
Asia, Europe and North America.
For the distribution of our total revenues,
from products and services, by geographic areas, see Note 15A to our consolidated financial statements.
The semiconductor industry is dominated
by a small number of large companies. As a result, our sales are highly concentrated among a relatively small number of customers. The
following table indicates the percentage of our total revenues derived from sales to our five largest customers and the range of these
revenues from these customers for the periods indicated.
| |
|
2021 |
|
|
2022 |
|
|
2023 |
|
|
Total revenues from five largest customers |
|
|
70 |
% |
|
|
57 |
% |
|
|
52 |
% |
|
Range of revenues from five largest customers |
|
|
4%-31 |
% |
|
|
6%-23 |
% |
|
|
5%-19 |
% |
Competition
The industries in which Nova operates
are highly competitive and characterized by rapid technological change. Nova’s ability to compete generally depends on its ability
to develop and introduce competitive solutions, commercialize its technology in a timely manner, continuously improve its products, and
develop new products that meet the evolving customer requirements. Significant competitive factors include technical capability and differentiation,
productivity, cost-effectiveness and the ability to support a global customer base. The importance of these factors varies according to
customers’ needs, including product mix and respective product requirements, applications, and the timing and circumstances of purchasing
decisions. Substantial competition exists in all areas of Nova’s business.
Competitors range from small companies
that compete in a single region, which may benefit from policies and regulations that favor domestic companies, to global, diversified
companies. Nova’s ability to compete requires a high level of investment in R&D, marketing and sales, and global customer support
activities.
Research and Development
We have assembled a core team of experienced
scientists and engineers who are highly skilled in their particular field or discipline. Our research and development core competencies,
technologies and disciplines are in scatterometry, thin film metrology, XPS, interferometry, Raman Spectroscopy metrology, chemical
metrology techniques and semiconductor process control, and include multidisciplinary measurement instruments, complex system engineering,
algorithms, physical modeling, optical design, interpretation software, machine learning, image acquisition, pattern recognition, X-ray
energy sources, electron optics and detection, multiple types of electrochemical, and spectroscopic analysis methods, applied to characterize
individual and complex multi-component mixes vacuum systems and equipment integration. Our research and development staff consist
of about 480 highly skilled members, approximately 110 of whom hold Ph.D.’s. In addition, we rely on independent subcontractors
and consultants in various fields. Since June 2003, our research and development operations in Israel are certified for ISO 9001
quality standard (Current ISO 9001:2015 version), additionally certified in Germany and the U.S. as of 2020 and 2021, respectively.
The metrology and process control market
is characterized by continuous technological development and product innovations. We believe that the rapid and ongoing development of
new products and enhancements to our existing product lines is critical to our success. Accordingly, we devote a significant portion of
our technical, management and financial resources to developing innovative products, new applications and emerging innovative technologies.
Our vision is to continue to be an innovative
leader in the semiconductor process control market, through increasing our leadership in the Dimensional, Materials and Chemical metrology
solutions.
Our research and development efforts,
designed to support this vision, are structured through different and separate development projects, which are initiated following a detailed
project plan, technical feasibility, and risk analysis. The main projects are monitored throughout their life cycle in a structured process,
including design reviews and project management reviews.
In the frame of our research and development
activities we participate from time to time in development consortia arrangements, which also help us to support our customers in the
transition to advance technology nodes. These consortia are joint collaboration programs with other semiconductors companies and are supported
and funded by the IIA and/or European Joint Research and/or the German BMBF. It should be noted, that in order to maintain our eligibility
for these programs, we must continue to meet certain conditions. These programs might restrict our ability to manufacture particular products
and transfer particular technology, which were funded by the IIA. For additional information, see “Item 5C - Grants from the Israel
Innovation Authority & European programs” in this Annual Report.
As part of our long-term technological
collaboration, we are also engaged with joint development activities with some of our strategic customers, as well as with research institutes
and other semiconductor companies. These activities sometimes impose limitations on the joint intellectual property developed as part
of these programs.
Patents and Other Proprietary Rights
Our continued success depends upon
our ability to protect our core technology and intellectual property. We therefore have an extensive program devoting resources to seeking
patent protection for our inventions and discoveries that we believe will provide us with competitive advantages. Our patents and applications
principally cover various aspects of optical measurement systems and methods, integrated process control implementation concepts, and
optical, opto-mechanical and mechanical design. In addition, our patents and applications cover various aspects of X-ray based measurement
systems and methods, including process control implementation concepts, X-ray energy sources, electron optics and detection, vacuum systems
and equipment integration. Our patents and applications portfolio also include aspects of Chemical metrology. To protect our proprietary
rights, we also rely on a combination of copyrights, trademarks, trade secret laws, contractual provisions (e.g. confidentiality agreements)
and licenses. Our copyrights include software copyrights. We constantly seek to control access to, and distribution of our proprietary
information, such as our proprietary algorithms. We enter into confidentiality and proprietary rights agreements with our employees, consultants
and business partners, and we control access to and distribution of our proprietary information.
Our in-house know-how is an
important element of our intellectual property. The development and management of our products require sophisticated coordination among
many specialized employees. We believe that duplication of this coordination by competitors or individuals seeking to copy our products
would be difficult. The risk of a competitor effectively replicating the functionality of our products is further mitigated by the fact
that most of the core technology operating on our systems is not exposed to a user or to our competitors. To protect our technology, we
implement multiple layers of security.
Despite our efforts to protect
our proprietary rights, competitors may be able to develop similar technology independently or design around our patents and, despite
our efforts, our trade secrets may be disclosed to others. Furthermore, the laws of countries other than the U.S. may not protect our
intellectual property to the same extent as the laws in the U.S. We also cannot assure that: (i) our pending patent applications will
be approved; (ii) any patents granted will be broad enough to protect our technology or provide us with competitive advantages or will
not be successfully challenged or invalidated by third parties; or (iii) that the patents of others will not have an adverse effect on
our ability to do business. We may also have to commence legal proceedings against third parties to protect our intellectual property.
From
time to time, we receive communications from others asserting that our products infringe or may infringe their intellectual property rights.
Typically, our in-house patent counsel investigates these matters and, where appropriate, retains outside counsel to provide assistance.
We are not presently involved in any material legal proceedings in which a third party has asserted that we have violated their intellectual
property rights. If,
however, we become involved in any such litigation and its outcome is adverse to us, it may result in a loss of proprietary rights, subject
us to significant liabilities, including triple damages in some instances, require us to seek licenses from third parties which may not
be available on reasonable terms or at all, or prevent us from selling our products. Furthermore, any litigation relating to intellectual
property, even if we are ultimately successful, could result in substantial costs and diversion of time and effort by our management.
This in and of itself could have a negative impact on us. While we believe that we would be successful
in any litigation seeking to enforce our patent rights, the ultimate outcome of any litigation or other legal proceedings cannot be predicted.
Manufacturing
We have one manufacturing facility for
our Optical based product lines (including the Raman technology), which is located in Rehovot, Israel, one manufacturing facility for
our X-ray and SIMS based product lines, which is located in Fremont, CA, U.S., and two manufacturing facilities for our Chemical Analysis
and Metrology technology related product lines, which are located in Pliezhausen and Bad Urach, Germany.
In 2023, we expanded our production and
development capabilities with a new state-of-the-art cleanroom in Rehovot, Israel that support the Company’s newly introduced technologies
and continuous growth. In addition, we also established a cleanroom in a new “Innovation Center” facility at our Fremont site.
These facilities became operational in 2023.
Our principal manufacturing activities
include assembly, integration, final testing and calibration. Our production activities are conducted in our manufacturing and repair
center facilities in Israel, Germany and in California. We rely and expect to continue to rely on subcontractors and turnkey suppliers
to fabricate components, build subassemblies and perform other non-core activities in a cost-effective manner. While we use standard components
and subassemblies wherever possible, most mechanical parts, metal fabrications, optical components and other critical components used
in our products are engineered and manufactured to our specifications. A small portion of these components and subassemblies are obtained
from a limited group of suppliers, and occasionally from a single source supplier.
In order to leverage the relatively high
volume of systems we manufacture, and in order to decrease production costs, we continue to focus our internal manufacturing activities
on processes that add significant value or require unique technology or specialized knowledge and outsource others. Our sites, in Israel,
Fremont, CA, Pliezhausen and Bad Urach, Germany are certified by the ISO 9001:2015 quality mark by an international certification institute.
Additionally, we received the formal certification of ISO 14001and ISO 45001 for our sites in Israel and Fremont, CA. We are being annually
recertified for these standards.
Environmental, Social and Governance (ESG)
Nova ESG 2023 Status
On April 4, 2023, we published our first
Environmental, Social, and Governance (ESG) Insight Review, as was published on our website (the “ESG
Plan”). We aim to continue improving our ESG Plan, which we plan to review and updated every two years. Our top priority
remains the wellbeing of our employees and their families. On October 7th, our ESG Plan was put to the test and assisted our management
team to rapidly adapt our operations and safety measures to provide support for our teams both in Israel and abroad.
As part of the ESG Plan, we established
a management level ESG Steering Committee, led by our CEO, which oversees the ESG policies, strategy and implementation to monitor our
long-term and annual guidelines and results related to ESG matters. This committee serves as a supplement to the responsibilities of our
Chief Human Resources Officer, which among other matters, is responsible for developing strategies and initiatives to achieve our ESG
goals as detailed in our ESG Plan. All as part of our vision to become a more active influencer in creating a sustainable and equitable
future. Our ESG Plan was composed in accordance with the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board
(SASB) guidelines, and the United Nations Sustainable Development Goals (SDGs). It is built on four pillars that we aim to interlace across
our daily operations and culture: (i) Governance – elevating ethical and corporate governance methods; (ii) People and Social Impact
– with a focus on both the individual and the surrounding communities; (iii) Innovative Approach – connecting technical roadmap
to unique culture for long-term impact; and (iv) Environment and Supply Chain – managing efficiently footprint, energy and sustainable
supply chain.
For more
information on our ESG Plan – please visit our website where you can access the full report. Information
contained on, or that can be accessed through, our website does not constitute a part of this Annual Report and is not incorporated by
reference herein.
Capital Expenditures
Our capital expenditures are primarily
for network infrastructure, computer hardware and software, construction and leasehold improvements of our facilities, expansion of clean
room facilities and demonstration and development tools. None of these assets are held as collateral or guarantee other obligations. For
additional information on our capital expenditures, see “Item 5B. Liquidity and Capital Resources” in this Annual Report.
Government Regulation
For information relating to the impact of certain government
regulations on our business, see “Item 5.C – Grants from the Israel Innovation
Authority” on this Annual Report.
4.C Organizational Structure
Our Subsidiaries
Our subsidiaries as of the end of 2023
and the countries of their incorporation are as follows. All of our subsidiaries are wholly owned by the Company:
|
Name of Subsidiary |
Place of Incorporation |
|
Nova Measuring Instruments, Inc. |
Delaware, U.S. |
|
Nova Measuring Instruments K.K. |
Japan |
|
Nova Measuring Instruments Taiwan Ltd. |
Taiwan |
|
Nova Measuring Instruments Korea Ltd. |
Korea |
|
Nova Measuring Instruments GmbH* |
Germany |
|
Nova Measuring Instruments (Shanghai) Co., Ltd. |
China |
* On June 26, 2023 ancosys GmbH merged into its parent company,
Nova Measuring Instruments GmbH.
4.D
Property, Plant and Equipment
|
Location |
Purpose of use |
Approximate
SQM |
Expiration date |
|
Israel
Rehovot and Ness Ziona
|
Offices, manufacturing and laboratories
|
16,000
|
August 2029 with an option to extend the lease period by two periods of five years
each, subject to customary conditions. Ness Ziona 2800 sqm lease is expected to end in January 2026 |
|
US
Fremont California
|
Offices, manufacturing and laboratories |
8,000 |
March 2029 with an option to extend for an additional five years, subject to customary conditions.
|
|
Germany
Bad Urach |
Offices, manufacturing and laboratories |
6,500 |
The facility is owned by the company and is currently being constructed. The facility is planned to fully
replace the Pliezhausen facility. |
|
Germany
Pliezhausen
|
Offices, manufacturing and laboratories |
4,500 |
2025, to be replaced by the Bad Urach facility.
|
|
Taiwan
Hsinchu |
Offices and laboratories |
2,000 |
2031 |
|
US, China, Korea, Taiwan, Japan |
Offices and laboratories |
Less than 2,000 each |
Ranging between 2024 and 2027. |
We believe that our facilities and equipment
are in good operating condition and adequate for their present usage.
Item 4A. Unresolved
Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
Information in this Operating Review
and Financial Prospects Section should be read in conjunction with our consolidated financial statements and notes thereto which are included
elsewhere in this Annual Report.
Executive Overview
Nova is a leading innovator and key provider
of metrology solutions for advanced process control used in semiconductor manufacturing. We deliver continuous innovation by providing
state-of-the-art high-performance metrology solutions for effective process control throughout the semiconductor fabrication lifecycle.
We bring pioneering metrology solutions to the world of process control, by industrializing laboratory and research-grade technologies
and developing emerging metrology solutions. Nova’s product portfolio, deployed by the world’s largest integrated circuit
manufacturers, combines high-precision hardware and cutting-edge software and provides its customers with deep insight into the development
and production of the most advanced semiconductor devices. Our unique capability to develop innovative metrology solutions allows its
customers to improve device performance, enhance yields and accelerate time to market. We sell our solutions mainly to semiconductor manufacturers,
and in some cases to semiconductor process equipment manufacturers.
Our business is greatly affected by the
level of spending on capital equipment by semiconductor manufacturers. In addition, demand for our products and services is affected by
the timing of new IC capacity expansion and ramping up of new technology nodes, by the timing of releasing new products by us and our
competitors, market acceptance of our new or enhanced products and changes or improvements in semiconductor design or manufacturing processes.
In the past five years (2018-2023), we
achieved a positive Compound Annual Growth Rate (CAGR) of products revenues of approximately 16%, while Gartner Inc. estimates that the
Process Control sector has achieved a CAGR of approximately 13% (Gartner Q4-2023 forecast, published on December 2023). During these years,
we successfully diversified our technology to include Material and Chemical metrology capabilities, on top of our Dimensional metrology
solutions. We also added advanced machine learning algorithms on top of our physical modeling, and we advanced our traditional tool set
to include advanced capabilities in both hardware and software. We also diversified our revenue mix across semiconductor sectors, customers
and geographies. During these years, we were also able to increase our total available market through development of new technologies
used for Materials and Dimensions metrology, addressing emerging applications in both Memory and Foundry/Logic across trailing edge and
advanced technology nodes.
In 2023, product sales accounted for
approximately 78% of our total revenues, and services accounted for approximately 22%.
As of the end of 2023, we had cash reserves, net of convertible senior notes, of approximately
$444 million, and working capital of approximately $387 million, which consist of current assets net of current liabilities.
Our service organization is operating
on a profit-and-loss basis, and the objectives of our service organization are defined and measured by customer satisfaction, quality
support parameters, and profit and loss criteria. The service organization provides support to all products we sell, during both the warranty
period and the post warranty period. Service revenues are mostly driven by extended warranty, time and material requests, service contracts
and proactive sales to the install base to improve productivity and metrology performance.
Significant Events in 2023 and Outlook for 2024
During 2023, we demonstrated
several significant achievements:
|
• |
Solid business results, including growth in service sales. |
|
• |
Expanding our manufacturing capacity by opening of a new clean room facility in
Israel. |
|
• |
Diversified customers mix, across multiple territories. |
|
• |
Further expansion into advanced packaging with new and existing products.
|
|
• |
Further market adoption of Nova’s advanced portfolio: |
|
o |
Materials, chemical and dimensional metrology solutions. |
|
o |
Hardware and software coupling. |
|
o |
Machine learning and AI capabilities to complement physical modeling.
|
|
o |
Holistic offering, including Integrated and Standalone metrology. |
|
• |
Continued proliferation of Nova’s newly announced solutions of Elipson, Metrion
and AncoScene products. |
|
• |
Continued evolution of our Optical CD solutions with new generations of Integrated
and Standalone metrology platforms. |
|
• |
Completion of the post-merger integration of ancosys. |
|
• |
Continued investments in research and development programs aimed to generate new
organic growth engines for process control. |
|
• |
Deepening collaboration with research institutes and customers' development centers,
utilizing a variety of our products, leading to our positioning as a long-term technology development and high-volume manufacturing partner.
|
|
• |
ESG (Environment, Social and Governance) – In 2023 we published our first
ESG review. We are determined as a company to play a vital role in creating a world that values equality, safety and environmental health
for the benefit of future generations to come. We are committed to proactively invest in embedding social responsibility as part of our
culture and business management to support our values. |
In 2024, we plan to focus on the following:
|
• |
Investing in organization development to enhance our human capital and the strength
of our global teams based on our values and culture. |
|
• |
Continue to strengthen our competitive market position, through unique innovation
and technical leadership. |
|
• |
Continue executing our innovation and development plans to meet future industry
challenges. |
|
• |
Continue executing our well-defined strategy to reach $1B USD in revenues, organically
and inorganically. The strategy defines the Company’s growth path in revenue, customers, technology and financial performance.
|
|
• |
Expand our total available markets by addressing new emerging metrology applications
and markets sectors, through solutions delivery to the challenging buildup of advanced Logic technology nodes, memory scaled 3D-NAND nodes
and DRAM scaled devices at leading edge customers. |
|
• |
Continue delivering metrology systems for the trailing edge technology nodes and
to advanced packaging customers to support new applications ramp up and expansions. |
|
• |
Continue the collaborations and joint research programs with leading semiconductor
manufacturers and relevant leading research institutes. |
|
• |
Continue innovation and diversification of our products through several new product
introductions to extend the Company’s market leadership and total available market. |
|
• |
Continue our plans to generate revenues and competitive edge through SW algorithms
and Machine Learning solutions. |
|
• |
Strengthening the partnership with our customers and build a “Customer Centric”
approach to accommodate and deliver customers’ requirements along the semiconductor lifecycle. |
|
• |
Continue investing in developing new approach and methods for inline materials process
control.
|
|
• |
Continue investing in our chemical metrology product development and enhance our
product offering. |
|
• |
Create synergy between our product lines towards a combined offering for advanced
applications, which require dimensional, material and chemical metrology. |
|
• |
Grow our production facilities and offices footprint to meet semiconductor demand
and our strategic plans and continue to develop modern and streamlined core business processes through new ERP and Service CRM infrastructure.
|
|
• |
Elevate our investment in ESG programs in order to promote social responsibility
programs through our five pillars program (for details, refer to the Environmental, Social and Governance (ESG) chapter in Item 4.B in
this Annual Report). |
The major challenges we could face
in fulfilling our plans include:
|
• |
Meeting strategic, development, operational and delivery targets in light of the
macro economical, geopolitical and trade restriction issues across the globe and the current conditions in Israel. |
|
• |
On time delivery of the required solutions to meet the current and future needs
of our existing and new customers. |
|
• |
Correctly understanding the market trends and competitive landscape to ensure our
products retain proper differentiation to win customer confidence. |
|
• |
Creating aggressive, innovative and competitive roadmap deliverables at reasonable
costs in order to properly control expenses. |
|
• |
Identifying the metrology evolution roadmap for future industry needs to meet process
control requirements and lead the market. |
|
• |
Achieving long-term growth targets while supporting extensive growth in all our
activities. |
|
• |
Building a solid global infrastructure to accommodate further growth. |
|
• |
Failure to design, implement and smoothly transition to the new ERP system.
|
In order to address the risks above we
implemented a global plan to secure our employees safety, guarantee supply chain resiliency, assure business continuity and continuous
support to our customers.
We collaborate with key customers, equipment
manufacturers, and research institutes to stay informed about their metrology and process control requirements. This helps us align our
roadmap to their needs and address any technical or roadmap risks and challenges.
It is our belief that we have been able
to consistently improve our market position because of a combination of factors:
|
• |
Optical metrology has become an enabler for the industry over the last few years.
|
|
• |
Materials metrology has been widely adopted by leading memory and logic/foundry
customers. We expect further adoption in the next few years. |
|
• |
The growing adoption of our metrology portfolio in the advanced packaging market.
|
|
• |
Our unique metrology portfolio, combining optical, X-Ray and chemical metrology
for both dimensions and materials. This provides the most advanced portfolio, combining the best innovative metrology capabilities with
the best reliability and return on investment. |
|
• |
The ability to provide a unique and differentiated technology portfolio sets us
apart from the competition and adding a competitive edge to our offering. |
|
• |
Our solutions are well accepted by leading customers that allow us to gain more
market share with additional process steps and new applications. |
|
• |
Our ability to closely team with our customers allows us to predict the industry
evolution and process control challenges and by that introduce innovative metrology roadmap to solve industry needs. |
|
• |
Our diversified portfolio, which is a result of continuous investment in research
and development, is becoming more attractive to our customers. |
|
• |
Extending our solutions’ base to include hardware and software elements in
a coupled offering. |
|
• |
Successful track record in completing and integrating inorganic products, as a result
of M&A, which allows us to diversify our product offering to expand our addressable markets. |
|
• |
Well controlled and efficient operating model to support our profitable growth and
operational resiliency. |
We anticipate ongoing growth in the adoption
of our solutions as the semiconductor manufacturing process becomes increasingly complex and the industry evolves. We believe that our
target market is growing as we expand our offering to more stages of the semiconductor manufacturing process and develop innovative new
metrology solutions. As the semiconductor production process becomes increasingly challenging, we believe that the need for our diverse
portfolio of technologies for dimensional, materials and chemical metrology will continue to grow in the coming years.
5.A
Operating Results
Overview
A substantial portion of our revenues
is coming from a small number of customers, and we anticipate that our revenues will continue to depend on a limited number of major customers.
For the distribution of our total revenues,
from products and services, by geographic areas, see Note 15A to our consolidated financial statements.
The sale cycle of our systems is long
and the rate and timing of customer orders may vary significantly from month to month as a function of the specific timing of fab expansions.
We schedule production of our systems based upon order backlog and customer forecasts.
Our revenues decreased by 9% in 2023
following an increase of 37% in 2022, and an increase of 54% in 2021.
The following table shows the relationship,
expressed as a percentage, of the listed items from our consolidated income statements to our total revenues for the periods indicated:
Percentage of Total Revenues Year
ended December 31:
| |
|
2021 |
|
|
2022 |
|
|
2023 |
|
| |
|
|
|
|
|
|
|
|
|
|
Revenues from product sales |
|
|
81 |
% |
|
|
81 |
% |
|
|
78 |
% |
|
Revenues from services |
|
|
19 |
% |
|
|
19 |
% |
|
|
22 |
% |
|
Total revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sale |
|
|
32 |
% |
|
|
34 |
% |
|
|
32 |
% |
|
Cost of services |
|
|
12 |
% |
|
|
11 |
% |
|
|
12 |
% |
|
Total cost of revenues |
|
|
43 |
% |
|
|
45 |
% |
|
|
43 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
57 |
% |
|
|
56 |
% |
|
|
57 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses, net |
|
|
16 |
% |
|
|
16 |
% |
|
|
17 |
% |
|
Sales and marketing expenses |
|
|
10 |
% |
|
|
9 |
% |
|
|
10 |
% |
|
General and administrative expenses |
|
|
4 |
% |
|
|
4 |
% |
|
|
4 |
% |
|
Total operating expenses |
|
|
30 |
% |
|
|
29 |
% |
|
|
31 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
27 |
% |
|
|
26 |
% |
|
|
26 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income (expense), net |
|
|
(1 |
)% |
|
|
2 |
% |
|
|
4 |
% |
|
Income before income taxes |
|
|
26 |
% |
|
|
28 |
% |
|
|
30 |
% |
|
Income tax expenses |
|
|
4 |
% |
|
|
3 |
% |
|
|
4 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
22 |
% |
|
|
25 |
% |
|
|
26 |
% |
Comparison of Years Ended December 31, 2023 and 2022
Revenues.
Our revenues in 2023 decreased by $52.8 million, or 9%, compared to 2022. Revenues attributable to product sales were $405.0 million,
a decrease of $59.1 million, or 13%, compared to 2022. Revenues attributable to services were $112.9 million, an increase of $6.3 million,
or 6%, compared to 2022. The decrease in product revenues in 2023 was attributed to the lower WFE investments and capacity expansions
in 2023 compared to 2022. The increase in services revenues in 2023 was attributed mainly to the increase in our systems installed base.
Cost
of Revenues and Gross Profit. Cost of revenues consists of labor, material and overhead costs of
manufacturing our systems, royalties, amortization of intangible assets and the costs associated with our worldwide service and support
infrastructure. It also consists of inventory write-offs and provisions for estimated future warranty costs for systems we have sold.
Our cost of revenues attributable to product sales in 2023 was $164.0 million. Our gross margin attributable to product revenues in 2023
was 60%, compared to 59% in 2022. The increase in products gross margins in 2023 is related mainly to a different product and customer
volumes mix. Our cost of services in 2023 was $60.8 million, compared to $62.4 million in 2022. Gross margin attributable to service revenues
in 2023 was 46%, compared to 41% in 2022. The increase in services gross margins in 2023 is related mainly to the increase in service
revenues in parallel to successful cost restraining measures implemented during 2023.
Research
and Development Expenses, net. Consist primarily of salaries and related expenses and also include
consulting fees, subcontracting costs, related materials and overhead expenses, after offsetting grants received or receivable from governmental
funding of research and development activities. Our net research and development expenses in 2023 were $88.0 million, a decrease of $2.4
million, or 3%, compared to 2022, after offsetting grants received of $3.1 million in 2023 and 2022, each. Research and development expenses
excluding grants received or receivable in 2023 were $91.1 million, compared to $93.5 million in 2022. The decrease in 2023 is mainly
related to successful cost restraining measures implemented during 2023. In 2023, net research and development expenses represented 17%
of our revenues, compared to 16% in 2022.
Sales
and Marketing Expenses. Sales and marketing expenses are mainly comprised of salaries and related
costs for sales and marketing personnel, travel related expenses, overhead and commissions to our representatives and sales personnel.
Our sales and marketing expenses in 2023 were $52.5 million, a decrease of $0.3 million, or 0.5%, compared to 2022. Sales and marketing
expenses represented 10% of our revenues in 2023 compared to 9% of our revenues in 2022.
General
and Administrative Expenses. General and administrative expenses are comprised of salaries and related
expenses and other non-personnel related expenses such as legal expenses. Our general and administrative expenses in 2023 were $20.4 million,
a decrease of $3.4 million, or 14%, compared to 2022. The decrease in general and administration expenses in 2023 was attributed to 2022
ancosys acquisition costs and to successful cost restraining measures implemented during 2023. In 2023, general and administration expenses
represented 4% of our revenues, same as in 2022.
Financial
income (expense), net. Financial income (expenses), net is comprised of interest income, financial
expenses related to the Convertible Senior Notes, exchange rate impact and bank charges. In 2023, we recorded $22.4 million of net financial
income compared to $8.5 million in 2022. The increase in financial income in 2023 was mainly attributed to higher interest income in 2023
as a result of higher global interest rates during 2023.
Income
Tax Expenses. Income tax expenses are comprised of current tax expenses and deferred tax expenses/income.
In 2023, we recorded $18.4 million income tax expenses, reflecting effective tax rate of 11.9%. In 2022, we recorded $18.1 million of
income tax expenses, reflecting effective tax rate of 11.7%.
Comparison of Years Ended December 31, 2022 and 2021 is incorporated
by reference to the Company’s Annual Report on Form 20-F filed with the Securities and Exchange Commission on February 28, 2023.
5.B
Liquidity and Capital Resources
As of December 31, 2023, we
had working capital of approximately $387 million, compared to working capital of approximately $479 million as of December 31, 2022.
The decrease in our working capital in 2023 was mainly attributed to the classification of the senior convertible notes as short-term
liabilities in 2023, which was partially offset by increase in cash and marketable securities.
Cash and cash equivalents, short-term
and long-term deposits and marketable securities as of December 31, 2023 were $641 million compared to $529 million as of December 31,
2022, and increased mainly due to our fluent operating cash flow.
Trade accounts receivables slightly
increased from $109 million as of December 31, 2022 to $111 million as of December 31, 2023.
Inventories increased from $117 million
as of December 31, 2022 to $138 million as of December 31, 2023. The increase in inventory is related to the anticipated increase in our
business levels in the first half of 2024 as well as higher inventories to support new products proliferations.
Operating activities in 2023 generated
positive cash flow from operating activities of $124 million compared to a positive cash flow from operating activities of $120 million
in 2022.
The following table describes our
investments in capital expenditures during the last three years (US dollars, in thousands):
| |
|
2021 |
|
|
2022 |
|
|
2023 |
|
| |
|
Domestic |
|
|
Abroad |
|
|
Domestic |
|
|
Abroad |
|
|
Domestic |
|
|
Abroad |
|
|
Electronic equipment |
|
|
2,356 |
|
|
|
1,134 |
|
|
|
3,664 |
|
|
|
4,155 |
|
|
|
2,086 |
|
|
|
2,867 |
|
|
Office furniture and equipment |
|
|
22 |
|
|
|
283 |
|
|
|
66 |
|
|
|
1,055 |
|
|
|
360 |
|
|
|
499 |
|
|
Leasehold improvements |
|
|
371 |
|
|
|
650 |
|
|
|
8,934 |
|
|
|
436 |
|
|
|
2,994 |
|
|
|
2,457 |
|
|
Land and buildings |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,004 |
|
|
|
- |
|
|
|
5,925 |
|
|
Total |
|
|
2,749 |
|
|
|
2,067 |
|
|
|
12,664 |
|
|
|
8,650 |
|
|
|
5,440 |
|
|
|
11,748 |
|
In 2023, the gross investment in capital
expenditures, including inventory items moved to capital and investment in new ERP, was approximately $25 million, and was financed from
our operating cash flow. In 2024, we expect our gross capital spending to increase to approximately $35 million, mainly as a result of
continuous investments in facilities and new ERP.
Our principal liquidity requirement is
expected to be for working capital and capital expenditures, as well as additional acquisitions and investment in new ERP. We believe
that our current cash reserves will be adequate to fund our planned activities for at least the next twelve months. Our long-term capital
requirements will be affected by many factors, including the success of our current products, our ability to enhance our current products
and our ability to develop and introduce new products that will be accepted by the semiconductor industry. We plan to finance our long-term
capital needs with our cash reserves together with positive cash flow from operations, if any. If these funds are insufficient to finance
our future business activities, which may include acquisitions, we would have to raise additional funds through the issuance of additional
equity or debt securities, through borrowing or through other means. We cannot assure that additional financing will be available on acceptable
terms.
Presently, our short-term debt
is comprised from Convertible Senior Notes.
We do not have a readily available source
of other short-term or long-term debt financing such as a line of credit.
With regard to usage of hedging financial
instruments and the impact of inflation and currency fluctuations, see “Item 11. Quantitative and Qualitative Disclosures about
Market Risk” in this Annual Report.
5.C
Research and Development, Patents and Licenses, etc.
For information regarding our research
and development activities, see “Item 4B – Research and Development” in this Annual Report.
Grants from the Israeli Innovation Authority & European Programs
IIA sponsoring for generic research and development
projects of large Israeli companies
We participate in a generic research
and development programs sponsored by the IIA, available for Israeli companies that meet specific criteria’s set forth by the IIA.
Companies eligible to participate in these programs receive IIA funding intended to focus on long-term creation of know-how and technological
infrastructure, used for the development or production of future innovative products. These programs do not require payments of royalties
to the IIA, but all other restrictions under the Innovation Law, such as local manufacturing obligations and know-how transfer limitations,
as further detailed hereunder, are applicable to the know how developed by us with the funding received in such programs.
Joint programs of the European Research Area and
the IIA(for Nova Ltd.) or BMBF (for Nova Measuring Instruments Gmbh)
We participate in European consortia,
which are joint programs governed by the Electronic Component Systems (ECSEL) & Key Digital Technologies (KDT), for European Leadership
Joint Undertaking (the “JU”) as part of the Horizon 2020 & Horizon Europe,
respectively, which are cooperations between the European Research Area and the (the “EU Consortia”).
Some of the obligations and undertakings
specified hereunder in connection with IIA or BMBF activities (such as the restrictions under the Innovation Law and obligation to grant
certain access rights to our technology and intellectual property rights) apply with respect to some of these joint projects. In addition,
the participation in an EU Consortia includes specific obligations, such as the following: The budgeted grant will be paid to the company
pursuant to certain rules regarding ‘eligible costs’; Obligations to properly implement the activities assigned under the
specific EU Consortia project; Restrictions in contributions of third parties (by service or otherwise); Obligations to keep information
up to date and to inform about events and circumstances likely to affect the consortium activity; Obligations related to records keeping,
investigations and audits by the JU in order to verify the proper implementation of the specific EU Consortium project and compliance
with the obligations under the terms of the program, including assessing deliverables and reports during a period of up to two years following
the receipt by the company of the full grant payment; Obligations related to Intellectual property allocation generated by an EU Consortium,
background intellectual property designation prior to the commencement of the EU Consortium’s project and the provision of access
rights to results obtained as part of the EU Consortium. Breach of such obligations may result in the reduction of the aggregate expected
grant amount or claiming back previously received grants. In addition, the company may be subject to administrative and financial penalties
such as temporary exclusion from all JU European Consortia and fines of up to 10% of the maximum expected grant, as well as to contractual
liabilities.
European Research Area program
We also participate in European consortia
which are not part of the JU (Joint Undertaking) program, thus, these programs are funded only by the European commission with no national
funding from the Israel Innovation Authority. The restrictions under the Israeli Innovation Law do not apply to the project under these
programs.
Past royalty bearing programs and royalties arrangements
Some of our previous research and development
efforts were financed in part through royalty-bearing grants. We were obligated to pay royalties from sales of products funded with these
grants. This obligation included different annual interest rates ranging up to 5%. In August 2016, we entered into a royalty buyout arrangement
(the “Arrangement”) with the IIA. As part of the Arrangement we paid approximately $12.9 million to the IIA in in September
2016. The contingent net royalty liability to the IIA at the time we executed the Arrangement was approximately $24 million. As a result
of the foregoing payment, we are released from any future royalty payments on these previous funds received from the IIA. However, to
the extent that we will be able to commercialize products that were developed as part of IIA programs and were declared as “failed”
at the time of the Arrangement, we will be required to pay royalties to the IIA from income generated from such commercialization. Currently,
we do not anticipate that such failed projects will generate revenues in the future. We note that the Arrangement does not release the
Company from other obligations towards the IIA as further detailed herein. In addition, in the future, we may, alone or together with
third parties, participate in research and development programs, which may bear royalty obligations (depending on the specific terms of
the applicable program).
Pertinent obligations under the Israeli Encouragement
of Research, Development and Technological Innovation in the Industry Law 1984
Under the Encouragement of Research,
Development and Technological Innovation in the Industry Law 1984 and the provisions of the applicable regulations, rules, procedures
and benefit tracks, together the Innovation Law, a qualifying research and development program is typically eligible for grants of up
to 50% of the program’s pre-approved research and development expenses. The program must be approved by a committee of the IIA.
The recipient of the grants is required to return the grants by the payment of royalties on the revenues generated from the sale of products
(and related services) developed (in whole or in part) under IIA program up to the total amount of the grants received from IIA, linked
to the U.S. dollar and bearing annual interest (as determined in the Innovation Law). Following the full payment of such royalties and
interest, there is generally no further liability for royalty payment for our currently developed and sold products. Nonetheless, the
restrictions under the Innovation Law (as generally specified below) will continue to apply even after our company has repaid the grants,
including accrued interest, in full.
The main pertinent obligations under
the Innovation Law are as follows:
|
• |
Local Manufacturing Obligation.
The terms of the grants under the Innovation Law require that we manufacture the products developed with these grants in Israel. Under
the regulations promulgated under the Innovation Law, the products may be manufactured outside Israel by us or by another entity only
if prior approval is received from the IIA (such approval is not required for the transfer of less than 10% of the manufacturing capacity
in the aggregate, as declared to be manufactured out of Israel in the applications for funding, in which case a notice should be provided
to the IIA). This approval may be given only if we abide by all the provisions of the Innovation Law and related regulations. Ordinarily,
as a condition to obtaining approval to manufacture outside Israel, we would be required to pay royalties at an increased rate (usually
1% in addition to the standard rate and increased royalties cap between 120% and 300% of the grants, depending on the manufacturing volume
that is performed outside Israel). We note that a company also has the option of declaring in its IIA grant application an intention to
exercise a portion of the manufacturing capacity abroad, thus, if the grant application is approved by IIA, such company will avoid the
need to obtain additional approvals and pay the increased royalties cap for manufacturing outside of Israel at portions which were mentioned
in such approved grant applications. |
|
• |
Know-How transfer limitation. The
Innovation Law restricts the ability to transfer know-how funded by the IIA outside of Israel, including by way of a license to a non-Israeli
entity. Transfer of IIA funded know-how outside of Israel requires prior approval of the IIA. The IIA approval to transfer know-how created,
in whole or in part, in connection with an IIA-funded project to third party outside Israel is subject to payment of a redemption fee
to the IIA calculated according to a formula provided under the Innovation Law that is based, in general, on the ratio between the aggregate
IIA grants to the company’s aggregate investments in the project that was funded by these IIA grants, multiplied by the transaction
consideration, taking into account depreciation mechanism, and less royalties already
paid to the IIA. The regulations promulgated under the Innovation Law establish a maximum payment of the redemption fee paid to
the IIA under the above mentioned formulas and differentiates between two situations: (i) in the event that the company sells its IIA
funded know-how, in whole or in part, or is sold as part of an M&A transaction, and subsequently ceases to conduct business in Israel,
the maximum redemption fee under the above mentioned formulas will be no more than six times the total grants received (plus accrued interest)
for development of the know-how being transferred, or the entire amount received from the IIA, as applicable; (ii) in the event that following
the transactions described above (i.e., asset sale of IIA funded know-how or transfer as part of an M&A transaction) the company undertakes
to continue its R&D activity in Israel (for at least three years following such transfer and maintain at least 75% of its R&D
staff employees it had for the six months before the know-how was transferred, while keeping the
same scope of employment for such R&D staff), then the company is eligible for a reduced cap of the redemption fee of no more
than three times the amounts received (plus accrued interest) for the applicable know-how being transferred, or the entire amount received
from the IIA, as applicable. No assurance can be given that approval of any such transfer, if requested, will be granted and what will
be the amount of the redemption fee payable. |
Approval of the transfer of IIA funded
technology to another Israeli company requires a pre-approval by IIA and may be granted only if the recipient undertakes to fulfil all
the liabilities to IIA and undertakes abides by all the provisions of the Innovation law and related regulations, including the restrictions
on the transfer of know-how and manufacturing rights outside of Israel and the obligation to pay royalties. In light of the Arrangement
(as further discussed below), in certain circumstances, under such sale transactions (i.e., the transfer of IIA funded technology or portion
thereof to another Israeli company), we might be obligated to pay royalties to the IIA from any income derived from such a sale transaction.
|
• |
Licensing arrangements. Under the
terms of the Innovation Law, licensing know how developed under the IIA programs outside of Israel, requires prior consent of IIA and
payment of license fees to IIA, calculated in accordance with the licensing rules promulgated under the Innovation Law. The payment of
the license fees does not discharge the company from the obligation to pay royalties or other payments due to IIA in accordance with Innovation
Law. |
These restrictions may impair our ability to enter into
agreements for those products or technologies which were developed with assistance of the IIA grants without the approval of the IIA.
We cannot be certain that any approval of the IIA will be obtained on terms that are acceptable to us, or at all. Furthermore, in the
event that we undertake a transaction involving the transfer to a non-Israeli entity of know-how developed with IIA funding pursuant to
a merger or similar transaction, the consideration available to our shareholders may be reduced by the amounts we are required to pay
to the IIA. Any approval, if given, will generally be subject to additional financial obligations. Failure to comply with the requirements
under the Innovation Law may subject us to mandatory repayment of grants received by us (together with interest and penalties), as well
as may expose us to criminal proceedings. In addition, IIA may from time-to-time audit sales of products which it claims incorporate technology
funded via IIA programs and this may lead to additional royalties being payable on additional products.
5.D
Trend Information
For information regarding the most significant
recent trends in our market, see “Item 4B– Our Market – The Semiconductor
Market – Update ” in this Annual Report.
5.E
Critical Accounting Estimates
We have provided a summary of our significant
accounting policies, estimates and judgments in Note 2 to our consolidated financial statements, which are included elsewhere in this
Annual Report. The following critical accounting discussion pertains to accounting estimates management believes are most critical to
the portrayal of our historical financial condition and results of operations and that require significant, difficult, subjective or complex
judgments. Other companies in similar businesses may use different estimation policies and methodologies, which may impact the comparability
of our financial condition, results of operations and cash flows to those of other companies.
The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Our management evaluates its estimates on an ongoing basis, including
those related to, but not limited to revenue recognition, allowance for credit losses related to marketable securities, inventory write-offs,
business combination, fair value and useful lives of intangible assets, and income taxes and tax uncertainties . These estimates are based
on management's knowledge about current events and expectations about actions the Company may undertake in the future. Actual results
could differ from those estimates.
Revenue Recognition
Under ASC 606, the company derives revenue
from the sales of advanced process control systems, spare parts, labor hours (mainly systems installation) and service contracts.
Contracts with customers may include
multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative
Standalone Selling Price (“SSP”). Judgment is required to determine the SSP for each distinct performance obligation. The
Company uses a range of amounts to estimate SSP when it sells each of the products and services separately and needs to determine whether
there is a discount to be allocated based on the relative SSP of the various products and services.
The Company enters into revenue arrangements
that include products and services which are generally distinct and accounted for as separate performance obligations. The Company determines
whether arrangements are distinct based on whether the customer can benefit from the product or service on its own or together with other
resources that are readily available and whether the Company's commitment to transfer the product or service to the customer is separately
identifiable from other obligations in the contract.
Marketable Securities
The Company accounts for Credit losses
in accordance with ASU 2016-13, Topic 326 “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial
Instruments”. The guidance requires the Company to determine whether a decline in fair value below the amortized cost basis of an
available for sale debt security is due to credit related factors or noncredit related factors. A credit related impairment should be
recognized as an allowance on the balance sheet with a corresponding adjustment to earnings, however, if the Company intends to sell an
impaired available for sale debt security or more likely than not would be required to sell such a security before recovering its amortized
cost basis, the entire impairment amount would be recognized in earnings with a corresponding adjustment to the security’s amortized
cost basis.
Inventories
Inventories are stated at the lower of
cost or net realizable value. Inventory write-downs are provided to cover risks arising from slow-moving items, technological obsolescence,
excess inventories, discontinued products, and for market prices lower than cost, if any. We periodically evaluate the quantities on hand
relative to historical and projected sales volume (which is determined based on an assumption of future demand and market conditions),
the age of the inventory and the expected consumption of service spare parts. At the point of the loss recognition, a new lower cost basis
for that inventory is established. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings
in the current period.
Business Combination
The results of an acquired business in
a business combination are included in the Company’s consolidated financial statements from the date of acquisition according to
the guidance of ASC Topic 805, “Business Combinations.” The Company allocates the purchase price, which is the sum of the
consideration provided and may consist of cash, equity or a combination of the two, to the identifiable assets and liabilities of the
acquired business at their fair values as of the acquisition date. The excess of the purchase price over the amount allocated to the identifiable
assets and liabilities, if any, is recorded as goodwill.
Contingent consideration incurred in
a business combination is included as part of the purchase price and recorded at a probability weighted assessment of the fair value as
of the acquisition date. The fair value of the contingent consideration is re-measured at each reporting period, with any adjustments
in fair value recognized in earnings under general and administrative expenses.
Intangible assets
As
a result of previous acquisitions, our balance sheet included acquired intangible assets, in the aggregate amount of approximately $39.2
million and $43.6 million as of December 31, 2022 and 2023, respectively.
We allocate the purchase price
to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. These valuations require
management to make significant estimations and assumptions, especially with respect to intangible assets. Critical estimates in valuing
intangible assets include future expected cash flows from technology acquired, backlog and customer relationships. Management’s
estimates of fair value are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.
Intangible assets are comprised of acquired technology and customer relations.
Accounting for income tax
We are subject to income taxes in Israel,
the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining
our taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will
not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves in light
of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final
tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the
period in which such determination is made.
Significant judgment is also required
in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider
all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies.
In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation
allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
For a discussion of other significant
accounting policies used in the preparation of our financial statements and recent accounting pronouncements, see Note 2 to our consolidated
financial statements contained elsewhere in this Annual Report.
Item 6. Directors,
Senior Management and Employees
6.A
Directors and Senior Management
The following is the list of senior management
and directors as of February 9, 2024:
|
Name |
Age |
Position |
|
Eitan Oppenhaim (4) |
58 |
Executive Chairman of the Board of Directors
|
|
Avi Cohen (1)(2) (4) |
70 |
Director |
|
Raanan Cohen (2)(3) |
68 |
Director |
|
Zehava Simon (1)(2)(3)(4) |
65 |
Director |
|
Sarit Sagiv (1)(2) |
55 |
Director |
|
Yaniv Garty (3)(4) |
56 |
Director |
|
Gabriel Waisman
|
53 |
President & CEO |
|
Dror David
|
54 |
Chief Financial Officer |
|
Shay Wolfling
|
52 |
Chief Technology Officer |
|
Adrian S. Wilson
|
52 |
President of US subsidiary & General
Manager Material Metrology Division |
|
Effi Aboody
|
53 |
Corporate VP and General Manager Dimensional
Metrology Division |
|
(1) |
Member of the audit committee |
|
(2) |
Member of the compensation committee |
|
(3) |
Member of the nominating governance and sustainability committee |
|
(4) |
Member of the strategy and M&A committee |
Mr.
Eitan Oppenhaim was named executive chairman of our board of directors on March 31, 2023, after serving
as member of our board of directors from October 2019. Mr. Oppenhaim served as the President and Chief Executive Officer of the Company
from July 31, 2013 until March 31, 2023, and has previously served as the Executive Vice President Global Business Group, since November
2010. From 2009 until 2010, Mr. Oppenhaim served as Vice President and Europe General Manager of Alvarion Ltd., a public company traded
on Nasdaq. During the years 2007 through 2009, Mr. Oppenhaim served as Vice President of sales and marketing of OptimalTest Ltd.. Prior
to that, from 2002 until 2006, Mr. Oppenhaim served as Vice President – Business Manager of the Flat Panel Displays division of
Orbotech Ltd., a public company traded on Nasdaq. From 2001 until 2002, Mr. Oppenhaim served as Managing Director of Asia Pacific at TTI
Telecom International, a leading provider of assurance, analytics and optimization solutions to communications service providers (CSP)
worldwide. Prior to that, from 1994 until 2001, Mr. Oppenhaim held several key executive positions at Comverse Network Systems Ltd., a
public company traded on Nasdaq. Mr. Oppenhaim holds a BA in Economics from the Haifa University, Israel and an MBA from Ben-Gurion University,
Beer-Sheva, Israel.
Mr.
Avi Cohen has served as a director of the Company since 2008 and during the period between December
2022 and March 2023 also served as the interim chairperson of our board of directors while Dr. Michael Brunstein was absent for health-related
reasons. He also, serves as Executive Chairman of ZOOZ Power Ltd. (TASE: ZOOZ) and as a director of Cognyte Software Ltd. (Nasdaq: CGNT)
as well as on the board of directors of Cortica Ltd., Sight Diagnostics, and CGS Tower Networks Ltd. From July 2016 to September 2017
Mr. Cohen served as the CEO of MX1, a global media service provider founded in July 2016 as a result of the acquisition of RR Media (Nasdaq:
RRM) by SES S.A. and the following merger between RR Media, and SES Platform Services GmbH. From July 2012 until the merger, Mr. Cohen
served as the CEO of RR Media. Prior to that, until March 2012, Mr. Cohen served as President and CEO of Orbit Technologies (TASE: ORBI).
From September 2006 until December 2008, Mr. Cohen served as chief operating officer and deputy to the CEO of ECI Telecom Ltd. Prior to
joining ECI, Mr. Cohen served in a variety of executive management positions at KLA (Nasdaq: KLAC). From 2003 he was a group vice president
and member of the executive management committee. From 1995 he was the president of KLA Israel responsible for the optical metrology division.
Prior to joining KLA, Mr. Cohen also spent three years as managing director of Octel Communications, Israel, after serving as CEO of Allegro
Intelligent Systems, which he founded and which was acquired by Octel. Mr. Cohen holds a B.Sc. and a M.Sc. in electrical engineering and
applied physics from Case Western Reserve University, U.S.
Mr.
Raanan Cohen was appointed as a director of the Company
by our board of directors in February 2014. Prior to that and until December 2012, Mr. Cohen served as the President and Chief Executive
Officer of Orbotech Ltd., a public company traded on Nasdaq. Mr. Cohen also served in a range of other executive positions at Orbotech
Ltd, including Co-President for Business and Strategy, EVP and President of the Printed Circuit Board (PCB) Division, Vice President for
the PCB-AOI product line and President and chief executive officer of
Orbotech, Inc. Prior to its merger with Orbotech in 1991, Mr. Cohen held various positions at Orbot, another manufacturer of AOI systems.
Prior to joining Orbot in 1984, he worked at Telrad Networks Ltd. Mr. Cohen currently serves as the Chief Executive Officer of EyeWay
Vision Ltd., a private company and a director of Gezuntech therapeutics, a private company. Mr. Cohen holds a B.Sc. in Computer Science
from the Hebrew University of Jerusalem, Israel.
Ms.
Zehava Simon was
elected as the Company’s external director in accordance with the provisions of the Companies Law in June 2014 and reelected in
June 2017. Effective as of May 2018, and our adoption of the exemption under the
Regulation (as defined below), Ms. Simon is no longer classified as an external director under the Companies Law. Ms. Simon
served as a Vice President of BMC Software from 2000 until 2013 and in her last position (as of 2011) acted as Vice President of Corporate
Development. From 2002 to 2011, Ms. Simon served as Vice President and General Manager of BMC Software in Israel. In this role, she was
responsible for directing operations in Israel and India as well as offshore sites. Prior to that, Ms. Simon held various positions at
Intel Israel., which she joined in 1982, including leading of Finance & Operations and Business Development for Intel in Israel. Ms.
Simon is currently a board member of Audiocodes Ltd., a public company traded on Nasdaq and TASE, Nice Systems, a public company traded
on Nasdaq and TASE. Ms. Simon is a former member of the board of directors of Insightec Ltd. (2005-2012), M-Systems Ltd., a Nasdaq listed
company which was acquired in 2006 by SanDisk Corp., a public company traded on Nasdaq as well (2005-2006) and Tower Semiconductor Ltd.,
a public company traded on TASE and Nasdaq (1999-2004). Ms. Simon holds a B.A. in Social Sciences from the Hebrew University of Jerusalem,
Israel, a law degree (LL.B.) from Reichman University (formerly, the Interdisciplinary Center in Herzliya, Israel) and an M.A. in Business
and Management from Boston University, U.S.
Ms.
Sarit Sagiv was appointed to serve as a director of the
Company by our board of directors in August 2021. Ms. Sagiv serves as a member of the Investments
Committee of Phoenix Insurance and as a member of the board of directors of OPC Energy Ltd., a public company traded on TASE. Ms. Sagiv
had served as General Manager of the Global Business division at Amdocs (Nasdaq: DOX) between 2016 and 2020. Prior to this role, Ms. Sagiv
served as the Chief Financial Officer of Nice Ltd. (NASDAQ and TASE: NICE), with responsibility for the finance, legal, operations and
IT areas, as well as the Chief Financial Officer of Retalix Ltd. (Nasdaq and TASE: RTLX). Ms. Sagiv also held various other Chief Financial
Officer and senior financial positions. Ms. Sagiv is a certified public accountant. She holds a B.A. in Accounting and Economics and an
MBA, both from Tel-Aviv University, Israel and an M.A. in Law from Bar Ilan University, Israel.
Mr.
Yaniv Garty was appointed to serve as a director of the Company by our board of directors as of April
2, 2023. From January 2017 to February 2023, Mr. Garty was a Vice President at Intel, a public company traded on the Nasdaq, and the General
Manager of Intel Israel – Israel’s largest Hi-Tech employer and Intel’s largest operation outside the U.S. Before returning
to Israel from the Bay Area, Mr. Garty held multiple positions within Intel since its acquisition of Envara Inc. in 2004. He initially
served as Chief Operating Officer of Intel’s Broadband Wireless Division (WiMAX/4G and WLAN solutions), and from 2011 to 2018 as
the General Manager of the Wireless Connectivity Solutions business unit, a worldwide organization responsible for delivering wireless
connectivity technologies and products. Prior to Intel’s acquisition of Envara, Mr. Garty had multiple engineering, business, and
managerial positions in different companies, including Serconet Networks, Optibase, and Orckit Communications. Prior to this, Mr. Garty
served as a R&D Engineer with the Ministry of Defense of Israel. Mr. Garty additionally serves as the Chairman of the America-Israel
Chamber of Commerce since January 2018, a voluntary organization of more than 230 Israeli and multinational companies. Mr. Garty holds
a B.Sc. in electrical engineering and an MBA, both from Tel Aviv University, Israel.
Mr.
Gabriel Waisman was appointed by our board of directors as the Company’s President & Chief
Executive Officer, effective as of March 31, 2023. Mr. Waisman previously served as the Company’s Chief Business Officer (CBO) since
2016, responsible for customer facing groups, including global sales, marketing, customer support and applications. Mr. Waisman has over
17 years of managerial expertise in a global geographically dispersed environment, and extensive experience pioneering multidisciplinary
technologies, particularly within the Electronics and Telecom sectors. Prior to joining Nova, Mr. Waisman served as President of both
Orbotech Pacific (Orbotech Ltd Hong Kong) and Orbotech West (Orbotech Inc., USA) where he was responsible for Sales & Marketing, Finance
and Operations, and Customer Support. Prior to this, Mr. Waisman served in various managerial positions at Alvarion, starting as Strategic
Marketing Director, EMEA, and moving on to Vice President of Strategic Accounts, General Manager of Western Europe, followed by Managing
Director, Asia-Pacific. Mr. Waisman has also served as EMEA Regional Sales & Marketing Director (Broadband Division) at Comverse.
He holds a B.Sc. in Electronic Engineering from the Technion Institute of Technology in Israel and an MBA in Business Administration from
the Tel-Aviv University, Israel.
Mr.
Dror David has served as the Chief Financial Officer since November 2005. Mr. David joined Nova in
April 1998, as the Company’s Controller, and since then served in various financial and operational positions, including the position
of Vice President of Resources, in which he was responsible for the finance, operations, information systems and human resources functions
of the Company. Mr. David was also a leading member in the Company’s initial public offering on Nasdaq in 2000, the Company’s
private placement in 2007 and the Company's secondary offering in 2010. Prior to joining Nova, Mr. David spent five years in public accounting
with Deloitte Touch in Tel Aviv, specializing in industrial high-tech companies. Mr. David is a Certified Public Accountant in Israel,
holds a B.A. in Accounting and Economics from Bar Ilan University, Israel, and an MBA. from Derby University of Britain.
Dr.
Shay Wolfling joined Nova in 2011, as Chief Technology Officer. Prior to joining Nova, Dr. Wolfling
was an R&D manager at KLA-Tencor-Belgium (formerly ICOS Vision Systems, a public traded company acquired by KLA in 2008), where he
led multidisciplinary metrology & inspection development projects. From 2000 until its technology acquisition by ICOS in 2005, Dr.
Wolfling was a founder and Vice President of Research and Development of Nano-Or-Technologies, a start-up company with a proprietary technology
for 3D optical measurements. Dr. Wolfling helped Nano-Or develop from the idea stage to initial product sales. Prior to founding Nano-Or,
Dr. Wolfling was a project manager in Y-Beam-Technologies, a start-up offering laser-based skin treatments. Dr. Wolfling has several patents
under his name in the field of optical measurements. Dr. Wolfling holds a B.Sc. in physics and mathematics from the Hebrew University
of Jerusalem, Israel, a second degree in physics from Tel-Aviv University, Israel and a Ph.D. in physics from the Hebrew University
of Jerusalem, Israel.
Mr.
Adrian S. Wilson joined Nova in January 2018 as General Manager Material Metrology Division and President
of our U.S. subsidiary, Nova Measuring Instruments, Inc. Mr. Wilson has over 30 years of Semiconductor capital equipment and materials
experience. Mr. Wilson joins us from Nanometrics Inc., where he held the position of Vice President & General Manager of Advanced
Imaging and Analytics Business Unit. Prior to Nanometrics Inc., he held the position of Managing Director of Element Six Technologies
Ltd., the non-abrasive arm of the synthetic diamond group of DeBeers, focused on thermal management and optical components for the semiconductor
industry. Mr. Wilson has experience in leading both start-ups and divisions within large public multi-national companies, including KLA,
FormFactor Inc. and Phoenix X-ray Systems & Services Inc., a capital equipment start-up. Mr. Wilson holds a bachelor’s degree
in Electronics Engineering, post Grad in Marketing Management and an MBA in Technology Management. Mr. Wilson’s accreditations include
Fellow of the Chartered Institute of Marketing (UK) and Fellow of the Institute of Directors (UK).
Mr.
Effi Aboody has served as our Corporate VP and General Manager Dimensional Metrology Division since
September 2019. Mr. Aboody joined Nova in 2016 as Vice President and Head of the Global Applications team. Mr. Aboody started his career
at Intel Corporation Ltd in 1996 as an Integration engineer, working in Portland and California R&D centers, in both logic and
memory devices, followed by several managerial positions including Process Integration , Sort testing manager and Yield manager. In 2008,
Mr. Aboody served as Yield and Integration Departments at Numonyx Ltd focusing on NOR flash memory process and reliability. In 2011, Mr.
Aboody managed the Engineering and Yield Departments at Micron Technology Ltd Fab12. In 2013, Mr. Aboody returned to Intel Corporation
to manage the Fab28 Yield Organization, responsible for CPU and SoC outgoing yield performance, defects and Labs. Mr. Aboody holds an
Executive MBA from Tel-Aviv University, Israel and a B.Sc. in Materials Engineering from Ben-Gurion University of the Negev, Israel.
Voting Agreement
We are not aware of any voting agreement
currently in effect.
6.B
Compensation
The aggregate compensation expensed,
including share-based compensation and other compensation expensed by us, to our board and senior management members listed in item 6.A
in this Annual Report, with respect to the year ended December 31, 2023 (consisting of 12 persons) was approximately $12 million.
This amount includes approximately $0.5 million set aside or accrued to provide pension, severance, retirement, or similar benefits and
amounts expensed by the Company for automobiles made available to its executive officers).
Disclosure regarding the compensation
of our senior executives on an individual basis will be disclosed in our proxy statement in connection with the 2024 annual general meeting
of shareholders in accordance with Israeli regulations.
Terms of employment of Mr. Gabriel
Waisman, who was appointed as our President and Chief Executive Officer effective as of March 31, 2023, as were approved by our shareholders
at the 2023 annual general meeting of shareholders, are as follows:
General
(i) a monthly base salary of NIS 110,000
(approximately, $31,000), effective as of April 1, 2023; (ii) an annual bonus of up to twelve (12) monthly base salaries for 100% achievement
(with additional payment of up to twelve (12) monthly salaries in the case of overachievement), subject to objectives which are annually
predetermined by our board of directors and the compensation committee, in accordance with our compensation policy; (iii) in the event
of termination of employment (other than for cause), Mr. Waisman will be entitled to a six months advance notice, during which he will
be entitled to all of his compensation components, including the continued vesting of his equity awards. In the event of termination of
employment not for cause, the annual bonus will be prorated (subject to certain adjustments); (iv)customary social benefits such as pension
fund or management insurance, education fund, vacation pay, sick leave and convalescence pay; (v) subject to required approvals under
applicable law, a directors and officers' insurance, including a “run-off” insurance policy; and (vi) monthly travel expenses
or a Company car (deducted out of the gross salary), cellular phone, a land line phone, toll road expenses, a laptop computer, annual
medical check-up and other expense reimbursements pursuant to the Company general policies as applicable from time to time.
Equity-Based Compensation
On June 1, 2023, per the approval
at the annual general meeting of shareholders, Mr. Waisman was granted a total of 12,000 restricted share units that vest over a period
of four (4) years, in equal annual installments, unless such restricted share units have been cancelled in accordance with the terms and
conditions of the share incentive plan of the Company or the employment terms of Mr. Waisman. In addition, Mr. Waisman was granted with
12,000 performance-based restricted units that vest over a period of four (4) years, in four equal annual installments, provided that
the Company meets or exceeds the non-GAAP operating profit as set forth in the Company's budget as approved by the board of directors
for the fiscal year preceding the date of vesting, unless such performance share units have been cancelled in accordance with the terms
and conditions of the share incentive plan of the Company or the employment terms of Mr. Waisman. In the event a portion of the performance
share units fails to vest, such portion will be carried forward to the fourth vesting date and will vest if the Company’s average
annual return on equity based on net income during the previous four (4) years will be no less than ten percent (10%).
Compensation
upon Significant Event
In the event that prior to the completion
of the vesting of equity awards granted to Mr. Waisman an acquisition of the Company or asset transfer of all or substantially all the
assets of the Company(collectively, “"M&A Event”) will occur while Mr. Waisman is employed by the Company and holds the
position of the Company’s Chief Executive Officer & President, then immediately prior to, and contingent upon, the closing of
such M&A Event, all of Mr. Waisman unvested equity awards will become fully vested and exercisable, or substituted for equity awards
in a successor company.
In the event an M&A Event will occur
while Mr. Waisman is employed by the Company and holds the position of the Company’s Chief Executive Officer & President, the
compensation committee and the Board may grant to Mr. Waisman a special bonus of up to 12 monthly salaries.
Compensation
upon Acquisition
In the event the Company acquires
another business (whether by merger, share or asset purchase) while Mr. Waisman is employed by the Company and holds the position of the
Company’s Chief Executive Officer & President, Mr. Waisman may be granted a special bonus of up to 12 monthly salaries, subject
to the compensation committee and board of director's discretion.
Directors and Officers Equity Based Compensation
As of
February 9, 2024, a total of 40,647 options to purchase our ordinary shares and 151,006 RSU’s were outstanding and held by certain
directors and senior management members listed in item 6.A in this Annual Report (consisting of 11 persons), of which 37,641 options are
currently exercisable or exercisable within 60 days of February 9, 2024. 70,452 shares are held by trustee due to vested RSUs and 2,149
RSU’s will vest within 60 days of February 9, 2024. See “Item 6E. Share Ownership” in this Annual Report.
In accordance
with our current equity-based compensation policy, the exercise price of granted options is equal to the closing sale price of the Company's
ordinary shares on Nasdaq on the day of grant.
Compensation of Directors
The compensation scheme for our non-executive
directors (other than the chairperson of the board of directors), which does not include any pay per meeting, as approved by our shareholders
in June 2022, is as follows:
(i) an annual payment of NIS 210,000
(approximately US$57,000) with additional annual payment for service on board committees as follows: NIS 42,000 (approximately $11,400)
(or NIS 63,000 (approximately $17,000) for the chairperson) for each member of the audit or compensation committee; and NIS 30,000 (approximately
$8,100) (or NIS 44,000 (approximately $12,000) for the chairperson) for each member of the nominating committee or any other Board Committee;
(ii) in the event of a director appointed
by our board of directors, a one-time equity award of restricted share units of up to $170,000 prorated based on the number of days between
the date of appointment to our board of directors and the date of the first annual general meeting of our shareholders following such
appointment, which will vest over a period of four (4) years; and
(iii) an equity award of restricted
share units, on an annual basis on the date of our annual general meeting of the Company’s shareholders, under our incentive plan
(provided the director is still on the Board) at a value of $170,000, which will vest over a period of four (4) years, subject to such
director’s continued service through such date.
Our shareholders further approved
that the chairperson of the board of directors will be entitled to an annual compensation of NIS 360,000 (approximately US$98,000) and
an annual equity grant of restricted share units at the value of $600,000.
On May 18, 2023, our shareholders
approved the following additional termination terms to Mr. Eitan Oppenhaim, in his position as our former President and Chief Executive
Officer: an adjustment period of six (6) months, in addition to the three (3) months advance notice as set in Mr. Oppenhaim’s employment
agreement, during which Mr. Oppenhaim will be entitled to all compensation components, including bonuses.
On May 18, 2023, our shareholders
further approved the following additional compensation scheme for non-executive directors and chairperson of the board of directors: a
director whose service as a director ends (other than in the case the director is removed by our shareholders or disqualified under the
Companies Law) following at least eight (8) years of directorship will be entitled to the acceleration of vesting of any equity awards,
including options and restricted share units, subject to vesting within three (3) months of his or her last date of service, so such equity
awards will be fully vested as of such date.
On June 23, 2022, our shareholders
approved our current compensation policy.
The full text of our current compensation
policy was filed as exhibit 4.7 to the 2022 Annual Report and is incorporated by reference. Furthermore, following the SEC approval of
Nasdaq’s proposed clawback listing standards, under Rule 10D-1 (the “Clawback Listing Rules”),
which directed companies to adopt and comply with a written clawback policy, to disclose and file the policy as an exhibit to its annual
report, we have adopted as of October 2, 2023, 2023, a clawback policy as contemplated pursuant to the Clawback Listing Rules, as filed
as an exhibit to this Annual Report as Exhibit 97.
6.C
Board Practices
Our Amended and Restated Articles
of Association, as adopted by the Company’s shareholders on June 24, 2021, or the Articles, provide that we may have between five
and nine directors. Our board of directors currently consists of six directors, two of which are female directors.
Under the Companies Law, companies incorporated
under the laws of the State of Israel that are “public companies,” including companies with shares listed on the Nasdaq Global
Select Market, are required to appoint at least two external directors.
Pursuant to regulations promulgated under
the Companies Law, companies with shares traded on a U.S. stock exchange, including the Nasdaq Global Select Market, may, subject to certain
conditions, “opt out” from the Companies Law requirements to appoint external directors and related Companies Law rules concerning
the composition of the audit committee and compensation committee of the board of directors. In accordance with these regulations, in
May 2018, we elected to “opt out” from the Companies Law requirements to appoint external directors and related Companies
Law rules concerning the composition of the audit committee and compensation committee of the board of directors.
Under these regulations, the exemptions
from such Companies Law requirements will continue to be available to us so long as: (i) we do not have a “controlling shareholder”
(as such term is defined under the Companies Law), (ii) our shares are traded on a U.S. stock exchange, including the Nasdaq Global
Select Market, and (iii) we comply with the director independence requirements, the audit committee and the compensation committee
composition requirements, under U.S. laws (including applicable Nasdaq Rules) applicable to U.S. domestic issuers.
Our board of directors has determined
that all of our directors, except for Mr. Oppenhaim, qualify as ‘‘independent directors’’ as defined by the Nasdaq
Stock Market Rules.
Our Articles provide that directors
may be elected at our annual general meeting of shareholders by a vote of the holders of more than 50% of the total number of votes represented
at such meeting, not taking into consideration abstention votes. In addition, our board of directors is authorized to appoint directors,
at its discretion, provided that the total number of directors does not exceed the maximum number of directors permitted by the Articles.
Our directors serve as such until the next annual general meeting of our shareholders.
According to the Companies Law, the board
of directors of a public company must establish the minimum number of board members that are to have accounting and financial expertise
while considering, inter alia, the nature of the company, its size, the scope and complexity of
its operations and the number of directors stated in the Articles.
Our board of directors resolved that
the minimum number of board members that need to have accounting and financial expertise is one (1).
Our board of directors determined that
Ms. Sarit Sagiv has accounting and financial expertise as described in the regulations promulgated pursuant to the Companies Law, and
that, therefore, the requirements of the minimum number of board members that need to have accounting and financial expertise, as set
by the board of directors, has been met.
Our board of directors has adopted a
training program for newly appointed directors. Once appointed and following the completion of their onboard training, our directors continue
to receive ongoing training as part of our directors training and development efforts.
Family Relationships
There are no family relationships
between any members of our executive management and our directors.
Board of Directors’ Committees
The Company’s board of directors
has appointed the following committees:
Audit Committee
Our Audit Committee is comprised of
Sarit Sagiv (Chairperson), Zehava Simon and Avi Cohen. The audit committee is responsible to provide oversight of the accounting and financial
reporting process of the Company and the audits of the financial statements of the Company, and assist the Board in its oversight of (i)
the integrity of the Company's financial statements and other published financial information, (ii) the Company's compliance with applicable
financial and accounting related standards, rules and regulations, (iii) the selection, engagement and termination, subject to shareholder
approval, of the Company's independent auditor, (iv) the pre-approval of all audit, audit-related and all permitted non-audit services,
if any, by the Company's independent auditor, and the compensation therefor, (v) the Company's internal controls over financial reporting
and (vi) risk assessment and risk management, including cyber risks.
Under the Companies Law, the audit
committee is responsible, among others, for (i) identifying deficiencies in the business management practices of the Company, including
by consulting with the internal auditor, and recommending remedial actions with respect to such deficiencies; (ii) reviewing and approving
related party transactions, including, among others, determining whether or not such transactions are deemed material actions or extraordinary
transactions; (iii) ensuring that a competitive process is conducted for related party transactions with a controlling shareholder (regardless
of whether or not such transactions are deemed extraordinary transactions), optionally based on criteria which may be determined by the
audit committee annually in advance; (iv) setting forth the approval process for transactions that are 'non-negligible' (i.e., transactions
with a controlling shareholder that are classified by the audit committee as non-negligible, even though they are not deemed extraordinary
transactions), as well as determining which types of transactions would require the approval of the audit committee, optionally based
on criteria which may be determined annually in advance by the audit committee; (v) evaluating the Company’s internal audit program
and the performance of the Company’s internal auditor and the resources at his/her disposal; (vi) reviewing the scope of work of
the Company’s external auditor and making recommendations regarding his/her salary; and (vii) creating procedures relating to the
employees’ complaints regarding deficiencies in the administration of the Company as well as adopting against retaliation. The audit
committee is also responsible for reviewing and approving any material change or waiver in the Company's Corporate Code of Conduct regarding
directors or executive officers, and disclosures made in the Company's annual report in such regard. The audit committee operates under
a charter dully adopted by the board of directors.
Our board of directors has determined
that each member of our audit committee is independent as such term is defined in Rule 10A‑3 under the Exchange Act, and that
each member of our audit committee satisfies the additional requirements applicable under the Nasdaq rules to members of an audit
committee.
Our audit committee also acts as our
investment committee, monitoring our cash reserves investment policy.
Compensation Committee
Our Compensation
Committee is comprised of Zehava Simon (Chairperson), Avi Cohen, Raanan Cohen and Sarit Sagiv. The function of the compensation committee
is described in the approved charter of the committee, and includes assisting the board of directors in discharging its responsibilities
relating to compensation of the Company’s officers, directors and executives and the overall compensation programs and reviewing
and approving, or if required by law, approving and recommending for approval by the board of directors, grants and awards under the Company’s
equity incentive plans. The primary objective of the committee is to oversee the development and implementation of the compensation policies
and plans that are appropriate for the Company in light of all relevant circumstances, and which provide incentives that fit the Company’s
long-term strategic plans and are consistent with the culture of the Company and the overall goal of enhancing shareholder’s value.
Our board of directors has determined
that each member of our compensation committee is independent under the Nasdaq rules, including the additional independence requirements
applicable to the members of a compensation committee.
Under the Companies Law and our compensation
committee charter, our compensation committee is responsible, among others, for (i) recommending to the board of directors regarding its
approval of a compensation policy in accordance with the requirements of the Companies Law, and any other compensation policies, incentive-based
compensation plans and equity-based plans; (ii) overseeing the development and implementation of such compensation plans and policies
that are appropriate in light of all relevant circumstances and recommending to the board of directors regarding any amendments or modifications
that the compensation committee deems appropriate; (iii) determining whether to approve transactions concerning the terms of engagement
and employment of our officers and directors that require compensation committee approval under the Companies Law or our compensation
plans and policies; (iv) oversees the administration of our clawback policies with respect to executive compensation, in line with our
charter, including as required pursuant to SEC and Nasdaq rules; and (v) taking any further actions as the compensation committee is required
or allowed to under the Companies Law or the compensation plans and policies.
Nominating Governance and Sustainability Committee
Our
Nominating Governance and Sustainability Committee
is comprised of Raanan Cohen (Chairperson), Zehava Simon and Yaniv Garty. The function of the nominating committee is described
in the approved charter of the committee, and includes responsibility for identifying individuals qualified to become board members and
recommending that the board of directors consider the director nominees for election at the general meeting of shareholders. In June 2022,
our board of directors expanded the committee’s responsibilities to also include recommending to the board of directors on
governance matters and for developing and recommending to our board of directors business conduct and ethics guidelines, applicable to
the Company, including overseeing the Company’s policies, programs and strategies related to environmental, social and governance
(“ESG”) matters, periodically reviewing such guidelines and recommending any changes thereto, and overseeing the evaluation
of our board of directors and management.
Strategy and M&A Committee
In August 2023, our board of directors
established our Strategy and M&A Committee, which is comprised of Yaniv Garty (Chairperson),
Eitan Oppenhaim, Avi Cohen and Zehava Simon. The function of the strategy and M&A committee is described in the approved charter of
the committee, and includes responsibility for providing the board of directors with recommendations, in relation to: (i) the development
and execution of the Company’s strategy, including its strategic plans and initiatives; and (ii) the identification and analysis
of acquisition, merger, joint venture, and investment opportunities. The committee shall also maintain a cooperative, interactive planning
process with management, including but not limited to, identifying and prioritizing strategic goals.
All committees are acting according
to written charters that were approved by our board of directors. Additionally, we adopted an internal enforcement plan which was approved
by our board of directors. The internal enforcement plan, as part of which we adopted and implementing procedures and policies in order
to comply with the provisions of the Israeli Securities Law, 5728-1968 (the “Israeli Securities Law”), the Companies Law.
The internal enforcement plan includes, among others, the board committees’ charters and the internal auditor charter, procedures
with respect to related party transactions, insider trading, which prohibits hedging activities, equity-based compensation policy, reporting
and complaints, anti-bribery and anti-fraud policies and a code of conduct. Each of our committees have the power to retain, terminate
and approve the related fees and other retention terms, as it deems appropriate, outside counsel and other experts and consultants to
assist the committee in connection with its responsibilities without our board of directors’ approval and at the Company's expense.
Approval of Related Party Transaction
The Companies Law requires that office
holders of a company, including directors and executive officers, promptly disclose to the board of directors any personal interest they
may have and all related material information known to them about any existing or proposed transaction with such company. The approval
of the board of directors is required for 'non-extraordinary' transactions between a company and its office holders, or between a company
and other persons in which an office holder has a personal interest, unless such company's articles of association provide otherwise.
Under the Companies Law, a 'non-extraordinary' transaction between a company or between the company and a third party in which an office
holder of a company has a personal interest, will require the approval of the board of directors or a committee authorized by the board
of directors, unless such company's articles of association provide otherwise. Our Articles do not provide otherwise, and therefore such
transaction requires the approval of our board of directors. If a transaction is an “extraordinary transaction”, it is subject
to the approval of the audit committee prior to its approval by the board of directors. For information regarding the necessary approvals
under the Companies Law for transactions with office holders and directors regarding their terms of engagement with the company, see “—
Compensation of Officers and Directors” in this Item below.
In addition, an extraordinary transaction
between a public company and a controlling shareholder (i.e. a shareholder who has the ability to direct the activities of a company,
including a shareholder that owns 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights, but
excluding a shareholder whose power derives solely from its position on the board of directors or any other position with the company),
or in which a controlling shareholder has a personal interest, including a private placement in which the controlling shareholder has
a personal interest, a transaction between a public company and a controlling shareholder, the controlling shareholders' relative, or
entities under its control, directly or indirectly, with respect to services to be provided to the public company, and a transaction concerning
the terms of compensation of the controlling shareholder or the controlling shareholder’s relative, who is an office holder or an
employee, requires the approval of the audit committee or, in some cases, the compensation committee (see "— Compensation of Officers
and Directors" in this Item below), the board of directors and a majority of the shares voted by the shareholders of the company participating
and voting on the matter in a shareholders’ meeting. In addition, the shareholder approval must fulfill one of the following requirements:
(i) the majority must include at least a majority of the shares of the voting shareholders who have no personal interest in the transaction
(in counting the total votes of such shareholders, abstentions are not taken into account); or (ii) the total of opposition votes among
the shareholders who have no personal interest in the transaction may not exceed 2% of the aggregate voting rights in the company. Any
such transaction the term of which is more than three years, must be approved in the same manner every three years, unless with respect
to certain transactions as permitted by the Companies Law, the audit committee has determined that longer term is reasonable under the
circumstances.
According to the Companies Law, if an
extraordinary transaction is discussed by the board of directors or the audit committee, directors and office holders that have personal
interest in the proposed transaction, may not participate in the discussion or vote. However, if the majority of the members of the audit
committee or the board of directors (as applicable) have personal interest in the proposed transaction, then all directors (including
those with personal interest) may participate in the discussion and vote, provided that in the event the majority of the members of the
board of directors have personal interest in the transaction, said transaction will also be subject to the approval of the Company's shareholders.
Compensation of Officers and Directors
Under the Companies Law, Israeli public
companies are required to establish a compensation committee and adopt a policy regarding the compensation and terms of employment of
their directors and officers. For information on the composition, roles and objectives of the compensation committee pursuant to the Companies
Law and our compensation committee charter, see above “—Board of Directors’ Committees — Compensation Committee"
in this Annual Report.
Pursuant to the Companies Law, the compensation
policy must be approved by the company's board of directors after reviewing the recommendations of the compensation committee. The compensation
policy also requires the approval of the general meeting of the shareholders, which approval must satisfy one of the following (the "Majority
Requirement"): (i) the majority should include at least a majority of the shares of the voting shareholders who are non-controlling shareholders
or do not have a personal interest in the approval of the compensation policy (in counting the total votes of such shareholders, abstentions
are not be taken into account) or (ii) the total number of votes against the proposal among the shareholders mentioned in paragraph (i)
does not exceed two percent of the aggregate voting power in the company. Under certain circumstances and subject to certain exceptions,
the board of directors may approve the compensation policy despite the objection of the shareholders, provided that the compensation committee
and the board of directors determines that it is for the benefit of the company, following an additional discussion and based on detailed
arguments.
The Companies Law provides that the compensation
policy must be re-approved (and re-considered) every three years, in the manner described above. Moreover, the board of directors is responsible
for reviewing from time to time the compensation policy and deciding whether or not there are any circumstances that require an adjustment
to the company's compensation policy. When approving the compensation policy, the relevant organs must take into consideration the goals
and objectives listed in the Companies Law, and include reference to specific issues listed in the Companies Law. Such issues include,
among others (the “Compensation Policy Mandatory Criteria”): (i) the relevant person’s education, qualifications, professional
experience and achievements; (ii) such person's position within the company, the scope of his responsibilities and previous compensation
arrangements with the company; (iii) the proportionality of the employer cost of such person in relation to the employer cost of other
employees of the company, and in particular, the average and median pay of other employees in the company, including contract workers,
and the impact of the differences between such person's compensation and the other employees' compensation on the labor relations in the
company; (iv) the authority, at the board of director's sole discretion, to lower any variable compensation components or set a maximum
limit (cap) on the actual value of the non-cash variable components, when paid; and (v) in the event that the terms of engagement include
any termination payments - the term of employment of the departing person, the company’s performance during that term, and the departing
person’s contribution to the performance of the company.
In addition, the Companies Law provides
that the following matters must be included in the compensation policy (the "Compensation Policy Mandatory Provisions"): (i) the award
of variable components must be based on long term and measurable performance criteria (other than non-material variable components, which
may be based on non-measurable criteria taking into account the relevant person's contribution to the performance of the company); (ii)
the company must set a ratio between fixed and variable pay, set a cap on the payment of any cash variable compensation components as
of the payment of such components, and set a cap on the maximum cash value all non-cash variable components as of their grant date; (iii)
the compensation policy must include a provision requiring the relevant person to return to the company any compensation that was awarded
on the basis of financial figures that were subsequently restated; (iv) equity based variable compensation components should have an appropriate
minimum vesting periods, which should be linked to long term performance objectives; and (v) the company must set a clear limit on termination
payments.
Furthermore, our Compensation Policy
contains a compensation recovery provision which enables us under certain circumstances to recover bonuses paid in excess due to an accounting
restatement, allows our chief executive officer to approve immaterial changes in the terms of employment of executive officers, provided
such changes are in accordance with our Compensation Policy, and enables us to exculpate, indemnify and insure our directors and executive
officers subject to certain limitations as set forth therein.
Pursuant to the Companies Law, any transaction
with an office holder (except directors and the chief executive officer of the company) with respect to such office holder's compensation
arrangements and terms of engagement, requires the approval of the compensation committee and the board of directors. Such transaction
must be consistent with the provisions of the company's compensation policy, provided that the compensation committee and the board of
directors may, under special circumstances, approve such transaction that is not in accordance with the company's compensation policy,
if both of the following conditions are met: (i) the compensation committee and the board of directors discussed the transaction in light
of the roles and objectives of the compensation committee (also see above "—Board of Directors' Committees — Compensation
Committee" in this Annual Report) and after taking into consideration the Compensation Policy Mandatory Criteria and including in such
transaction the Compensation Policy Mandatory Provisions; and (ii) the company's shareholders approved the transaction, provided that
in public companies the approval must satisfy the Majority Requirement. Notwithstanding the above, the compensation committee and the
board of directors may, under special circumstances, approve such transaction even if the shareholders' meeting objected to its approval,
provided that (i) both the compensation committee and the board of directors re-discussed the transactions and decided to approve it despite
the shareholder's objection, based on detailed arguments, and (ii) the company is not a 'Public Pyramid Held Company'. For the purpose
hereof, a "Public Pyramid Held Company" is a public company that is controlled by another public company (including companies that issued
only debentures to the public), which is also controlled by another public company (including companies that issued only debentures to
the public) that has a controlling shareholder.
Transactions between public companies
(including companies that have issued only debentures to the public) and their chief executive officer, with respect to his or her compensation
arrangement and terms of engagement, require the approval of the compensation committee, the board of directors and the shareholder's
meeting, provided that the approval of the shareholders' meeting must satisfy the Majority Requirement. Notwithstanding the above, the
compensation committee and the board of directors may, under special circumstances, approve such transaction with the chief executive
officer even if the shareholders' meeting objected to its approval, provided that (i) both the compensation committee and the board of
directors re-discussed the transactions and decided to approve it despite the shareholder's objection, based on detailed arguments, and
(ii) the company is not a Public Pyramid Held Company. Such transaction with the chief executive officer must be consistent with the provisions
of the company's compensation policy, provided that the compensation committee and the board of directors may, under special circumstances,
approve such transaction that is not in accordance with the company's compensation policy, if both of the following conditions are met:
(i) the compensation committee and the board of directors discussed the transaction in light of the roles and objectives of the compensation
committee (see above —“Board of Directors' Committees – Compensation Committee" in this Annual Report) and after taking
into consideration the Compensation Policy Mandatory Criteria and including in such transaction the Compensation Policy Mandatory Provisions;
and (ii) the company's shareholders approved the transaction, provided that in public companies the approval must satisfy the Majority
Requirement. In addition, the compensation committee may determine that such transaction with the chief executive officer of the company
does not have to be approved by the shareholders of the company, provided that: (i) the chief executive officer is independent based on
criteria set forth in the Companies Law; (ii) the compensation committee determined, based on detailed arguments, that bringing the transaction
to the approval of the shareholders may compromise the chances of entering into the transaction; and (iii) the terms of the transaction
are consistent with the provisions of the company's compensation policy. Under the Companies Law, non-material amendments of transactions
relating to the compensation arrangement or terms of engagement of office holders (including the chief executive officer), require only
the approval of the compensation committee.
With respect to transactions relating
to the compensation arrangement and terms of engagements of directors in public companies (including companies that have issued only debentures
to the public), the Companies Law provides that such transaction is subject to the approval of the compensation committee, the board of
directors and the shareholders' meeting. Such transaction must be consistent with the provisions of the company's compensation policy,
provided that the compensation committee and the board of directors may, under special circumstances, approve such transaction that is
not in accordance with the company's compensation policy, if both of the following conditions are met: (i) the compensation committee
and the board of directors discussed the transaction in light of the roles and objectives of the compensation committee (see above "—Board
Practices –Board of Directors' Committees – Compensation Committee" in this Annual Report) and after taking into consideration
the Compensation Policy Mandatory Criteria and including in such transaction the Compensation Policy Mandatory Provisions; and (ii) the
company's shareholders approved the transaction, provided that in public companies the approval must satisfy the Majority Requirement.
Pursuant to the Companies Law, a compensation
policy must be re-approved (and re-considered) at least once in every three years. The current compensation policy was approved by our
shareholders on June 23, 2022.
Internal Auditor
Under the Companies Law, the board
of directors must also appoint an internal auditor nominated by the audit committee. Our internal auditor is Ms. Dana Gottesman-Erlich,
CPA (Isr.) of BDO Ziv Haft, an independent registered accounting firm which is a part of the BDO international accounting firm. The role
of the internal auditor is to examine whether a company’s actions comply with the law and proper business procedure. The internal
auditor may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member
of the company’s independent accounting firm or its representative. The Companies Law defines an interested party as a holder of
5% or more of the shares or voting rights of a company, any person or entity that has the right to nominate or appoint at least one director
or the general manager of the company or any person who serves as a director or as the general manager of a company. Our internal auditor
is working based on a risk survey and audit plan, which is determined by our audit committee and approved by our board of directors.
6.D
Employees
Set forth below is a chart showing the
number of people we employed at the times indicated:
|
As of December 31, |
|
2021 |
|
|
2022 |
|
|
2023 |
|
|
Total Personnel |
|
|
819 |
|
|
|
1,177 |
|
|
|
1,202 |
|
|
Located in Israel |
|
|
428 |
|
|
|
505 |
|
|
|
516 |
|
|
Located abroad |
|
|
391 |
|
|
|
672 |
|
|
|
686 |
|
|
In operations |
|
|
176 |
|
|
|
280 |
|
|
|
287 |
|
|
In research and development |
|
|
328 |
|
|
|
462 |
|
|
|
477 |
|
|
In global business |
|
|
240 |
|
|
|
311 |
|
|
|
318 |
|
|
In general and administration |
|
|
75 |
|
|
|
124 |
|
|
|
120 |
|
The numbers of employees set forth in this table do not
include contractors and an insignificant number of temporary employees retained by the Company from time to time.
In the high-tech industry in general
and specifically in the semiconductors industry, there is intense competition for high-skilled employees. Nova believes that the company’s
future success will depend, by a large part, on our continued ability to attract, hire and retain qualified and highly motivated employees
in every role and seniority level.
Under
applicable Israeli law, we and our employees are subject to protective labor provisions such as restrictions
on working hours, minimum wages, paid vacation, sick pay, severance pay and advance notice of termination of employment as well as equal
opportunity and anti-discrimination laws. Orders issued by the Israeli Ministry of Economy and Industry make certain industry-wide collective
bargaining agreements applicable to us. These agreements affect matters such as cost of living adjustments to salaries, length of working
hours and week, recuperation and travel expenses. In Israel, we are subject to the instructions of the Extension Order in the Industrial
Field for Extensive Pension Insurance 2006 according to the Israeli Collective Bargaining Agreements Law, 1957 (the “Extension Order”).
The Extension Order determines the pension terms of the employees which fall under its criteria.
6.E
Share Ownership
Based on information provided to us,
our 11 directors and senior management members listed in Item 6.A in this Annual Report, have had, as a group, sole voting and investment
power for 108,093 shares beneficially owned by them as of February 9, 2024 (representing approximately 0.4% of the 29,019,663 issued and
outstanding ordinary shares of our company as of such date). Such number includes 37,641 shares subject to options that are immediately
exercisable or exercisable within 60 days of February 9, 2024 (with expiration dates ranging between 2024 and 2027; exercise prices ($/share)
ranging between $23.36 and $102.35), 70,452 shares held by the trustee due to vested RSUs, and 2,149 RSUs to be vested within 60 days
as of February 9, 2024. Each of such directors and senior management members beneficially owned less than 0.4% of our company’s
shares as of such date.
Beneficial ownership of shares is determined
in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment
power. Ordinary shares that are subject to warrants or options that are presently exercisable or exercisable within 60 days of the date
of February 9, 2024 are deemed to be outstanding and beneficially owned by the person holding the options for the purpose of computing
the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage of any other person.
Employee Benefit Plans
The share option
plans under which we have outstanding equity grants, are described below:
2007 Incentive
Plan (which was active until October 2017) - As of December 31, 2023, options to purchase 4,304,112 ordinary shares at an exercise prices
which range from $0.43 to $9.58, the fair market value of our shares on the dates of grant, were granted under this plan of which, as
of December 31, 2023, 3,070,179 options were exercised, 12,595 options were outstanding and exercisable, 1,221,338 options had been cancelled
and no options were outstanding and unvested. As of December 31, 2023, a total of 834,142 RSU’s had been granted, of which 728,223
had vested, 105,919 had been cancelled and no RSU's were outstanding. Following adoption of 2017 share incentive plan, as detailed herein,
we have ceased granting equity under the 2007 incentive plan.
2017 Share Incentive
Plan - The maximum number of ordinary shares to be issued under the plan, which was adopted by our board of directors on August 1, 2017,
is 2,500,000, subject to future increases or decreases by the Company. As of December 31, 2023, options to purchase 635,877 ordinary
shares at an exercise prices which range from $ 22.56 to $ 102.35, the closing price of the Company's ordinary shares on Nasdaq on the
day of grant, were granted under this plan of which, as of December 31, 2023, 299,835 options were exercised, 93,864 options were outstanding
and exercisable, 242,358 options had been cancelled and 5,739 were outstanding and unvested. As of December 31, 2023, 1,412,773 RSU’s
had been granted, of which 705,139 RSU’s had vested, 119,965 had been cancelled and 587,669 RSU's were outstanding.
On June 23, 2022,
our shareholders (following an approval by our compensation committee and board of directors), approved the Company's compensation policy,
which includes, among others, provisions relating to equity-based compensation for Nova's executive officers.
The compensation
policy provides, among others, that: (i) such equity based compensation is intended to be in a form of share options and/or other equity
based awards, such as RSUs, in accordance with the Company's equity incentive plan in place as may be updated from time to time; (ii)
all equity-based incentives granted to executive officers will be subject to vesting periods in order to promote long-term retention of
the awarded executive officers. Unless determined otherwise in a specific award agreement approved by the compensation committee and the
board of directors, grants to executive officers (other than directors) will vest gradually over a period of between three to five years;
and (iii) all other terms of the equity awards will be in accordance with Nova's incentive plans and other related practices and policies.
The board of directors may, following approval by the compensation committee, extend the period of time for which an award is to remain
exercisable and make provisions with respect to the acceleration of the vesting period of any executive officer's awards, including, without
limitation, in connection with a corporate transaction involving a change of control, subject to any additional approval as may be required
by the Companies Law. The compensation policy also provides that the equity-based compensation will be granted from time to time and be
individually determined and awarded according to the performance, educational background, prior business experience, qualifications, role
and the personal responsibilities of the executive officer. The fair market value of the equity-based compensation for the executive officers
will be determined according to acceptable valuation practices at the time of grant. Our compensation policy provides that equity-based
compensation awarded to employees, executive officers or directors shall not be, in the aggregate, in excess of 10% of our share capital
on a fully diluted basis at the date of the grant.
Our equity-based compensation policy, provides, among others,
that the exercise price for each option will be equal to the closing sale price of the Company's ordinary shares on Nasdaq on the day
of grant.
For additional information regarding our employees’ incentive
plans, see Note 9 of our consolidated financial statements, contained elsewhere in this Annual Report.
6.F
Disclosure of Registrant’s Action to Recover Erroneously
Awarded Compensation.
Not applicable.
Item 7. Major
Shareholder and Related Party Transactions
7.A
Major Shareholders
The following table sets forth certain
information regarding the beneficial ownership of our outstanding ordinary shares as of the dates indicated below for each shareholder
who we know beneficially owns five percent or more of the outstanding ordinary shares.
Beneficial
ownership of shares is determined under rules of the SEC and generally includes any shares over which a person exercises sole or shared
voting or investment power. Applicable
percentages are based on 29,019,663 ordinary shares outstanding as of February 9, 2024.
|
Name |
|
Number of Ordinary
Shares Beneficially
Owned |
|
|
Percentage of Ordinary
Shares
Beneficially Owned |
|
|
Wasatch Advisors Inc.
(1) |
|
|
3,123,837 |
|
|
|
10.77 |
% |
|
FMR LLC (2)
|
|
|
2,416,804 |
|
|
|
8.33 |
% |
|
Menora
Mivtachim Holdings Ltd.
(3) |
|
|
2,083,389 |
|
|
|
7.18 |
% |
|
Migdal Insurance & Financial Holdings Ltd.
(4) |
|
|
1,909,027 |
|
|
|
6.58 |
% |
|
Harel Insurance Investments & Financial Services Ltd.
(5) |
|
|
1,849,259 |
|
|
|
6.37 |
% |
|
(1) |
The information is based upon Amendment
no. 4 Schedule 13G/A filed with the SEC by Wasatch Advisors Inc. on February 9, 2024 regarding holdings as of December 31, 2023.
|
|
(2) |
The information is based upon Amendment no. 2 to Schedule
13G/A filed with the SEC by FMR LLC, its subsidiaries and Abigail P. Johnson on February 9, 2024 regarding
holdings as of December 31, 2023. |
|
(3) |
The information is based upon Amendment no. 6 to Schedule 13G/A filed with the SEC by Menora Mivtachim
Holdings Ltd., Menora Mivtachim Pensions and Gemel Ltd., Menora Mivtahim Insurance Ltd., Menora Mivtachim Vehistadrut Hamehandesim Nihul
Kupot Gemel Ltd. and Shomera Insurance Company Ltd. on February 14, 2024 regarding holdings as of December 31, 2023. |
|
(4) |
The information is based upon Schedule 13G filed with the
SEC by Migdal Insurance & Financial Holdings Ltd. on January 31, 2024 regarding
holdings as of December 31, 2023. |
|
(5) |
The information is based upon Amendment no. 10 to Schedule
13G/A filed with the SEC by Harel Insurance
Investments & Financial Services Ltd. on January 30, 2024 regarding
holdings as of December 31, 2023. |
All the shareholders of the Company have the same voting
rights.
To our knowledge, the
significant changes in the percentage of ownership held by our major shareholders during the past three years have been: (i) the
decrease in the percentage of ownership by Adage Capital Partners LP, Adage Capital Partners GP, L.L.C and Adage Capital Advisors L.L.C
below 5% in 2021; (ii) the increase in the percentage of ownership by Wasatch Advisors Inc. above 10% in 2022; and (iii) the increase
in the percentage of ownership by FMR LLC above 5% in 2021.
As of February 9, 2024, our ordinary
shares were held by 10 registered holders (not including CEDE & Co.). Based on the information provided to us by our transfer agent,
as of February 9, 2024, 9 registered holders were U.S. domicile holders and held approximately 0.02% of our outstanding ordinary shares.
Control of Registrant
To the Company’s knowledge, it
is not owned or controlled by a foreign government. Except for the shareholders identified above owning more than five percent of the
Company’s ordinary shares, the Company has no knowledge of any corporation or other natural or legal person owning a controlling
interest in the Company.
7.B
Related Party Transactions
In June 2023, we obtained directors’
and officers’ liability insurance for our officers and directors with coverage in an aggregate amount of $50 million (including
$10 million Side A DIC). This directors’ and officers’ liability insurance was presented and approved by our compensation
committee in accordance with the framework under our compensation policy.
Our compensation policy authorizes the
Company, as long as the compensation policy is in effect, to extend and/or renew the directors’ and officers’ liability insurance
or enter into a new insurance policy, provided however, that the insurance transaction complies with the following conditions: (i) the
limit of liability of the insurer will not exceed the greater of $50 million or 30% of our shareholders equity based on our most recent
financial statements at the time of approval by the compensation committee; and (ii) the insurance policy, as well as the limit of liability
and the premium for each extension or renewal will be approved by the compensation committee (and, if required by law, by the board of
directors) which will determine that the sums are reasonable considering our exposures, the scope of coverage and the market conditions
and that the insurance policy reflects the current market conditions, and it will not materially affect our profitability, assets or liabilities.
Further, upon circumstances to be approved
by the compensation committee (and, if required by law, by the board of directors), we will be entitled to enter into a "run off" insurance
policy of up to seven years, with the same insurer or any other insurance, as follows: (i) the limit of liability of the insurer will
not exceed the greater of $50 million or 30% of our shareholders equity based on our most recent financial statements at the time of approval
by the compensation committee; and (ii) the insurance policy, as well as the limit of liability and the premium for each extension or
renewal will be approved by the compensation committee (and, if required by law, by the board of directors) which shall determine that
the sums are reasonable considering our exposures covered under such policy, the scope of cover and the market conditions, and that the
insurance policy reflects the current market conditions and that it will not materially affect our profitability, assets or liabilities.
We may also extend the insurance policy
in place to include cover for liability pursuant to a future public offering of securities. The insurance policy as well as the additional
premium should be approved by the compensation committee (and if required by law, by the board of directors) which will determine that
the sums are reasonable considering the exposures pursuant to such public offering of securities, the scope of cover and the market conditions
and that the insurance policy reflects the current market conditions, and it does not materially affect our profitability, assets or liabilities.
In addition, following the approval by
our shareholders at the annual general meeting held on June 24, 2021, we undertook to indemnify our officers and directors up to the greater
of (a) twenty-five percent (25%) of the Company’s total shareholders’ equity according to the Company’s most recent
financial statements as of the time of the actual payment of indemnification; (b) US$200 million; (c) ten percent (10%) of the Company
"total market cap" (which shall mean the average closing price of the Company’s ordinary shares over the 30 trading days prior to
the actual payment of indemnification multiplied by the total number of issued and outstanding shares of the Company as of the date of
actual payment); and (d) in connection with or arising out of a public offering of the Company’s securities, the aggregate amount
of proceeds from the sale by the Company and/or any shareholder of Company’s securities in such offering.
Following the approval by our shareholders
at the annual general meeting held on June 23, 2022, and as provided in our compensation policy, we have exempted our directors and officers
in advance for all or any of their liability for damage in consequence of a breach of the duty of care vis-a-vis our company, to the extent
permitted by applicable law.
Pursuant to our amended and restated
compensation policy, we may indemnify our directors and officers to the fullest extent permitted by applicable law, for any liability
and expense that may be imposed on the director or the officer, as provided in the indemnity agreement between us and such individuals,
all subject to applicable law and our articles of association.
For information relating to options
granted to officers and directors, see “Item 6E. Share Ownership” in this Annual Report. For information regarding our compensation
policy and compensation arrangements with our directors and executive officers (including our chairman and chief executive officer), please
refer to “Item 6B. Compensation” in this Annual Report.
7.C
Interest of Experts and Counsel
Not applicable.
Item 8. Financial
Information
8.A
Consolidated Statements and Other Financial Information
See “Item 17. Financial Statements”
in this Annual Report.
Legal Proceedings
From time to time, we or our subsidiaries
may be a party to legal proceedings and claims in the ordinary course of business. While the outcome of these matters cannot be predicted
with certainty, we do not believe they will have a material effect on our consolidated financial position, results of operations, or cash
flows. We are currently not involved in any significant proceedings.
Dividend Policies
We anticipate that, for the foreseeable
future, we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do
not expect to pay cash dividends for at least the next several years.
The distribution of dividends may be
limited by the Companies Law, which permits the distribution of dividends only out of retained earnings or earnings derived over the two
most recent fiscal years, whichever is higher, provided that there is no reasonable concern that payment of a dividend will prevent a
company from satisfying its existing and foreseeable obligations as they become due. Our Amended and Restated Articles of Association
provide that dividends will be paid at the discretion of, and upon resolution by, our board of directors.
In addition, distribution of dividends
may be subject to certain tax implications. For additional information regarding tax implication of dividends' distribution, see “Item
10E. Taxation – Israeli Taxation” in this Annual Report.
Export Sales
Substantially all of our products are
sold to customers located outside Israel.
8.B
Significant Changes
Not applicable.
Item 9. The Offer
and Listing
9.A
Offer and Listing Details
Our ordinary shares began trading
on Nasdaq on April 11, 2000 under the symbol “NVMI”. Our ordinary shares were registered for trading on the Tel Aviv Stock
Exchange Ltd. in 2002 under the symbol “נובה”.
9.B
Plan of Distribution
Not applicable.
9.C
Markets
Our
ordinary shares are quoted on the Nasdaq Global Select Market under the symbol “NVMI” and on the Tel Aviv Stock Exchange Ltd.
9.D
Selling Shareholders
Not applicable.
9.E
Dilution
Not applicable.
9.F
Expenses of the Issue
Not applicable.
Item 10. Additional
Information
10.A
Share Capital
Not applicable.
10.B
Memorandum and Articles of Association
A copy of our amended and restated articles
of association were attached as Exhibit 1.1 to our 2022 Annual Report and are incorporated by reference to this Annual Report. The information
called for by this Item is set forth in Exhibit 2.1 to our 2022 Annual Report and is incorporated by reference into this Annual Report.
10.C
Material Contracts
Israeli Lease Agreement
A summary of our Israeli Lease
Agreement has been attached as Exhibit 4.7 to our 2022 Annual Report and is incorporated by reference to this Annual Report. See Note
11 to our consolidated financial statements included within this Annual Report.
Convertible Senior notes
For a description of our issuance of
convertible notes, see Note 10 to our consolidated financial statements included within this Annual Report.
10.D
Exchange Controls
Israeli law and regulations do not impose
any material foreign exchange restrictions on non-Israeli holders of our ordinary shares.
Dividends, if any, paid to holders of
our ordinary shares, and any amounts payable upon our dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel
of our ordinary shares to an Israeli resident, may be paid in non-Israeli currency or, if paid in Israeli currency, may be converted into
freely repatriable dollars at the rate of exchange prevailing at the time of conversion.
10.E
Taxation
Israeli Taxation
The following is a summary of the material
Israeli tax laws applicable to us, and some Israeli Government programs benefiting us. This section also contains a discussion of some
Israeli tax consequences to persons owning our ordinary shares. This summary does not discuss all the aspects of Israeli tax law that
may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject
to special treatment under Israeli law. Examples of this kind of investor include, not for profit organizations, pension funds and other
exempt institutional investors, traders in securities, partnerships and other transparent entities, individuals under the tax regime for
“new immigrants” or “returning residents” and other taxpayers who are subject to special tax regimes not covered
in this discussion. Some parts of this discussion are based on a new tax legislation which has not been subject to judicial or administrative
interpretation. The discussion should not be construed as legal or professional tax advice and does not cover all possible tax considerations.
SHAREHOLDERS ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE ISRAELI OR OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING,
IN PARTICULAR, THE EFFECT OF ANY FOREIGN, STATE OR LOCAL TAXES.
General Corporate Tax Structure in Israel
Israeli companies are generally subject
to corporate tax on their taxable income at the rate of 23% for the 2018 tax year and thereafter. However, the effective tax rate payable
by a company that derives income from an Approved Enterprise, a Beneficiary Enterprise, a Preferred Enterprise, a Special Preferred Enterprise,
a Preferred Technology Enterprise or Special Preferred Technology Enterprise (as discussed below) may be lower. Capital gains derived
by an Israeli company are generally subject to the prevailing regular corporate tax rate.
Income Tax Regulations (Rules
on Bookkeeping by Foreign Invested Companies and Certain Partnerships and Determination of their Taxable Income), 1986
As a “foreign invested company”
(as defined in the Israeli Law for the Encouragement of Capital Investments-1959), the Company's management has elected to apply Income
Tax Regulations (Rules for Maintaining Accounting Records of Foreign Invested Companies and Certain Partnerships and Determining Their
Taxable Income) - 1986. Accordingly, its taxable income or loss is calculated in US Dollars.
Tax Benefits under the Law
for the Encouragement of Capital Investments, 1959
Tax benefits prior to the 2005 Amendment
The
Law for the Encouragement of Capital Investments, 1959, generally referred to as
the “Investments Law”,
provided (prior to the 2005 amendment) that a capital investment in eligible facilities may, upon application to the Israeli Authority
for Investments and Development of the Industry and Economy (the “Investment
Center”), be granted the status of
an Approved Enterprise. Each certificate of approval for an Approved Enterprise relates to a specific investment program delineated both
by its financial scope, including sources or funds, and by its physical characteristics or the facility or other assets, e.g., the equipment
to be purchased and utilized pursuant to the program.
A company owning an Approved Enterprise
is eligible for a combination of grants and tax benefits (the “Grant Track”). The tax benefits under the Grant Track include,
among others, accelerated depreciation and amortization for tax purposes. The benefits period is ordinarily seven years commencing with
the year in which the Approved Enterprise first generates taxable income. The benefits period is limited to 12 years from the earlier
of the commencement of production by the Approved Enterprise or 14 years from the date of approval of the Approved Enterprise.
A company owning an Approved Enterprise
may elect to forego its entitlements to grants and tax benefits under the Grant Track and apply for alternative package of tax benefits
for a benefit period of between seven and ten years (the “Alternative Track”). Under the Alternative Track, a company’s
undistributed income derived from the Approved Enterprise will be exempt from corporate tax for a period of between two and ten years,
starting from the first year the company derives taxable income under the Approved Enterprise program. The length of this exemption will
depend on the geographic location of the Approved Enterprise within Israel. After the exemption period lapses, the company shall be subject
to tax at a reduced corporate tax rate between of 10% to 25% depending on the level of foreign investment in the company in each year
for the remainder of the benefits period.
In the past, we had elected to be taxed
under the Alternative Track (and in subsequent years elected to forego this tax regime and elected to adopt the Preferred Technological
Enterprise regime as mentioned below.
Dividends paid to Shareholders out of
any income attributed to an Approved Enterprise (or out of dividends received from a company whose income is attributed to an Approved
Enterprise) are generally subject to withholding tax at the rate of 15% or at a lower rate provided under an applicable tax treaty (subject
to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). The 15% tax rate is limited to dividends
and distributions out of income derived during the benefits period and actually paid at any time up to 12 years thereafter. After this
period, the withholding tax is applied at a rate of up to 30%, or at the lower rate under an applicable tax treaty (subject to the receipt
in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). In the case of a company which is considered
a Foreign Investment Company as defined in the Investment Law, the 12-year limitation on reduced withholding tax on dividends does not
apply.
A dividend distributed or deem distributed
which was exempt from tax (“Trapped Profits”) out of income derived from the Approved
Enterprise will be subject to tax with respect to the amount distributed (grossed up to reflect such pre-tax income that it would have
had to earn in order to distribute the dividend) at the corporate tax rate which would otherwise been applicable, which is at ranged between
10%-25%, depending on the level of foreign investment in the company in each year. Under the Investments Law, the transfer of funds from
the company to shareholders and other related parties may be deemed to be regarded as a dividend distribution for this purpose in certain
circumstances.
On November 15, 2021 a new amendment
of the Investment Law was enacted (i) providing a reduced corporate income tax on the Trapped Profits distributed within a year from such
amendment. The reduced corporate income tax is based on a certain formula and subject to reinvestment of certain amounts in enumerated
assets/activities; (ii) harshening the rules with respect to determining the profits from which a dividend was distributed and providing
that part of any dividend distribution, will be deemed as distributed from the Trapped Profits, according to a certain formula.
Tax benefits under the 2005 Amendment
An amendment to the Investments Law,
which was effective as of April 1, 2005, changed certain provisions of the Investments Law, or the 2005 Amendment. An eligible investment
program under the 2005 Amendment qualified for benefits as a “Beneficiary Enterprise”. According to the 2005 Amendment, only
Approved Enterprises receiving cash grants require the prior approval of the Investment Center. As a result, a company was no longer required
to obtain the advance approval of the Investment Center in order to receive the tax benefits previously available under the alternative
benefits program. Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that
its facilities meet the criteria for tax benefits set forth in the 2005 Amendment. A company that had a Beneficiary Enterprise may, at
its discretion, approach the ITA for a pre-ruling confirming that it is in compliance with the provisions of the Investment Law.
The
duration of the tax benefits described
herein is limited to the earlier of seven (7) or ten (10) years (depending
on the geographic location of the Beneficiary Enterprise within Israel) from the
Commencement Year (as described below) or 12 or 14 years from the first
day of the Year of Election (as described below), depending on the location of the company within Israel.
Commencement Year is defined as the later of the first tax year in which a company had derived liable income for tax purposes from the
Beneficiary Enterprise, or the Year of Election, which is defined
as the year in which a company requested to have the tax benefits apply to the
Beneficiary Enterprise. The tax benefits granted to a Beneficiary
Enterprise are determined, depending on the geographic location of the Beneficiary
Enterprise within Israel.
Similar
to the previously available Alternative Track, exemption from corporate tax may be available on undistributed income for a period of two
to ten years (i.e., Trapped Profits), depending on the geographic location of the Beneficiary Enterprise
within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefits period, depending on the level of foreign
investment in each year. If the company pays a dividend out of income derived from the Beneficiary Enterprise
during the benefits period and such dividend is actually paid at any time up to 12 years thereafter, except with respect to a foreign
investment company, in which case the 12-year limit does not apply, such income will be subject to withholding tax at the rate of 15%
(in case of non-Israeli shareholders – subject to the receipt in advance of valid certificate from the ITA allowing the 15% tax
rate, or a lower rate under a tax treaty, if applicable). A Company that pays dividend out of Trapped Profits will be subject to
tax with respect to the amount distributed (grossed up to reflect such
pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate which would have otherwise
been applicable.
The
benefits available to a Beneficiary Enterprise
are subject to the continued fulfillment of conditions stipulated in the Investment Law and its regulations. If a company does not meet
these conditions, it would be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index and interest,
or other monetary penalty.
As a result of the 2005 Amendment, tax-exempt
income generated under the provisions of the Investments Law, as amended, will subject us to taxes upon distribution or liquidation and
we may be required to record deferred tax liability with respect to such tax-exempt income. On November 15, 2021 a new amendment of the
Investment Law was enacted (i) providing a reduced corporate income tax on the Trapped Profits distributed within a year from such amendment.
The reduced corporate income tax is based on a certain formula and subject to reinvestment of certain amounts in enumerated assets/activities;
(ii) harshening the rules with respect to determining the profits from which a dividend was distributed and providing that part of any
dividend distribution, will be deemed as distributed from the Trapped Profits, according to a certain formula.
In December 2021, we entered into an
elective tax agreement with the Israeli Tax Authorities and opt-in with the new Amendment. The reduced corporate income tax on the Trapped
Profits was approximately $5.8M, or 10%, and was provided for in the 2021 financial statements of operations, net of related provisions. We
had three Approved Enterprise plans under the Investments Law, which entitled us to certain tax benefits. In addition, in 2011, based
on Company investments in property and equipment in the years 2008 and 2009, the Company submitted the applicable form as a Benefited
Enterprise in accordance with the 2005 Amendment to the Investments Law. The year of election was 2010.
Tax benefits under the 2011 Amendment
On December 29, 2010, the Israeli Parliament
approved the 2011 amendment to the Investments Law (the “2011 Amendment”). The 2011 Amendment significantly revised the tax
incentive regime in Israel, commencing on January 1, 2011.
The 2011 Amendment introduced a new status
of “Preferred Enterprise”, replacing the existing status of “Beneficiary Enterprise” and introduced new benefits
for income generated by a “Preferred Company” through its Preferred Enterprise. A Preferred Company is an industrial company
that meets certain conditions (including a minimum threshold of 25% export). However, under the 2011 Amendment the requirement for a minimum
investment in productive assets in order to be eligible for the benefits granted under the Investments Law as with respect to “Beneficiary
Enterprise” was cancelled.
A Preferred Company is entitled to a
reduced flat tax rate with respect to its preferred income attributed to the Preferred Enterprise, at the following rates:
|
Tax Year |
Development Region “A” |
Other Areas within Israel |
|
2011-2012 |
10% |
15% |
|
2013 |
7% |
12.5% |
|
2014-2016 |
9% |
16% |
|
2017 onwards* |
7.5% |
16% |
* In December 2016, the Israeli Parliament
(the Knesset) approved an amendment to the Investments Law pursuant to which the tax rate applicable to Preferred Enterprises in Development
Region "A" would be reduced to 7.5% as of January 1, 2017.
The classification of income generated
from the provision of usage rights in know-how or software that were developed in the Preferred Enterprise, as well as royalty income
received with respect to such usage, as preferred income is subject to the issuance of a pre-ruling from the ITA stipulates that such
income is associated with the productive activity of the Preferred Enterprise in Israel.
In addition, the 2011 Amendment introduced
a new status of “Special Preferred Company” which is an Industrial company meeting, in addition to the conditions prescribed
for “Preferred Company” certain additional conditions (including that the total Preferred Enterprise income is at least NIS
1.5 billion in 2016 and NIS 1 billion and part of a group that generates income of at least NIS 10 billion). The tax rate applicable for
a period of 10 years to income generated by such an enterprise will be reduced to 5%, if located in Development Region “A”,
or to 8%, if located in other area within the State of Israel.
Dividends
distributed from preferred income which is attributed to a “Preferred Enterprise” or a “Special Preferred Enterprise”
will be subject to withholding tax at source at the following rates: (i) Israeli resident corporations – 0% (although, if such dividends
are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% (with respect to non-Israeli shareholders
– subject to the receipt in advance of a valid certificate from the ITA allowing the reduced 20%, or such lower rate as may be provided
in an applicable tax treaty), (ii) Israeli resident individuals – 20% (iii) non-Israeli residents - 20% or a lower rate under a
tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate.
The 2011 Amendment also revised the
Grant Track to apply only to the approved programs located in Development Region “A” and shall provide not only cash grants
(as prior to the 2011 Amendment) but also the granting of loans. The rates for grants and loans shall not be fixed but up to 20% of the
amount of the approved investment. In addition, a company owning a Preferred Enterprise under the Grant Track may be entitled also to
the tax benefits which are prescribed for a Preferred Enterprise.
The provisions of the 2011 Amendment
do not apply to existing “Beneficiary Enterprises” or “Approved Enterprises”, which will continue to be entitled
to the tax benefits under the Investments Law, as has been in effect prior to the 2011 Amendment, unless the company owning such enterprises
had made an election to apply the provisions of the 2011 Amendment (such election cannot be later rescinded), which is to be filed with
the ITA, not later than the date prescribed for the filing of the company’s annual tax return for the respective year. A company
owning a Beneficiary Enterprise or Approved Enterprise which made such election by June 30, 2015, will be entitled to distribute income
generated by the Approved/Beneficiary Enterprise (which is not related to Trapped Profits) to its Israeli corporate shareholders tax free.
Until the end of 2015, we did not utilize
tax benefits related to Preferred Enterprises. In 2016, we started utilized such benefits, with a related tax rate of 16%.
The New Technological Enterprise Incentives Regime—the
2017 Amendment
The 2017 Amendment was enacted as part
of the Economic Efficiency Law that was published on December 29, 2016, and became effective on January 1, 2017. The 2017 Amendment provides
new tax benefits for two types of “Technology Enterprises”, as described below, and is in addition to the other existing tax
beneficial programs under the Investment Law.
The new incentives regime will apply
to “Preferred Technology Enterprises” that meet certain conditions, including: (1) the R&D expenses in the three years
preceding the tax year were on average at least 7% out of the company's turnover or exceeded NIS 75 million (approximately $21 million)
for a year; and (2) one of the following: (a) at least 20% of the workforce (or at least 200 employees) are employees whose full salary
has been paid and reported in the Company’s financial statements as R&D expenses; (b) a venture capital investment approximately
equivalent to at least NIS 8 million (approximately $2.2 million) was previously made in the company and the company did not change its
line of business; (c) growth in sales by an average of 25% or more, over the three years preceding the tax year, provided that the turnover
was at least NIS 10 million (approximately $2.8 million), in the tax year and in each of the preceding three years; or (d) growth in workforce
by an average of 25% or more, over the three years preceding the tax year, provided that the company employed at least 50 employees, in
the tax year and in each of the preceding three years.
A “Special Preferred Technological
Enterprise” is an enterprise that meets conditions 1 and 2 above, and in addition is part of a group that has total annual consolidated
revenues at least NIS 10 billion.
Preferred Technological Enterprises will
be subject to a reduced corporate tax rate of 12% on their income that qualifies as “Preferred Technology Income”, as defined
in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technology Enterprise located in Development Region "A".
These corporate tax rates shall apply only with respect to the portion of intellectual property developed in Israel. In addition, a Preferred
Technology Company will enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain “Benefited Intangible
Assets” (as defined in the Investment Law) to a related foreign company if the Benefited Intangible Assets were acquired from a
foreign company on or after January 1, 2017 for at least NIS 200 million (approximately $56 million), and the sale receives prior approval
from the IIA. Special Preferred Technological Enterprises will be subject to 6% on “Preferred Technology Income” regardless
of the company’s geographic location within Israel.
In addition, a Special Preferred Technology
Enterprise will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Beneficiary Intangible
Assets” to a related foreign company if the Beneficiary Intangible Assets were either developed by the Special Preferred Technology
Enterprise or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from the IIA.
A Special Preferred Technology Enterprise
that acquires Benefited Intangible Assets from a foreign company for more than NIS 500 million (approximately $140 million), will be eligible
for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.
Dividends distributed by a Preferred
Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, are generally subject to
withholding tax at source at the rate of 20% (in the case of non-Israeli shareholders - subject to the receipt in advance of a valid certificate
from the ITA allowing the 20% reduced tax rate or a reduced rate as may be provided in an applicable tax treaty). However, if such dividends
are paid to an Israeli company, no tax is required to be withheld. If such dividends are, distributed to a parent foreign company that
holds solely or together with other foreign companies at least 90% of the shares of the distributing company and other conditions are
met, the withholding tax rate will be 4% (or a lower rate under a tax treaty, if applicable, and subject to the receipt in advance of
a valid certificate from the ITA allowing for a reduced tax rate).
We reviewed the criteria for the tax
rate of a “Preferred Technological Enterprise” and a “Special Preferred Technological Enterprise” and concluded
that we are entitled to the reduced tax rate under the “Preferred Technological Enterprises” tax incentive regime starting
2017. We have notified the ITA that we elected applying this status starting 2017. As part of these tax incentives, the Company is required
to allocate its taxable income between income from preferred technological enterprise and income related to preferred enterprise or regular
corporate income.
Law for the Encouragement of Industry (Taxes), 5729-1969
The Law for the Encouragement of Industry
(Taxes), 5729–1969, or the Industry Encouragement Law defines an “Industrial Company” as an Israeli resident company
which was incorporated in Israel, of which 90% or more of its income in any tax year (exclusive of income from certain government loans)
is generated from an “Industrial Enterprise” that it owns and located in Israel or in the “Area”, in accordance
with the definition under section 3A of the Israeli Income Tax Ordinance (New Version) 1961, or the Ordinance. An “Industrial
Enterprise” is defined as an enterprise whose principal activity in any given tax year is industrial manufacturing.
An Industrial Company is entitled to
certain tax benefits, including: (i) an amortization of the cost of purchased patent, the right to use a patent or know-how that were
purchased in good faith and are used for the development or promotion of the Industrial Enterprise, over an eight-year period, beginning
from the year in which such rights were first used, (ii) the right to elect to file consolidated tax returns with additional Israeli Industrial
Companies controlled by it, and (iii) the right to deduct expenses related to public offerings in equal amounts over a period of three
years beginning from the year of the offering.
Eligibility for benefits under the Encouragement
of Industry Law is not contingent upon approval of any governmental authority.
We believe that we qualify as an “Industrial
Company” within the meaning of the Industry Encouragement Law. There is no assurance that we qualify or will continue to qualify
as an Industrial Company or that the benefits described above will be available to us in the future.
Taxation
of the Company Shareholders
Capital Gains
Capital
gain tax is imposed on the disposition of capital assets by an Israeli resident, and on the disposition of such assets by a non-Israeli
resident if those assets are either (i) located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation, or
(iii) represent, directly or indirectly, rights to assets located in Israel, unless a tax treaty between Israel and the seller’s
country of residence provides otherwise. The Ordinance distinguishes between “Real Gain” and the “Inflationary Surplus”.
Real Gain is the excess of the total capital gain over Inflationary Surplus computed generally on the basis of the increase in the Israeli
Consumer Price Index (CPI) or, in certain circumstances, according to the change in the foreign currency exchange rate, between the date
of purchase and the date of disposition.
Generally,
the capital gain accrued by individuals on the sale of our ordinary shares
will be taxed at the rate of 25% (for any asset other than shares that are listed on a stock exchange purchased on or after January 1,
2003 the portion of the gain generated up to December 31, 2011 will be subject to the previous capital gains tax rates - 20% or 25% in
case of a Controlling Shareholder as described below). However, if the individual shareholder is a “Controlling Shareholder”
(i.e., a person who holds, directly or indirectly, alone or together with such person’s relative or another person who collaborates
with such person on a permanent basis based on a contract, 10% or more of one of
the Israeli resident company’s “means of control”) at
the time of sale or at any time during the preceding twelve (12) months period (or claims a deduction for interest and linkage differences
expenses in connection with the purchase and holding of such shares), such gain will be taxed at the rate of 30%.
The Real Gain derived by corporations
will be generally subject to the ordinary corporate tax rate (23% in 2018 and thereafter).
Individual
and corporate shareholder dealing in securities in Israel are taxed at the tax rates applicable to business income –
23% for corporations in 2018 and thereafter and a marginal tax rate of up
to 47% in 2023 for individuals, unless the benefiting provisions of an applicable treaty applies.
Notwithstanding
the foregoing, capital gain derived from the sale of our ordinary shares
by a non-Israeli shareholder may be exempt under the Ordinance from Israeli taxation provided that the following cumulative conditions,
among other things, are met: (i) the shares were purchased upon or after
the registration of the securities on the stock exchange, (ii) the seller does not
have a permanent establishment in Israel to which the derived capital gain is attributed; and (iii) with respect to our ordinary
shares listed on a recognized stock exchange outside of Israel, so long as neither the shareholder nor the particular capital gain is
otherwise subject to the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985. Non-Israeli corporations will not be entitled
to the foregoing exemptions if (i) an Israeli resident has a controlling interest, directly or indirectly, alone or together with another
(i.e., together with a relative, or together with someone who is not a relative but with whom, according to an agreement, there is regular
cooperation in material matters of the company, directly or indirectly), or together with another Israeli resident, exceed 25% in one
or more of the “means of control” in such non-Israeli resident corporation or (ii) Israeli residents are the beneficiaries
of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli resident corporation, whether directly or indirectly.
In
addition, the sale of shares may be exempt
from Israeli capital gain tax under the provisions of an applicable tax treaty. For example,
the U.S.-Israel Double Tax Treaty exempts U.S. resident from Israeli capital gain tax in connection with such sale, exchange or disposition
provided, among others, that (i) the U.S. resident owned, directly or indirectly, less than 10% of an Israeli resident company’s
voting power at any time within the 12 month period preceding such sale; (ii) the seller, being an individual, is present in Israel for
a period or periods of less than 183 days in the aggregate at the taxable year; (iii) the capital gain from the sale was not derived through
a permanent establishment of the U.S. resident which is maintained in Israel; (iv) the capital gain arising from such sale, exchange
or disposition is not attributed to real estate located in Israel; (v) the capital gains arising from such sale, exchange or disposition
is not attributed to royalties; and (vi) the shareholder is a U.S. resident (for purposes of the U.S.-Israel Double Tax Treaty) and is
holding the shares as a capital asset. Under the U.S.-Israel Double Tax Treaty, a U.S. resident would be permitted to claim a credit for
the Israeli tax against the U.S. federal income tax imposed with respect to the sale, exchange or disposition, subject to the limitations
in U.S. laws applicable to foreign tax credits. The U.S.-Israel Double Tax Treaty does not provide such credit against any U.S. state
or local taxes.
Either
the purchaser, the stockbrokers or financial
institution, through which payment to the seller is made, are obliged, subject to the above-mentioned exemptions, to withhold Israeli
tax at source from such payment. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains
in order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an
Israeli resident company, in the form of a merger or otherwise, the ITA may require from shareholders who are not liable for Israeli tax
to sign declarations in forms specified by this authority or obtain a specific exemption from the ITA to confirm their status as non-Israeli
resident.
At
the sale of securities traded on a stock exchange a
detailed return, including a computation of the tax due, must be filed and an advanced payment must be paid on January 31 and July 31
of every tax year in respect of sales of securities made within the previous six months. However, if all tax due was withheld at source
according to applicable provisions of the Ordinance and regulations promulgated thereunder the aforementioned return need not be filed
and no advance payment must be paid. Capital gain is also reportable on the annual income tax return.
Dividends
A
distribution of dividends from income, which is not attributed to an Approved Enterprise/Beneficiary
Enterprise/Preferred Enterprise/Preferred Technological Enterprise to an Israeli
resident individual, will generally be subject to income tax at a rate of 25%. However, a 30% tax rate will apply if the dividend recipient
is a “Controlling Shareholder” (as defined above) at the time of distribution or at any time during the preceding 12 months
period. If the recipient of the dividend is an Israeli resident corporation, such dividend will be exempt from income tax provided the
income from which such dividend is distributed was derived or accrued within Israel.
Distribution of dividends from income
attributed to a Preferred Enterprise or a Preferred Technological Enterprise is generally subject to a withholding tax at source at the
rate of 20%. However, if such dividends are distributed to an Israeli company, no withholding tax is imposed, although, if such dividends
are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% (in case of a non-Israeli shareholder
– subject to the receipt in advance of a valid certificate from the ITA allowing the reduced 20% or such lower rate as may be provided
in an applicable tax treaty may apply). Dividends distributed from income attributed to an Approved Enterprise and/or a Beneficiary Enterprise
are generally subject to a withholding tax at source at the rate of 15% (in the case of non-Israeli shareholders – subject to the
receipt in advance of valid certificate from the ITA allowing the reduced 15% tax rate or such a reduced tax rate as may be provided under
an applicable tax treaty).
The
Ordinance generally provides that a non-Israeli resident (either individual or corporation) is subject to an Israeli income tax on the
receipt of dividends at the rate of 25% (30% if the dividends recipient is a “Controlling Shareholder” (as defined above),
at the time of distribution or at any time during the preceding 12 months period); those rates are subject to a reduced tax rate under
the provisions of an applicable double tax treaty (subject to the receipt in advance of a valid certificate
from the ITA allowing for a reduced tax rate). For example, under the U.S.-Israel
Double Tax Treaty the following rates will generally apply in respect of dividends distributed by an Israeli resident company to a U.S.
resident: (i) if the U.S. resident is a corporation which holds during that portion of the taxable year which precedes the date of payment
of the dividend and during the whole of its prior taxable year (if any), at least 10% of the outstanding shares of the voting stock of
the Israeli resident paying corporation and not more than 25% of the gross income of the Israeli resident paying corporation for such
prior taxable year (if any) consists of certain type of interest or dividends – the maximum tax rate is 12.5% on dividends,
not generated by an Approved Enterprise or a Beneficiary Enterprise, (ii) if both
the conditions mentioned in section (i) above are met and the dividend is paid from an Israeli resident company’s
income which was entitled to a reduced tax rate applicable to an Approved Enterprise or a Beneficiary Enterprise – the tax rate
is 15%, and (iii) in all other cases, the tax rate is 25%, or the domestic rate (if such is lower). The aforementioned rates under the
U.S.-Israel Double Tax Treaty will not apply if the dividend income was derived through a permanent establishment of the U.S. resident
maintained in Israel.
If
the dividend is attributable partly to income derived from an Approved Enterprise, a Beneficiary
Enterprise a Preferred Enterprise, or a Technological Preferred Enterprise, and
partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income.
Payors of dividends on our shares, including
the Israeli stockbroker effectuating the transaction, or the financial institution through which the securities are held, are generally
required, subject to any of the foregoing exemption, reduced tax rates and the demonstration of a shareholder of his, her or its foreign
residency, to withhold taxes upon the distribution of dividends at a rate of 25%, provided that the shares are registered with a Nominee
Company (for corporations and individuals, whether the recipient is a Controlling Shareholder or not).
A non-Israeli resident who receives dividends
from which tax was withheld is generally exempt from the obligation to file tax returns in Israel with respect to such income, provided
that (i) such income was not generated from business conducted in Israel by the taxpayer, (ii) the taxpayer has no other taxable sources
of income in Israel with respect to which a tax return is required to be filed, and (iii) in the case of individuals, the taxpayer is
not obligated to pay excess tax (as further explained below).
Excess Tax
Individuals who are subject to tax in
Israel (whether any such individual is an Israeli resident or non-Israeli resident) are also subject to an additional tax at a rate of
3% on annual income exceeding NIS 698,280 (approximately $195 thousand) for 2023, which amount is linked to the annual change in the Israeli
consumer price index, including, but not limited to, dividends, interest and capital gain.
Estate and Gift Tax
Israeli law presently does not impose
estate or gift taxes.
Foreign Exchange Regulations
Non-residents of Israel who hold our ordinary shares are
able to receive any dividends, and any amounts payable upon the dissolution, liquidation and winding up of our affairs, repayable in non-Israeli
currency at the rate of exchange prevailing at the time of conversion. However, Israeli income tax is generally required to have been
paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of currency exchange control has
not been eliminated, and may be restored at any time by administrative action.
U.S. Taxation
The following discussion describes
certain material United States (“U.S.”) federal income tax consequences generally applicable to U.S. holders (as defined below)
of the purchase, ownership and disposition of our ordinary shares. This summary addresses only holders who acquire and hold ordinary shares
as “capital assets” for U.S. federal income tax purposes (generally, assets held for investment purposes).
For purposes of this discussion, a
“U.S. holder” is a beneficial owner of ordinary shares who is:
|
• |
An individual citizen or resident of the U.S. (as determined under U.S. federal
income tax rules); |
|
• |
a corporation (or another entity taxable as a corporation for U.S. federal income
tax purposes) created or organized in or under the laws of the U.S., any state thereof, or the District of Columbia; |
|
• |
an estate, the income of which is subject to U.S. federal income taxation regardless
of its source; or |
|
• |
a trust, if (a) a U.S. court is able to exercise primary supervision over its administration
and one or more U.S. persons have the authority to control all of its substantial decisions; or (b) the trust has in effect a valid election
in effect under applicable Treasury Regulations (as defined below) to be treated as a United States person. |
This summary is for general information
purposes only and does not purport to be a comprehensive description of all of the U.S. federal income tax considerations that may be
relevant to a decision to purchase, hold or dispose of the Company’s ordinary shares. In addition, the possible application of U.S.
federal estate or gift taxes or any aspect of state, local or non-U.S. tax laws is not considered. This discussion is based on current
provisions of the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations promulgated under the Code
by the U.S. Treasury Department (including proposed and temporary regulations) (the “Treasury Regulations”), rulings, current
administrative interpretations and official pronouncements by the Internal Revenue Service (the “IRS”), and judicial decisions,
all as currently in effect and all of which are subject to differing interpretations or to change, with a retroactive effect. Such changes
could materially and adversely affect the tax consequences described below. No assurance can be given that the IRS would not assert, or
that a court would not sustain, a position contrary to any of the tax consequences described below.
This discussion does not address all
aspects of U.S. federal income taxation that may be relevant to any particular U.S. holder based on the holder’s particular circumstances,
including, but not limited to:
|
• |
persons who own, directly, indirectly or constructively, 10% or more (by voting
power or value) of our outstanding voting shares; |
|
• |
persons who hold the ordinary shares as part of a hedging, straddle or conversion
transaction; |
|
• |
persons whose functional currency is not the U.S. dollar; |
|
• |
persons who acquire their ordinary shares in a compensatory transaction; |
|
• |
regulated investment companies; |
|
• |
real estate investment companies; |
|
• |
qualified retirement plans, individual retirement accounts and other tax-deferred
accounts; |
|
• |
traders who elect to mark-to-market their securities; |
|
• |
tax-exempt organizations; |
|
• |
banks or other financial institutions; |
|
• |
persons subject to special tax accounting rules as a result of any item of gross
income with respect to ordinary shares being taken into account in an applicable financial statement; |
|
• |
U.S. expatriates and certain former citizens and long-term residents of the United
States; and |
|
• |
persons subject to any alternative minimum tax. |
The tax treatment of a partner in
a partnership (or other entity or arrangement classified as a partnership for U.S. federal income tax purposes) may depend on both the
partnership’s and the partner’s status and the activities of the partnership. Partnerships (or other entities or arrangements
classified as a partnership for U.S. federal income tax purposes) that are beneficial owners of ordinary shares, and their partners and
other owners, should consult their own tax advisers regarding the tax consequences of the acquisition, ownership and disposition of ordinary
shares.
THIS SUMMARY OF MATERIAL UNITED STATES
FEDERAL INCOME TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. EACH HOLDER SHOULD CONSULT ITS TAX ADVISOR WITH
RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO IT OF AN INVESTMENT IN THE ORDINARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE UNITED STATES
FEDERAL INCOME TAX LAWS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE UNITED STATES FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE
LAWS OF ANY FOREIGN, STATE OR LOCAL JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
Distributions on the Ordinary Shares
We currently do not intend to distribute
dividends for at least the next several years. However, if we make any distributions of cash or other property to a U.S. holder of our
ordinary shares, the amount of the distribution for U.S. federal income tax purposes will equal the amount of cash and the fair market
value of any property distributed and will also include the amount of Israeli taxes withheld, if any, as described above under “[Israel
Taxation] — Dividends” above. In general (and subject to the PFIC rules discussed below), any distribution paid by us on the
ordinary shares to a U.S. holder will be treated as dividend income to the extent the distribution does not exceed our current and/or
accumulated earnings and profits, as determined under U.S. federal income tax principles. The amount of any distribution which exceeds
these earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. holder’s tax basis in its
ordinary shares to the extent thereof, and then as capital gain income (long-term capital gain if the U.S. holder’s holding period
exceeds one year), from the deemed disposition of the ordinary shares (subject to the PFIC rules discussed below). Corporate holders generally
will not be allowed a deduction for dividends received on the ordinary shares.
The amount of any dividend paid in
NIS (including amounts withheld to pay Israeli withholding taxes) will equal the U.S. dollar value of the NIS calculated by reference
to the exchange rate in effect on the date the dividend is received by the U.S. holder, regardless of whether the NIS are converted into
U.S. dollars. A U.S. holder will have a tax basis in the NIS equal to their U.S. dollar value on the date of receipt. If the NIS received
are converted into U.S. dollars on the date of receipt, the U.S. holder should generally not be required to recognize foreign currency
gain or loss in respect of the distribution. If the NIS received are not converted into U.S. dollars on the date of receipt, a U.S. holder
may recognize foreign currency gain or loss on a subsequent conversion or other disposition of the NIS. Such gain or loss will be treated
as U.S. source ordinary income or loss.
Dividends paid by us generally will
be foreign source, “passive income” for U.S. foreign tax credit purposes. U.S. holders may elect to claim as a foreign tax
credit against their U.S. federal income tax liability the Israeli income tax withheld from dividends received on the ordinary shares.
The Code provides limitations on the amount of foreign tax credits that a U.S. holder may claim. U.S. holders that do not elect to claim
a foreign tax credit may instead claim a deduction for Israeli income tax withheld, but only for a year in which these U.S. holders elect
to do so for all foreign income taxes. Certain U.S. Treasury regulations that apply to foreign income tax paid or accrued in taxable years
beginning on or after December 28, 2021 restrict the availability of any such credit based on the nature of the tax imposed by the foreign
jurisdiction (although Notice 2023-55 provides temporary relief from the application of certain aspects of these regulations and such
relief has been extended by Notice 2023-80 indefinitely until new guidance or regulations are issued). The rules relating to foreign tax
credits are complex (and may also be impacted by the tax treaty between the United States and Israel), and you should consult your tax
advisor to determine whether you would be entitled to this credit.
Under current law, certain distributions
treated as dividends that are received by an individual U.S. holder from a “qualified foreign corporation” generally qualify
for a 20% reduced maximum tax rate so long as certain holding period and other requirements are met. A non-U.S. corporation (other than
a corporation that is treated as a PFIC with respect to the U.S. holder for the taxable year in which the dividend is paid or the preceding
taxable year) generally will be considered to be a qualified foreign corporation (i) if it is eligible for the benefits of a comprehensive
tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for purposes of this
provision and which includes an exchange of information program, or (ii) with respect to any dividend it pays on stock which is readily
tradable on an established securities market in the United States. Dividends paid by us in a taxable year in which we are not a PFIC and
with respect to which we were not a PFIC in the preceding taxable year with respect to the U.S. holder are expected to be eligible for
the 20% reduced maximum tax rate, although we can offer no assurances in this regard. However, any dividend paid by us in a taxable year
in which we are a PFIC or were a PFIC in the preceding taxable year with respect to the U.S. holder will be subject to tax at regular
ordinary income rates (along with any applicable additional PFIC tax liability, as discussed below).
The additional 3.8% tax on “net
investment income” (described below) may apply to dividends received by certain U.S. holders who meet certain modified adjusted
gross income thresholds.
Sale, Exchange or Other Taxable Disposition of the
Ordinary Shares
Upon the sale, exchange or other taxable
disposition of the ordinary shares (subject to the PFIC rules discussed below), a U.S. holder generally will recognize capital gain or
loss in an amount equal to the difference between the amount realized and the U.S. holder’s tax basis in the ordinary shares. The
gain or loss recognized on the sale or exchange of the ordinary shares generally will be long-term capital gain (currently taxable at
a reduced rate for non-corporate U.S. holders) or loss if the U.S. holder’s holding period of the ordinary shares is more than one
year at the time of the disposition. The deductibility of capital losses is subject to limitations.
Gain or loss recognized by a U.S.
holder on a sale or exchange of ordinary shares generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes.
Under the tax treaty between the United States and Israel, gain derived from the sale, exchange or other taxable disposition of ordinary
shares by a holder who is a resident of the U.S. for purposes of the treaty and who sells the ordinary shares within Israel may be treated
as foreign source income for U.S. foreign tax credit purposes. However, if a U.S. holder is eligible for the benefit of the income tax
convention between the United States and the State of Israel and pays Israeli tax in excess of the amount applicable to such U.S. holder
under such convention or if the Israeli tax paid is refundable, the U.S. holder will not be able to claim any foreign tax credit or deduction
with respect to such excess portion of Israeli tax paid or the amount of Israeli tax refunded. In addition, pursuant to applicable United
States Treasury regulations, if a U.S. holder is not eligible for the benefits of an applicable income tax treaty or does not elect to
apply such treaty, then such holder may not be able to claim a foreign tax credit arising from any foreign tax imposed on the disposition
of our ordinary shares, depending on the nature of such foreign tax. The rules governing the treatment of foreign taxes imposed on a U.S.
holder and foreign tax credits are complex, and U.S. holders should consult their tax advisors as to whether the Israeli tax on gains
may be creditable or deductible in light of their particular circumstances, including their eligibility for benefits under an applicable
treaty and the potential impact of applicable United States Treasury regulations.
The additional 3.8% tax on “net
investment income” (described below) may apply to certain U.S. holders who meet certain modified adjusted gross income thresholds,
including capital gains.
Passive Foreign Investment Companies
In general, a foreign (i.e., non-U.S.)
corporation will be a PFIC for any taxable year in which, after applying the relevant look-through rules with respect to the income
and assets of its subsidiaries, either (1) 75% or more of its gross income in the taxable year is “passive income,” or (2)
assets held for the production of, or that produce, passive income comprise 50% or more of the average of its total asset value in the
taxable year. For purpose of the income test, passive income generally includes dividends, interest, royalties, rents, annuities and net
gains from the disposition of assets, which produce passive income. For purposes of the asset test, assets held for the production of
passive income includes assets held for the production of, or that produce dividends, interest, royalties, rents, annuities, and other
income that are considered passive income for purposes of the income test. In determining whether we meet the asset test, cash is considered
a passive asset and the total value of our assets generally will be treated as equal to the sum of the aggregate fair market value of
our outstanding stock plus our liabilities. If we own at least 25% (by value) of the stock of another corporation, we will be treated,
for purposes of the PFIC tests, as owning our proportionate share of the other corporation’s assets and receiving our proportionate
share of the other corporation’s income. The income test is conducted at the taxable year-end. The asset test is conducted on a
quarterly basis and the quarterly results are then averaged together.
If a corporation is treated as a PFIC
for any year during a U.S. holder’s holding period and the U.S. holder does not timely elect to treat the corporation as a “qualified
electing fund” under Section 1295 of the Code or elect to mark its ordinary shares to market (both elections described below), any
gain on the disposition of the shares will be treated as ordinary income, rather than capital gain, and the holder will be required to
compute its tax liability on that gain, as well as on dividends and other distributions, as if the income had been earned ratably over
each day in the U.S. holder’s holding period for the shares. The portion of the gain and distributions allocated to prior taxable
years in which a corporation was a PFIC will be ineligible for any preferential tax rate otherwise applicable to any “qualified
dividend income” or capital gains, and will be taxed at the highest ordinary income tax rate in effect for each taxable year to
which this portion is allocated. An interest charge will be imposed on the amount of the tax allocated to these taxable years. A U.S.
holder may elect to treat a corporation as a qualified electing fund only if the corporation complies with requirements imposed by the
IRS to enable the shareholder and the IRS to determine the corporation’s ordinary earnings and net capital gain. Additionally, if
a corporation is a PFIC, a U.S. holder who acquires shares in the corporation from a decedent generally will be denied the normally available
step-up in tax basis to fair market value for the shares at the date of death of the decedent and instead will have a tax basis equal
to the decedent’s tax basis if lower than fair market value. These adverse tax consequences associated with PFIC status could result
in a material increase in the amount of tax that a U.S. holder would owe and an imposition of tax earlier than would otherwise be imposed
and additional tax form filing requirements. Unless otherwise provided by the IRS, if a corporation is classified as a PFIC, a U.S. person
that is a direct or indirect holder generally will be required to file IRS Form 8621, Information Return by a Shareholder of a Passive
Foreign Investment Company or Qualified Electing Fund, or any applicable successor form, to report its ownership interest in such entity.
If a corporation is treated as a PFIC
with respect to a U.S. holder for any taxable year, the U.S. holder will be deemed to own shares in any of the foreign entities in which
such corporation holds equity interests that are also PFICs (or “lower-tier PFICs”), and the U.S. holder may be subject to
the tax consequences described above with respect to the shares of such lower-tier PFIC such U.S. holder would be deemed to own.
Status
of Nova as a PFIC. Under
the income test, less than 75% of our gross income was passive income in 2023. Under
the asset test, while we continued to have substantial amounts of cash and short-term deposits and the market value of our ordinary shares
continued to be volatile, a determination of the value of our assets by reference to the average market value of our ordinary shares and
our liabilities results in a conclusion that the average value of our passive assets did not exceed 50% of the average value of our gross
assets in 2023. Nonetheless, there is a risk that we were a PFIC in 2023 or we will be a PFIC in 2024 or subsequent years. Additionally,
due to the complexity of the PFIC provisions and the limited authority available to interpret such provisions, there can be no assurance
that our determination regarding our PFIC status could not be successfully challenged by the IRS.
Available
Elections. If we become a PFIC for any taxable year, an election to treat us as a “qualified
electing fund” or to “mark-to-market” our ordinary shares may mitigate the adverse tax consequences of PFIC status to
a U.S. holder.
If a U.S. holder makes a qualified
electing fund election (a “QEF election”) for its ordinary shares that is effective from the first taxable year that the U.S.
holder holds our ordinary shares and during which we are a PFIC, the electing U.S. holder will avoid the adverse consequences of our being
classified as a PFIC, but will instead be required to include in income a pro rata share of our net capital gain, if any, and other earnings
and profits (“ordinary earnings”) as long-term capital gains and ordinary income, respectively, on a current basis, in each
case whether or not distributed, in the taxable year of the U.S. holder in which or with which our taxable year ends. A subsequent distribution
of amounts that were previously included in the gross income of U.S. holders should not be taxable as a dividend to those U.S. holders
who made a QEF election. In the event we incur a net loss for a taxable year, such loss will not be available as a deduction to an electing
U.S. holder, and may not be carried forward or back in computing our net capital gain or ordinary earnings in other taxable years. The
tax basis of the shares of an electing U.S. holder generally will be increased by amounts that are included in income, and decreased by
amounts distributed but not taxed as dividends, under the QEF rules described above. In order to make (or maintain) a QEF election, the
U.S. holder must annually complete and file IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company
or Qualified Electing Fund, or any applicable successor form. However, we do not expect that we will prepare or provide to U.S. Holders
a “PFIC annual information statement,” which would enable a U.S. Holder to make a QEF election.
Alternatively, if a U.S. holder elects
to “mark-to-market” its ordinary shares, the U.S. holder generally will include in its income any excess of the fair market
value of our ordinary shares at the close of each taxable year over the holder’s adjusted basis in such ordinary shares. A U.S.
holder generally will be allowed an ordinary deduction for the excess, if any, of the adjusted tax basis of the ordinary shares over the
fair market value of the ordinary shares as of the close of the taxable year, or the amount of any net mark-to-market gains recognized
for prior taxable years, whichever is less. A U.S. holder’s adjusted tax basis in the ordinary shares generally will be adjusted
to reflect the amounts included or deducted under the mark-to-market election. Additionally, any gain on the actual sale or other disposition
of the ordinary shares generally will be treated as ordinary income. Ordinary loss treatment also will apply to any loss recognized on
the actual sale or other disposition of ordinary shares to the extent that the amount of such loss does not exceed the net mark-to-market
gains previously included with respect to such ordinary shares. If a U.S. holder makes a valid mark-to-market election with respect to
our ordinary shares for the first taxable year of the U.S. holder in which the U.S. holder holds (or is deemed to hold) our ordinary shares
and for which we are determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above in respect of
its ordinary shares. A mark-to-market election applies to the tax year for which the election is made and to each subsequent year, unless
our ordinary shares cease to be marketable, as specifically defined, or the IRS consents to revocation of the election. No view is expressed
regarding whether our ordinary shares are marketable for these purposes or whether the election will be available. However, because a
mark-to-market election likely cannot be made for any lower-tier PFICs, if we are a PFIC, a U.S. holder will generally continue to be
subject to the PFIC rules discussed above with respect to such holder’s indirect interest in any investments that we hold that are
treated as an equity interest in a PFIC for U.S. federal income tax purposes. As a result, it is possible that any mark-to-market election
will be of limited benefit.
If a U.S. holder makes either the
QEF election or the mark-to-market election, distributions and gain will not be recognized ratably over the U.S. holder’s holding
period or be subject to an interest charge as described above. Further, the denial of basis step-up at death described above will not
apply. If a U.S. holder makes the QEF election, gain on the sale of the ordinary shares will be characterized as capital gain. However,
U.S. holders making one of these two elections may experience current income recognition, even if we do not distribute any cash. The elections
must be made with the U.S. holder’s federal income tax return for the year of election, filed by the due date of the return (as
it may be extended) or, under certain circumstances provided in applicable Treasury Regulations, subsequent to that date.
The foregoing discussion relating
to the QEF election and mark-to-market elections assumes that a U.S. holder makes the applicable election with respect to the first year
in which Nova qualifies as a PFIC. If the election is not made for the first year in which Nova qualifies as a PFIC, the procedures for
making the election and the consequences of election will be different.
SPECIFIC RULES AND REQUIREMENTS APPLY
TO BOTH THE QEF ELECTION AND THE MARK-TO-MARKET ELECTION, AND YOU ARE URGED TO CONSULT YOUR TAX ADVISOR CONCERNING OUR PFIC STATUS AND
THE VARIOUS ELECTIONS YOU CAN MAKE.
Medicare Tax on Net Investment Income
A U.S. holder that is an individual
or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, will be subject to a 3.8% tax on
the lesser of (1) the U.S. holder’s “net investment income” for the relevant taxable year and (2) the excess of the
U.S. holder’s modified adjusted gross income for the taxable year over a certain threshold. A U.S. holder’s “net investment
income” generally may include its dividend income and its net gains from the disposition of shares, unless such dividends or net
gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain
passive or trading activities). If you are a U.S. holder that is an individual, estate or trust, you are urged to consult your tax advisors
regarding the applicability of the Medicare tax to your income and gains in respect of your investment in the shares and the interaction
of these rules with the rules applicable to income included as a result of the QEF election.
United States Information Reporting and Backup Withholding
In general, U.S. holders may be subject
to certain information reporting requirements under the Code relating to their purchase and/or ownership of stock of a foreign corporation
such as the Company. Failure to comply with these information reporting requirements may result in substantial penalties.
Specifically, certain U.S. Holders
holding specified foreign financial assets, including our ordinary shares, with an aggregate value in excess of the applicable U.S. dollar
threshold, are subject to certain exceptions, required to report information relating to our Ordinary Shares by attaching a complete IRS
Form 8938, Statement of Specified Foreign Financial Assets, to their tax returns, for each year in which they hold our ordinary shares.
U.S. Holders are urged to consult their own tax advisors regarding information reporting requirements relating to the ownership of our
Ordinary Shares.
In addition, and as discussed in the
section of this Annual Report entitled “U.S. Taxation – Passive Foreign Investment Companies”, if a corporation is classified
as a PFIC, a U.S. person that is a direct or indirect holder generally will be required to file an informational return annually on IRS
Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, or any applicable successor
form, to report its ownership interest in such entity, unless otherwise provided by the IRS.
Dividend payments and proceeds from
the sale or disposal of ordinary shares may be subject to information reporting to the IRS and possible U.S. federal backup withholding.
Certain holders (including, among others, corporations) generally are not subject to information reporting and backup withholding. A U.S.
holder generally will be subject to backup withholding if such holder is not otherwise exempt and such holder:
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• |
fails to furnish its taxpayer identification number, or TIN, which, for an individual,
is ordinarily his or her social security number; |
|
• |
furnishes an incorrect TIN; |
|
• |
is notified by the IRS that it is subject to backup withholding because it has previously
failed to properly report payments of interest or dividends; or |
|
• |
fails to certify, under penalties of perjury, that it has furnished a correct TIN
and that the IRS has not notified the U.S. holder that it is subject to backup withholding. |
Any U.S. holder who is required to
establish exempt status generally must file IRS Form W-9 (“Request for Taxpayer Identification Number and Certification”).
Backup withholding is not an additional
tax and may be claimed as a refund or a credit against the U.S. federal income tax liability of a U.S. Holder, provided that the required
information is timely furnished to the IRS.
10.F
Dividends and Paying Agents
Not applicable.
10.G
Statements by Experts
Not applicable.
10.H
Documents on Display
As a foreign private issuer, are exempt
from the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal
shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. Furthermore,
as a foreign private issuer, we are also not subject to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange
Act. In addition, we are not be required under the Exchange Act to file annual or other reports and consolidated financial statements
with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. Instead, we must file
with the SEC, within 120 days after the end of each fiscal year, or such other applicable time as required by the SEC, an Annual Report
containing consolidated financial statements audited by an independent registered public accounting firm. We also intend to furnish certain
other material information to the SEC under cover of Form 6-K.
We maintain a corporate website at www.novami.com.
Information contained on, or that can be accessed through, our website does not constitute a part of this Annual Report. We have included
our website address in this Annual Report solely as an inactive textual reference.
10.I
Subsidiary Information
Not applicable.
10.J
Annual Report to Security Holders
Not applicable.
Item 11. Quantitative
and Qualitative Disclosures About Market Risk
Market Risk
Market risk represents the risk of loss
that may impact the consolidated financial position, results of operations or cash flows of the Company. The Company is exposed to market
risk in the area of foreign exchange rates, as described below.
The Company does not utilize financial
instruments for trading purposes and holds no derivative financial instruments that could expose it to significant market risk.
Impact
of Currency Fluctuation
Because our results are reported in U.S.
Dollars, changes in the rate of exchange between the Dollar and local currencies in those countries in which we operate (primarily NIS
and Euro) will affect the results of our operations. The dollar cost of our operations in countries other than the U.S., is negatively
influenced by revaluation of the U.S. dollar against other currencies. During 2023, the value of the U.S. dollar revaluated against the
NIS by approximately 3.1%, and devaluated against the Euro by approximately 3.6%. As of December 31, 2023, the majority of our net monetary
assets were denominated in dollars and the remainder was denominated mainly in NIS and Euro. Net monetary assets that are not denominated
in dollars or dollar-linked NIS were affected by the currency fluctuations in 2023 and are expected to continue to be affected by such
currency fluctuations in 2024. As of December 31 ,2023 the Company recorded a NIS and Israel CPI linked lease liability, under the implementation
of ASC 842 in the amount of $30 million (including exchange rate differences of $1 million).
In 2023, we entered into currency-forward
transactions and currency-put options (NIS/dollar) of approximately $158 million with settlement dates through 2023-2024, designed to
reduce cash-flow exposure to the impact of exchange-rate fluctuations on firm commitments of approximately $158 million. In accordance
with ASC 815-10, we recorded in 2023 an increase of approximately $1.6 million in fair market value in "Other Comprehensive Income". Short-term
exposures to changing foreign exchange rates are primarily due to operating cash flows denominated in foreign currencies and transactions
denominated in non-functional currencies. Our most significant foreign currency exposures are related to our operations in Israel. We
have used foreign exchange forward contracts to partially cover known and anticipated exposures. We estimate that an instantaneous 10%
depreciation in NIS from its level against the dollar as of December 31, 2023, with all other variables held constant, would decrease
the fair value of our net liabilities denominated in NIS, held at December 31, 2023, by approximately $12.6 million.
Item 12. Description
of Securities Other than Equity Securities
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modification to the Rights of Security
Holders and Use of Proceeds
Not applicable.
Item 15. Controls and Procedures
a) Our
management, including our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls
and procedures as of December 31, 2023. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act, means controls and other procedures that are designed to ensure that information required to be disclosed by us
in the reports that we file or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed
to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated
and communicated to the our management, including our chief executive officer and chief financial officer, or persons performing similar
functions, as appropriate to allow timely decisions regarding required disclosure. Based on the foregoing, our chief executive officer
and chief financial officer have concluded that, as of December 31, 2023, our disclosure controls and procedures were effective.
b) Our
management, under the supervision of our chief executive officer and chief financial officer, is responsible for establishing and maintaining
adequate internal control over our financial reporting. The Company’s internal control over financial reporting, as defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act, means a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting includes policies and procedures that:
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pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect our transactions and asset dispositions; |
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• |
provide reasonable assurance that transactions are recorded as necessary to permit
the preparation of our financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our management and directors; and |
|
• |
provide reasonable assurance regarding the prevention or timely detection of unauthorized
acquisition, use or disposition of assets that could have a material effect on our financial statements. |
Due to its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our management evaluated the effectiveness
of our internal control over financial reporting as of December 31, 2023, based on the criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation,
our management concluded that, as of December 31, 2023, the Company’s internal control over financial reporting was effective.
c) Kost
Forer Gabbay & Kasierer, an independent registered accounting firm and a member firm of Ernst & Young Global,
has issued an attestation report on the effectiveness of our internal control over financial reporting, as stated in their report included
herein. See “Report of Independent Registered Public Accounting Firm” on page F-3.
d) There
were no changes in our internal controls over financial reporting identified with the evaluation thereof that occurred during the period
covered by this Annual Report that have materially affected, or are reasonable likely to materially affect our internal control over financial
reporting.
Item 16 [Reserved]
Item 16A. Audit Committee Financial Expert
Our board of directors has determined
that our audit committee includes one audit committee financial expert, as defined by Item 16A of Form 20-F. Our board of directors has
determined that Ms. Sarit Sagiv is an “audit committee financial expert” as defined by the SEC rules as well as an independent
director as such term is defined by Rule 5605(a)(2) of the Nasdaq Stock Market and has the requisite financial experience as defined by
the Nasdaq rules.
Item 16B. Code of Ethics
The Company has adopted a written code
of conduct that applies to all Company employees, including the Company’s directors, principal executive officer, principal financial
officer and principal accounting officer.
You may review our code of conduct on
our website: https://www.novami.com/, under “Investors/Corporate Governance”.
Information contained on, or that can be accessed through, our website does not constitute a part of this Annual Report.
Item 16C. Principal Accountant Fees and Services
Since 2015, Kost Forer Gabbay & Kasierer,
an independent registered accounting firm and a member of Ernst & Young Global (“Kost Forer Gabbay & Kasierer”) has
acted as our registered public accounting firm and independent auditors. The following table provides information regarding fees paid
by us to Kost Forer Gabbay & Kasierer for all services, including audit services, for the years ended December 31, 2022 and 2023:
| |
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2022 |
|
|
2023 |
|
|
Audit Fees |
|
|
713,000 |
|
|
|
740,000 |
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Tax Fees |
|
|
50,000 |
|
|
|
26,000 |
|
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Other Fees |
|
|
61,000 |
|
|
|
25,000 |
|
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Total |
|
|
824,000 |
|
|
|
791,000 |
|
“Audit fees” are fees associated with the annual audit of the Company consolidated financial statements and services that
generally the independent accountant provides, such as consultations on various accounting issues, performance of local statutory audits,
fees associated with the audit of management assessment of internal control over financial reporting, annual tax returns and audit of
reports to IIA.
“Tax
Fees” are fees related to ad hoc tax consulting services and opinions.
“Other
Fees” mainly include services related to SEC regulation consulting and due diligence services.
Our
audit committee has adopted a pre-approval policy for the engagement of our independent accountant to perform certain services. Pursuant
to this policy, which is designed to assure that such engagements do not impair the independence of our auditors, all audit, audit related
and tax services must be specifically approved by the audit committee and certain other non-audit, non-audit related and non-tax services
may be approved without consideration of specific case-by-case provided certain terms and procedures are met. The Company’s audit
committee approved all of the services provided by Kost Forer Gabbay & Kasierer in fiscal years 2023 and 2022.
I