We manufacture, market
and sell technologically advanced custom-made printed circuit boards, or PCBs, including high density interconnect, or HDI, flex-rigid
and rigid, with high layer count boards. Our principal customers include manufacturers of defense and aerospace, medical, industrial,
telecom and networking equipment, as well as contract electronic manufacturers. We were incorporated in 1970 under the laws of the
State of Israel. Since our initial public offering in January 1997, our ordinary shares have been listed on the NASDAQ Stock Market (symbol:
ELTK) and are presently traded on the NASDAQ Capital Market. As used in this annual report, the terms “we,” “us”
and “our” mean Eltek Ltd. and its subsidiaries, unless otherwise indicated.
Our functional currency
is the New Israeli Shekel while our reporting currency is the U.S. Dollar. All references in this annual report to “dollars”
or “$” are to U.S. Dollars and all references in this annual report to “NIS” are to New Israeli Shekels.
Our consolidated financial statements appearing in this annual report are prepared in accordance with U.S. GAAP. The consolidated
financial statements appearing in this annual report are translated into dollars at the representative rate of exchange under the current
rate method. Under such method, the income statement and cash flows statement items for each year (or period) stated in this report
are translated into dollars using the average exchange rates in effect at each period presented, and assets and liabilities for each year
(or period) are translated using the exchange rate as of the balance sheet date as published by the Bank of Israel ($1.00 = NIS 3.519
as of December 30, 2022), except for equity accounts, which are translated using the rates in effect at the date of the transactions.
All resulting exchange differences that do not affect our earnings are reported in the accumulated other comprehensive income as a separate
component of shareholders’ equity.
Statements made in this
annual report concerning the contents of any contract, agreement or other document are summaries of such contracts, agreements or documents
and are not complete descriptions of all of their terms. If we filed any of these documents as an exhibit to this annual report
or to any registration statement or annual report that we previously filed, you may read the document itself for a complete description
of its terms.
Except for the historical
information contained in this annual report, the statements contained in this annual report are “forward‑looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange
Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, as amended, with respect to our
business, financial condition and results of operations. Such forward-looking statements reflect our current view with respect to
future events and financial results. We urge you to consider that statements which use the terms “anticipate,” “believe,”
“do not believe,” “expect,” “plan,” “intend,” “estimate” and similar expressions
are intended to identify forward‑looking statements. We remind readers that forward-looking statements are merely predictions
and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results,
performance, levels of activity, or our achievements, or industry results, to be materially different from any future results, performance,
levels of activity, or our achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by applicable law,
including the securities laws of the United States, we undertake no obligation to publicly release any update or revision to any forward‑looking
statements to reflect new information, future events or circumstances, or otherwise after the date hereof. We have attempted to
identify significant uncertainties and other factors affecting forward-looking statements in the Risk Factors section that appears in
Item 3.D. “Key Information- Risk Factors.”
PART
I
| ITEM
1. |
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
| ITEM
2. |
OFFER STATISTICS AND EXPECTED TIMETABLE
|
| B. |
Capitalization and Indebtedness
Not applicable. |
| C. |
Reasons for the Offer and Use of Proceeds
Not applicable. |
Investing in our ordinary
shares involves a high degree of risk and uncertainty. You should carefully consider the risks and uncertainties described below
before investing in our ordinary shares. Our business, prospects, financial condition and results of operations could be adversely
affected due to any of the following risks. In that case, the value of our ordinary shares could decline, and you could lose all
or part of your investment. These risk factors include:
Risks Related to Our Business and Our Industry
| • |
We will likely require additional capital in the future, which may not be available to us. |
| • |
We are dependent on one-of-a-kind machinery that may malfunction and may not be easily replaced. |
| • |
Because competition in the PCB market is intense, our business, operating results and financial condition may be adversely affected.
|
| • |
Rapid changes in the Israeli and international electronics industries and recessionary pressures may adversely affect our business.
|
| • |
Our products and product components need to meet certain industry standards. |
| • |
Key customers account for a significant portion of our revenues. The loss of a key customer would have an adverse impact on our business
results. |
| • |
We are dependent upon a select number of suppliers for timely delivery of key raw materials and the loss of one or more of these
suppliers or delays in supply of these raw materials would adversely affect our manufacturing ability. If these suppliers delay
or discontinue the manufacture or supply of these raw materials, we may experience delays in production and shipments, increased costs
and cancellation of orders for our products. |
| • |
Our results of operations may be adversely affected by currency fluctuations. |
| • |
Unfavorable national and global economic conditions could adversely affect our business, operating results and financial condition.
|
| • |
We expect that our business insurance policies will be more limited in scope and our premiums will be higher than in prior years,
which could cause us to decrease our insurance coverages. As a result, we may incur uninsured losses. |
| • |
We are subject to environmental laws and regulations. Compliance with those laws and regulations requires us to incur costs and we
are subject to fines or other sanctions for non-compliance. |
| • |
We have in the past been, and currently are, subject to claims and litigation relating to environmental matters. If we are
found to be in violation of environmental laws, we could be liable for damages and costs of remediation and may be subject to a halt in
production, which may adversely affect our business, operating results and financial condition. |
| • |
We may fail to be in compliance with financial covenants in our loan agreements. |
| • |
While we have been profitable in recent years, we may not be able to sustain long term profitable operations and may not have sufficient
resources to fund our operations in the future, |
| • |
We may not succeed in our efforts to expand our activity in the U.S. and other foreign markets. If we are unsuccessful, our
future revenues and profitability would be adversely affected. |
| • |
We may be subject to the requirements of the National Industrial Security Program Operating Manual for
our facility security clearance, which is a prerequisite to our ability to work on classified contracts for the U.S. government.
|
| • |
We may encounter difficulties with our international operations and sales that may have a material adverse effect on our sales and
profitability. |
| • |
Compliance with the conditions of a new business permit issued to us in 2018, if required, may be costly. We may become subject to
certain sanctions, including significant fines, criminal proceedings and in an unlikely event an order shutting down our factory.
|
| • |
Damage to our manufacturing facilities due to fire, natural disaster, or other events could materially
adversely affect our business, financial condition, insurance premiums and results of operations. |
| • |
The spread of novel strain of coronavirus, COVID-19, may adversely affect our business operations and
financial condition. |
| • |
Our quarterly operating results fluctuate significantly. Results of operations in any period should not be considered indicative
of the results to be expected for any future period. |
| • |
Our products
and related manufacturing processes are often highly complex and therefore we may be delayed in product shipments. Our products may at
times contain manufacturing defects, which may subject us to product liability and warranty claims. Our
operating margins may be affected as a result of price increases for our principal raw materials. |
| • |
Increasing scrutiny and changing expectations from investors, lenders, customers and other market participants with respect to our
Environmental, Social and Governance policies may impose additional costs on us or expose us to additional risks. |
| • |
We compete with PCB manufacturers in Asia whose manufacturing costs are lower than ours. |
| • |
We may fail to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley
Act of 2002, which could have a material adverse effect on our operating results, investor confidence in our reported financial information,
and the market price of our ordinary shares. |
| • |
We are required to comply with “conflict minerals” rules which impose costs on us, may make
our supply chain more complex, and could adversely impact our business. |
| • |
Increased regulation associated with climate change and greenhouse gas emissions could impose significant
additional costs on operations. |
| • |
Obstacles in our transition to a new enterprise resource planning system may adversely affect our business and results of operations
and the effectiveness of our internal control over financial reporting. |
| • |
Breaches of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our
business. |
| • |
Technological change may adversely affect the market acceptance of our products. |
| • |
The measures we take in order to protect our intellectual property may not be effective or sufficient. |
| • |
Claims that our products infringe upon the intellectual property of third parties may require us to incur significant costs.
|
| • |
We are affected by increasing global inflation and higher interest rates which may increase our cost of goods and services and borrowing
costs. |
Risks Related to Our Human Capital
| • |
If our workforce will be represented by a labor union we could incur additional costs or experience work stoppages as a result of
the renegotiation of our labor contracts. |
| • |
From time to time, we may be named as a defendant in actions involving the alleged violation of labor laws
related to employment practices, wages and benefits. |
| • |
Under current Israeli law, we may not be able to enforce covenants not to compete and therefore may be
unable to prevent our competitors from benefiting from the expertise of some of our former employees. |
| • |
We depend on key personnel for the success of our business. |
| • |
Our
ability to have access to insurance programs for directors
and officers may be curtailed, which may adversely affect our ability to retain and attract directors and officers. |
Risks Related to Our Ordinary Shares
| • |
Our share price has been volatile in the past and may continue to be susceptible to significant market price and volume fluctuations
in the future. |
| • |
The voting interest of Mr. Nissan, individually and through Nistec Golan, our controlling shareholder, may conflict with the interests
of other shareholders. |
| • |
We may in the future be classified as a passive foreign investment company, or PFIC, which would subject our U.S. investors to adverse
tax rules. |
| • |
We do not expect to distribute dividends in the foreseeable future. |
Risks Related to Our Organization and Location
in Israel
| • |
Political, economic and military instability in Israel may disrupt our operations and negatively affect our business condition, harm
our results of operations and adversely affect our share price. |
| • |
Our results of operations may be negatively affected by the obligation of our personnel to perform military reserve service.
|
| • |
Service and enforcement of legal process on us and our directors and officers may be difficult to obtain. |
| • |
Provisions of Israeli law may delay, prevent or make difficult an acquisition of us, which could prevent a change of control and
therefore impact the price of our shares. |
| • |
The rights and
responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders
under U.S. law. |
| • |
The termination or reduction of tax and other incentives that the Israeli government provides to domestic companies may increase
the costs involved in operating a company in Israel. |
Risks Related to Our Business and Our Industry
We
will likely require additional capital in the future, which may not be available to us.
As of December 31, 2022, we had $7.4 million
in cash and cash equivalents and working capital of $12.9 million. The lack of sufficient working
capital could negatively impact our ability to compete effectively in the future or to expand our production facilities, including with
respect to our investment plans. To the extent that we incur operating losses in the future or are unable to generate free cash flows
from our business, we may not have sufficient working capital to fund our operations and will be required to obtain additional financing.
Our working capital requirements and cash flow provided by our operating and financing activities are likely to vary greatly from quarter
to quarter, depending on the following factors: (i) the timing of orders and deliveries; (ii) net profit in the period; (iii) the purchase
of new equipment; (iv) the build‑up of inventories; (v) the payment terms offered to our customers; (vi) the payment terms offered
by our suppliers; and (vii) ability to maintain our current, or obtain additional, lines of credit and long-term loans from banks and
other lenders. The lack of sufficient working capital could negatively impact our ability to compete effectively in the future.
As of December 31, 2022, we had $3.5 million
of outstanding long-term loans from banks (including current maturities) and unutilized revolving lines of credit aggregating NIS 8.7
million (approximately $2.5 million). These credit facilities may not remain available to us in the future. All of our assets are pledged
as security for our liabilities to our banks, whose consents are required for any future pledge of such assets.
We are dependent on one-of-a-kind
machinery that may malfunction and may not be easily replaced.
The proper function of our manufacturing equipment
is an important element in our effectively operating our business. We own and use several unique manufacturing machines, some of which
are aging and sometimes malfunction, causing disruptions and occasionally even cessation of our manufacturing activities, which adversely
affects our business. It is possible that substantial funds may be required to repair or replace our production machinery, for which replacements
or replacement parts may not be readily available to us. Machinery failure could cause a cessation of our manufacturing activities for
a significant period of time, which may have a material adverse effect on our business, financial condition and results of operations.
Key customers account
for a significant portion of our revenues. The loss of a key customer would have an adverse impact on our business results.
In the years ended December 31, 2022, 2021
and 2020, a group of affiliated companies accounted for 18.7%, 21.2% and 18.9% of our total revenues, respectively, and another group
of affiliated companies accounted for 9.2%, 7.9% and 11.6% of our total revenues, respectively. We expect that a significant portion of
our future revenues will continue to be dependent on a small number of customers. If we are unable to retain our key customers, or maintain
our level of business with such customers, or, if we are unable to attract sufficient new business to compensate for the loss of or reduction
in business from any of our key customers, our results of operations and financial condition would be adversely affected.
We are dependent upon
a select number of suppliers for timely delivery of key raw materials and the loss of one or more of these suppliers or delays in supply
of these raw materials would adversely affect our manufacturing ability. If these suppliers delay or discontinue the manufacture
or supply of these raw materials, we may experience delays in production and shipments, increased costs and cancellation of orders for
our products.
We currently obtain our key raw materials
from a select number of suppliers. We do not have long-term supply contracts with our suppliers and our principal suppliers may
not continue to supply raw materials to us at current levels or at all. Any delays in delivery or shortages in these raw materials
could interrupt and delay manufacturing of our products and may result in the cancellation of orders for our products.
As the majority of PCB manufacturing is centered
in South East Asia, raw material suppliers may focus their attention and give higher priority to manufacturers in those areas, which may
interrupt the supply of raw materials to us. In addition, these suppliers could discontinue the manufacture or supply of these raw
materials at any time. During the year ended December 31, 2022, our purchases from two (2) suppliers accounted for 29.3% and 18.1% of
our total of consolidated raw material costs, respectively. In the event such raw materials are not readily available to us, we may not
be able to identify and integrate alternative sources of supply in a timely fashion. Any transition to alternate suppliers may result
in delays in production and shipment and increased expenses and may limit our ability to deliver products to our customers.
If
a raw material or component supplier fails to satisfy our product quality standards, including standards relating to “conflict minerals”
it could harm our customer relationships. Furthermore, if we are unable
to identify an alternative source of supply, we may have to modify our products or a large portion of our production process to use a
substitute raw material, which requires customers’ consent of use of such materials and which may cause delays in production and
shipments, increased design and manufacturing costs and increased prices for our products.
Because competition in
the PCB market is intense, our business, operating results and financial condition may be adversely affected.
The global PCB industry is highly fragmented
and intensely competitive. It is characterized by rapidly changing technology, frequent new product introductions and rapidly changing
customer requirements. We compete principally in the market for complex, flex-rigid and rigid multi-layer PCBs. In the Israeli
market we mainly compete with PCB Technologies Ltd. and major international PCB exporters, mainly from South East Asia, Europe and North
America.
In the European market we mainly compete with
Advanced Circuit Boards NV (Belgium), AT&S Austria Technologie & Systemtechnik AG (Austria), Dyconex and Cicor (Switzerland),
Graphics, Exception PCB and Invotec (United Kingdom), Cistelaier and Somacis (Italy), Schoeller-Electronics GmbH (formerly Ruwel Werke
GmbH) (Germany) and certain other German companies. In the North American market we mainly compete with TTM, Inc. (previously known
as DDi Corp. and Viasystems), KCA Electronics Inc., Lenthor Engineering, Printed Circuits, Inc., Teledyne and
certain other American companies. Many of these competitors have significantly greater financial and marketing resources
than us. Our current competition in the rigid PCB segment is mainly from PCB manufacturers in Southeast Asia (mainly in China),
which have substantially lower production costs than us. Continued competitive pressures could cause us to lose significant market
share.
In
addition, these competitors may respond more quickly to new or emerging technologies or adapt more quickly to changes in customer requirements
than we do. We must continually develop improved manufacturing processes to meet our customers’ needs for complex products, and
our manufacturing process technology is generally not subject to significant proprietary protection. During recessionary periods in the
electronics industry, our strategy of providing quick-turn services, an integrated manufacturing solution, and responsive customer service
may take on reduced importance to our customers. As a result, we may need to compete more on the basis of price, which would cause our
gross margins to decline.
Our results of operations
may be adversely affected by currency fluctuations.
Our revenues and expenses are denominated
in NIS, US dollars and euros. Due to the different proportions of currencies our revenues and expenses are denominated in, fluctuations
in rates of exchange between NIS and other currencies may affect our operating results and financial condition. The NIS value of our dollar
and euro denominated revenues are negatively impacted by the devaluation of the dollar and the euro against the NIS. The average exchange
rate for the NIS against the dollar was approximately 4%% higher in 2022 than in 2021, which had a positive impact on our operating results
in 2022. In the past, the NIS exchange rate against the dollar and other foreign currencies fluctuated, generally reflecting inflation
rate differentials. If NIS value of our dollar or Euro denominated revenues decreases, our results of operations will be adversely affected.
We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation or appreciation of the NIS against the
dollar or other foreign currencies.
We currently do not engage in hedging transactions.
If we were to decide to enter into any hedging transactions in the future in order to protect ourselves in part from currency fluctuations,
we may not be successful in our hedging efforts, or such transactions, if entered into, may not materially reduce the effect of fluctuations
in foreign currency exchange rates on our results of operations. Such hedging transactions may not necessarily mitigate the longer-term
impact of currency fluctuations on the operating costs of our business operations, and may result in additional expenses.
Unfavorable national and
global economic conditions could adversely affect our business, operating results and financial condition.
During periods of slowing economic activity,
our customers may reduce their demand for our products, technology and professional services, which would reduce our sales, and our business,
operating results and financial condition may be adversely affected. The global and domestic economies
continue to face a number of economic challenges, including threatened sovereign defaults, credit downgrades, restricted credit
for businesses and consumers and potentially falling demand for a variety of products and services. These
developments, or the perception that any of them could occur, could result in longer sales cycles, slower adoption of new technologies
and increased price competition for our products and services. We could also be exposed to credit risk and payment delinquencies on our
accounts receivable, which are not covered by collateral.
Significant
portions of our business are conducted outside the markets in which our products and solutions are manufactured
or generally sold, and accordingly, we often export a substantial number of products into such markets. We may be denied access to potential
customers or suppliers or denied the ability to ship products from any of our subsidiaries into the countries in which we currently operate
or wish to operate, as a result of economic, legislative, political and military conditions, including hostilities and acts of terrorism,
in such countries.
In
particular, there is currently significant uncertainty about the future relationship between the U.S. and various other countries, with
respect to trade policies, treaties, government regulations, and tariffs. For example, the recent imposition of tariffs and/or changes
in tariffs on various products by the U.S. and other countries, including China and Canada, have introduced greater uncertainty with respect
to trade policies and government regulations affecting trade between the U.S. and other countries, and new and/or increased tariffs have
subjected, and may in the future subject, us to additional costs and expenditure of resources. Major developments in trade relations,
including the imposition of new or increased tariffs by the U.S. and/or other countries, and any emerging nationalist trends in specific
countries could alter the trade environment and consumer purchasing behavior which, in turn, could have a material effect on our financial
condition and results of operations. While the U.S. and China signed a “phase one” trade deal on January 15, 2020 to
reduce planned increases to tariffs, concerns over the stability of bilateral trade relations remain.
In response to the to the invasion of the
Ukraine by Russia in February 2022, the U.S. and other countries have imposed various sanctions against Russia including restrictions
on selling or importing goods, services or technology in or from affected regions and travel bans and asset freezes impacting connected
individuals and political, military, business and financial organizations in Russia. The U.S. and other countries could impose wider sanctions
and take other actions. It is not possible to predict the broader consequences of this conflict, which could include further sanctions,
embargoes, regional instability, geopolitical shifts in the Middle East and worldwide and adverse effects on macroeconomic conditions,
currency exchange rates and financial markets, all of which could impact our business, financial condition and results of operations.
We may also be required in the future to increase
our reserves for doubtful accounts. In addition, the fair value of some of our assets may
decrease as a result of an uncertain economy and as a result, we may be required to record impairment charges in the future. If
global economic and market conditions or economic conditions in key markets remain uncertain or weaken further, our financial condition
and operating results may be materially adversely affected.
We expect that our business insurance policies will be more limited
in scope and their premiums higher than prior years. As a result, we may incur uninsured losses.
The coverage limits and scope of our insurance
policies may not be sufficient to cover future potential claims. The insurance coverage we do obtain may contain large deductibles or
insufficient coverage or fail to cover certain risks or potential losses. In addition, our insurance policies are subject to annual review
by our insurers and may not be renewed on similar or favorable terms, including with respect to coverage, deductibles or premiums, or
at all. If we suffer future machinery deficiency, fires or floods, or product liability claims, we may be unable to maintain applicable
insurance at satisfactory rates or with adequate amounts or at all. Such an insurance claim could negatively affect our manufacturing
process and therefore, sales, or require a change in the design or manufacturing process, any of which could harm our relationship with
our customers and partners, and have a material adverse impact on our reputation and business, financial condition, results of operations
and prospects.
We are subject to environmental
laws and regulations. Compliance with those laws and regulations requires us to incur costs and we are subject to fines or other sanctions
for non-compliance.
Our operations are regulated under various
environmental laws and regulations that govern, among other things, the discharge of hazardous materials into the air and water, as well
as the handling, storage and disposal of such materials. Compliance with these laws and regulations is a major consideration for
PCB manufacturers because metals and chemicals classified as hazardous substances are used in the manufacturing process. Since May
2003, our environmental management system has been ISO 14001 certified. This certification was based on successful implementation of environmental
management requirements and includes ongoing monitoring of our processes, raw materials and products. The certification is subject
to periodic compliance audits conducted by the Standards Institution of Israel. If, in the future, we are found to be in violation of
environmental laws or regulations, we could be liable for damages, costs of remedial actions, may be subject to criminal prosecution including
a range of potential penalties, and could also be subject to revocation of permits necessary to conduct our business or any part thereof.
Any such liability or revocation could have a material adverse effect on our business, financial condition and results of operations.
Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated
with a violation. A shortage of water in Israel may reduce the allocation of water available to manufacturing plants, including ours,
which could affect the concentrations of pollutants in our wastewater, making it harder to comply with the foregoing regulations, in which
event we would be required to invest additional funds to improve our wastewater treatment systems.
The cost of compliance with environmental
laws and regulations depends in part on the requirements in such laws and regulations and on the method selected to implement them.
If new or more restrictive standards are imposed, the cost of compliance could be very high and have an adverse impact on our revenues
and results of operations if we cannot recover those costs through the rates that we charge our customers.
Our customers are also required to comply
with various government regulations, legal requirements and industry standards, including many of the industry-specific regulations discussed
above. Our customers’ failure to comply could affect their businesses, which in turn would affect our sales to them.
In addition, if our customers are required by regulation or other requirements to make changes in their product lines, these changes could
significantly disrupt particular programs for these customers and create inefficiencies in our business.
We have in the past been,
and currently are, subject to claims and litigation relating to environmental matters. If we are found to be in violation of environmental
laws, we might be liable for damages and costs of remediation and may be subject to a halt in production, which may adversely affect our
business, operating results and financial condition.
We have in the past been, and currently are,
subject to claims and litigation relating to environmental matters. We may be subject to further environmental claims alleging that
we are in violation of environmental laws. If we are unsuccessful in such claims and other future claims and litigations or if actual
results are not consistent with our assumptions and judgments, we may be exposed to losses that could be material to our company. If we
are found to be in violation of environmental laws, we could be liable, in addition to fines, for damages, costs of remedial actions and
a range of potential penalties, and could also be subject to a shutdown of our factory. Such sanctions could have a material adverse effect
on our business, financial condition and results of operations.
During 2022, our permit providing for deviations
from the standards for discharges into the municipal sewage system was extended. There can be no assurance that such extension will
be granted in the future.
In March 2019, representatives of the Ministry
inspected our premises and issued a warning related to an alleged breach of the Clean Air Law and a warning related to the Hazardous Materials
Law (1993). Following a hearing at the Ministry in August 2019, the Ministry conducted two additional tests after which we were asked
to take corrective actions. During May 2020 and July 2020, representatives of the Ministry inspected our premises again. In September
2020 the Ministry issued a warning related to an alleged breach of the Clean Air Law, the Hazardous Materials Law (1993), the Water Law
and Business Permit Law. According to this letter, we were invited to a hearing at the Ministry on November 9, 2020. Following that hearing
meeting, the district manager issued a protocol stating that he will recommend that the Ministry impose fines on our company. We responded
and requested the district and Ministry to reconsider, taking into account the corrective measures taken by us.
In July 2022, we received a notification
from the Israeli Ministry of Environmental Protection about its intention to impose a penalty of approximately $0.1 million for an alleged
breach of the Hazardous Materials Law (1993). We submitted a response to the notification and asked that the penalty be reduced
by 40%.
In January 2023, we received
a notification from the Ministry of Environmental Protection that it intends to impose a penalty of approximately $0.6 million for an
alleged breach of the Clean Air Law during the years 2019-2020. We intend to apply for a reduction in the amount of the penalty in accordance
with provisions of the Clean Air Law.
Increased
regulation associated with climate change and greenhouse gas emissions could impose significant additional costs on operations.
Various
governments and governmental agencies have adopted or are contemplating statutory and regulatory changes in response
to the potential impacts of climate change and emissions of greenhouse gases. International treaties or agreements may also result in
increasing regulation of climate change and greenhouse gas emissions, including the introduction of greenhouse gas emissions trading mechanisms.
Any such law or regulation regarding climate change and greenhouse gas emissions could impose significant costs on our operations and
on the operations of our customers and suppliers, including increased energy, capital equipment, environmental monitoring, reporting and
other compliance costs. The potential costs of “allowances,” “offsets” or “credits” that may
be part of potential cap-and-trade programs or similar proposed regulatory measures are still uncertain. Any adopted future climate
change and greenhouse gas laws or regulations could negatively impact our ability, and that of our customers and suppliers, to compete
with companies situated in areas not subject to such laws or regulations. These statutory and regulatory initiatives, if enacted, may
impact our operations directly or indirectly through our suppliers or customers. Until the timing, scope and extent of any future
law or regulation becomes known, we cannot predict the effect on our business, financial condition, results of operations or cash flows.
Increasing scrutiny and
changing expectations from investors, lenders, customers and other market participants with respect to our Environmental, Social and Governance,
or ESG, policies may impose additional costs on us or expose us to additional risks.
Companies across all industries are facing
increasing scrutiny relating to their ESG policies. Investors, lenders and other market participants are increasingly focused on ESG practices
and in recent years have placed increasing importance on the implications and social cost of their investments. The increased focus and
activism related to ESG may hinder our access to capital, as investors and lenders may reconsider their capital investment allocation
as a result of their assessment of our ESG practices. If we do not adapt to or comply with investor, lender or other industry shareholder
expectations and standards, which are evolving, or which are perceived to have not responded appropriately to the growing concern for
ESG issues, regardless of whether there is a legal requirement to do so, may suffer from reputational damage and the business, financial
condition and price our company’s shares could be materially and adversely affected.
We may fail to be in compliance
with financial covenants in our loan agreements.
We are subject to financial covenants in our
loan agreements with the banks that provide us with our credit facilities and long-term loans. Our compliance with the financial covenants
is measured annually based on our annual audited financial statements. While we were compliant with our covenants to the banks with respect
to our financial statements for each of the three years ended December 31, 2022, we were not in compliance with these covenants in prior
years and received waivers from our banks. These credit facilities may not remain available to us in the future. Furthermore, under
certain circumstances the banks may require us to accelerate or make immediate payment in full of our credit facilities. All of
our assets are encumbered as security for our liabilities to our banks, whose consents are required for any future pledge of such assets.
The borrowings from our banks are secured by specific liens on certain assets, by a first priority charge on the rest of our now-owned
or after-acquired assets and by a fixed lien on goodwill (intangible assets) and insurance rights (rights to proceeds on insured assets
in the event of damage). In addition, the agreements prohibit us from selling or otherwise transferring any assets except in the ordinary
course of business or from placing a lien on our assets without the banks’ consent.
Both of our banks have the right to demand
immediate repayment of the loans and lines of credit in the event of non-compliance with the financial covenants or a change of control
in our company, if such a change occurred without their prior approval. Our failure to remain in compliance with each of the banks’
covenants, obtain waivers, negotiate agreements with new covenant terms, or obtain additional financing, if required, may adversely affect
our business, results of operations and financial position.
While we have been profitable
in recent years, we may not be able to sustain long term profitable operations and may not have sufficient resources to fund our operations
in the future
While we achieved net profits in each of the
three years ended December 31, 2022, we have not maintained consistent profitable operations in the past. We have incurred an accumulated
deficit of approximately $9.9 million since inception. There can be no assurance that we will be able to operate profitably in the future.
To the extent that we incur operating losses in the future, we may have insufficient working capital to fund our operations. If
we do not generate sufficient cash from operations, we will be required to obtain additional financing or reduce our level of expenditure.
Such financing may not be available in the future, or, if available, may not be on terms favorable to us. If adequate funds are
not available to us, our business, and results of operations and financial condition will be materially and adversely affected.
We may not be able to
receive Israeli governmental grants in the future.
The Company was awarded a grant from the Israeli
Investment Authority that will fund 15% of our expected $1.5 million investment in Advanced Manufacturing Equipment compliant with Industry
4.0 standards, which focuses on interconnectivity, automation, machine learning, and real-time data. The grant also provides for potential
future grants covering an additional 5% of these capital investments, as soon as we demonstrate improvements in certain of our operational
indicators. There is no guarantee that we will demonstrate such improvements or be awarded the additional grant.
We received final approval from the Israel
Innovation Authority (“IIA”) for a 40%, royalty bearing participation in an approximately $800,000 one-year development program,
which started in January 2023. The total R&D program may be extended for a second year, subject to IIA approval. This R&D
program is meant to enable us to achieve a significantly faster production rate in certain stages of our manufacturing process, which
will also drastically reduce scrap. There can be no assurance that the R&D program will succeed in achieving its goals or that
all pre-defined benefits will be attained, thus any additional grants are not guaranteed.
Rapid changes in the Israeli
and international electronics industries and recessionary pressures may adversely affect our business.
Our principal customers include manufacturers
of defense and aerospace, medical, industrial, telecom and networking equipment, as well as contract electronic manufacturers. The electronics
industry is subject to rapid technological changes and products obsolescence. Discontinuance or modification of products containing PCBs
manufactured by our company could have a material adverse effect on us. In addition, the electronics industry is subject to sharp economic
cycles. Increased or excess production capacity by our competitors in the PCB industry and recessionary pressure in major electronics
industry segments may result in intensified price competition and reduced margins. As a result, our financial condition and results
of operations may be adversely affected. A decline in the Israeli and international electronic markets may cause a decline in our revenues
and adversely affect our operating results and financial condition in the future.
We may not succeed in
our efforts to expand our activity in the U.S. and other foreign markets. If we are unsuccessful, our future revenues and profitability
would be adversely affected.
Our business plan assumes an increase in revenues
from the U.S. and other market. However, our efforts to increase sales to such markets may not succeed. Sales to the medical, defense
and aerospace industries may be affected by several factors, including with respect mainly to the U.S., cutbacks in government spending.
If we are unsuccessful in such efforts, our future revenues and profitability would be adversely affected.
In order to sell PCBs to the U.S. defense
market we were required to obtain International Traffic in Arms Regulations (ITAR) registration from the U.S. Department of State, which
is subject to periodic extension. There can be no assurance that we will be able to retain our ITAR certification. In the event of a change
in control of our company, the U.S. Department of State may investigate the transfer of control and oppose the transaction. The
loss of our ITAR certification could adversely affect our future revenues and profitability.
We
may be subject to the requirements of the National Industrial Security Program Operating Manual for our facility security clearance, which
is a prerequisite to our ability to work on classified contracts for the U.S. government.
A
facility security clearance is required
in order to be awarded and perform classified contracts for the U.S. Department of Defense, or
the DoD, and certain other agencies of the U.S. government. To become a cleared entity, we must comply with the requirements of the National
Industrial Security Program Operating Manual, or the NISPOM, and any other applicable U.S. government industrial security regulations.
Further, due to the fact that a significant portion of our voting equity is owned by a non-U.S. entity, we are required to be governed
by and operate in accordance with the terms and requirements of a Special Security Agreement, or the SSA.
If
we were to violate the terms and requirements of the SSA, the NISPOM, or any other applicable U.S. government industrial security regulations
(which may apply to us under the terms of classified contracts), we could lose our security clearance.
We cannot be certain that we will be able to maintain our security clearance. If for some reason our security clearance is invalidated
or terminated, we may not be able to continue to perform on classified contracts and would not be able to enter into new classified contracts,
which could materially adversely affect our business, financial condition, and results of operations.
Breaches
of network or information technology security, natural
disasters or terrorist attacks could have an adverse effect on our business.
Cyber-attacks
or other breaches of network or IT security, natural disasters, terrorist acts or acts of war may cause equipment failures or disrupt
our systems and operations. We may be subject to attempts to breach the security of our networks and IT infrastructure through cyber-attack,
malware, computer viruses and other means of unauthorized access, which could also impact the operation of our products and services.
Our inability to operate our facilities as a result of such events, even for a limited period of time, may result in significant expenses
or loss of market share to other competitors in the global PCB industry. In addition, a failure to protect the privacy of customer and
employee confidential data against breaches of network or IT security could result in damage to our reputation.
During the third quarter of 2021, an unusual activity was detected on our computer network systems. We immediately took a number of actions
that led to the removal of the potential threat. The event ended without the need to disable our systems or any other impact. We believe
that the attempt was aimed at extracting information and not for a ransom demand. Following the incident, we took steps to strengthen
our computer infrastructure protection systems. Due to our quick response, we did not have a material adverse effect on our business or
operations to date. However, we could incur significant costs in order to investigate and respond to future attacks, to respond to evolving
regulatory oversight requirements, to upgrade our cybersecurity systems and controls, and to remediate security compromise or damage.
In response to past threats and attacks, we have implemented further controls and planned for other preventative actions to further strengthen
our systems against future attacks. However, we cannot assure that such measures will provide absolute security, that we will be able
to react in a timely manner in the future, or that our remediation efforts following past or future attacks will be successful. Consequently,
our financial performance and results of operations would be materially adversely affected.
We may encounter difficulties
with our international operations and sales that may have a material adverse effect on our sales and profitability.
Contracts with U.S. military agencies, as
well as military equipment manufacturers in Europe, are subject to certain regulatory restrictions and approvals, which we may not be
able to comply with or obtain. We may not be able to maintain or increase international market demand for our products. To
the extent that we cannot do so, our business, operating results and financial condition may be adversely affected.
International operations are subject to inherent
risks, including the following:
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the impact of possible recessionary environments or economic instability in multiple foreign markets; |
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changes in regulatory requirements and complying with a wide variety of foreign laws; |
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tariffs and other trade barriers; |
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the imposition of exchange or price controls or other restrictions on the conversion of foreign currencies; and |
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difficulties and costs of staffing and managing foreign operations. |
Significant political developments could also
have a materially adverse effect on us. In the United States, potential or actual changes in fiscal, defense appropriations, tax and labor
policies could have uncertain and unexpected consequences that materially impact our business, results of operations and financial condition.
Damage
to our manufacturing facilities due to fire, natural disaster, or other events could materially adversely affect our business, financial
condition, insurance premiums and results of operations.
The destruction or
closure of our facility for a significant period of time as a result of fire, explosion, act of war or terrorism, flood, tornado, earthquake,
lightning, other natural disasters, required maintenance, or other events could harm us financially, increasing our costs of doing business
and limiting our ability to deliver our manufacturing services on a timely basis.
Our insurance coverage with respect to damage to our facility
or our customers’ products caused by natural disasters is limited and is subject to deductibles and coverage limits. Such coverage
may not be adequate or continue to be available at commercially reasonable rates and terms. In addition, our insurance premiums have risen
due to recent events.
In the event our facility
is closed on a temporary or permanent basis as a result of a natural disaster, required maintenance or other event, our operations could
be significantly disrupted. Such events could delay or prevent product manufacturing and shipment for the time required to transfer production
or repair, rebuild or replace the affected manufacturing facilities. This time frame could be lengthy and result in significant expenses
for repair and related costs. While we have disaster recovery plans in place, there can be no assurance that such plans will be sufficient
to allow our operations to continue in the event of disaster, required repair or other extraordinary event. Any extended inability to
continue our operations at unaffected facilities following such an event would reduce our revenue and potentially damage our reputation
as a reliable supplier.
On
June 14, 2022, a fire broke out in one of the production rooms in our plant in Petach-Tikva. We
were able to contain the fire without any injuries and have completed the repair of the damaged line and our manufacturing capacity has
returned to normal levels. We are still discussing the amount of compensation to be received from our insurance company.
We
are vulnerable to the general economic effects of epidemics, pandemics and other public health crises, such as the COVID-19 pandemic which
began in 2020.
Although public health and quarantine conditions
appear to have improved in the majority of countries globally, uncertainty remains regarding the emergence of additional strains of COVID-19
and whether governments and health authorities around the globe will be forced to implement the same or similar quarantine measures as
utilized previously. The reimplementation of quarantine, lockdowns, or other measures in response to COVID-19 could significantly
increase the expenses we incur for precautionary protective measures, as well as the costs we incur due to operational disruptions. For
example, we may be required to limit the number of employees working based on our physical space or our production capabilities may suffer
due to shortages in raw material. Any of the foregoing factors could have an adverse effect on our business, financial condition
and operating results.
Unlike other industries, as a manufacturer
of physical products, we cannot rely on our main work force to be working from home. Israel and other countries have previously enforced
quarantines and shutdowns to slow the spread of COVID-19, and restricted international travel during this pandemic. While prior government
shutdowns did not have a significant impact on our business, a future government shutdown could result in the suspension of work in progress
and delivery delays which would adversely affect our future revenue and cash flow. We are continuing to closely monitor COVID-related
impacts on all aspects of our business and geographies, including on our workforce, supply chain and customers.
Our future results of
operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms,
supply chain disruptions and operational challenges faced by our customers. Continued outbreaks of COVID-19 could result in a widespread
health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn or
a global recession that could cause significant volatility or decline in the trading price of our securities, affect our ability to execute
strategic business activities, affect demand for our products and likely impact our operating results. These may further limit or restrict
our ability to access capital on favorable terms, or at all, lead to consolidation that negatively impacts our business, weaken demand,
increase competition, cause us to reduce our capital spend further, or otherwise disrupt our business.
Our quarterly operating
results fluctuate significantly. Results of operations in any period should not be considered indicative of the results to be expected
for any future period.
Our quarterly operating results have fluctuated
significantly in the past and are likely to fluctuate significantly in the future. Our future operating results will depend on many
factors, including (but not limited to) the following:
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the size and timing of significant orders and their fulfillment; |
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demand for our products and the mix of products purchased by our customers; |
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competition from lower priced manufacturers; |
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fluctuations in foreign currency exchange rates, primarily the NIS against the Dollar and the Euro; |
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availability of raw materials; |
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plant or line shutdowns to repair or replace malfunctioning manufacturing equipment; |
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the length of our sales cycles; |
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changes in our strategy; |
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the number of working days in the quarter; |
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changes in seasonal trends; and |
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general domestic and international economic and political conditions. |
Due to the foregoing factors, quarterly revenues and operating
results are difficult to forecast, and it is likely that there will be significant differences between the results from one quarter to
another.
Quarterly sales and operating results are
also difficult to forecast because they are dependent almost exclusively on the volume and timing of orders during the quarter and our
customers generally operate with a short delivery cycle and expect delivery of a significant portion of the order within 30 working days.
The delivery of such orders is subject to the number of available working days during the quarter, which can fluctuate significantly from
quarter to quarter due to holidays and vacations. Certain prototype and pre-production runs require even shorter turn-around times stemming
from customers’ product launches and design changes. In addition, there might be sudden increases, decreases or cancellations of
orders for which there are commitments, which further characterize the electronics industry and the companies that operate in it. The
industry practice is to make such changes without any penalties, except for the time and materials expended on the order.
Our expenses are, in significant part, relatively
fixed. If revenue levels fall below expectations, our net income is likely to be disproportionately adversely affected because a proportionately
smaller amount of the expenses varies with our revenues. We may not be able to be profitable on a quarterly or annual basis in the
future. An ongoing pattern of cancellations, reductions in orders and delays could have a material adverse effect on our results
of operations. Due to all of the foregoing, it is very difficult to predict revenues for any future quarter with any significant
degree of accuracy. Accordingly, we believe that period-to-period comparisons of our operating results are not necessarily meaningful
and should not be relied upon as indications of future performance.
Our
products and related manufacturing processes are often highly complex and therefore we may be delayed in product shipments. Our products
may at times contain manufacturing defects, which may subject us to product liability and warranty claims.
Our business involves highly complex manufacturing
processes that are subject to periodic failure. Process failures have occurred in the past and have resulted in delays in product
shipments, and process failures may occur in the future. Furthermore, we face an inherent business
risk of exposure to warranty and product liability claims, which are likely to be substantial in light of the use of our products
in business-critical applications. Our products may fail to perform as expected or may be alleged
to result in bodily injury or property damage. If we were to manufacture and deliver products to our customers that contain defects, whether
caused by a design, manufacturing or component failure, or by deficiencies in the manufacturing processes, it may result in delayed shipments
to customers and reduced or cancelled customer orders. In addition, if any of our products are or are alleged to be defective, we
may be required to participate in a recall of such products. Over the years we have been involved in claims or litigation
relating to allegedly defective products. A successful warranty or product liability claim against us
in excess of our established warranty and legal reserves or available insurance coverage, or a requirement that we participate in a product
recall may have a material adverse effect on our business, financial condition, results of operations or cash flows and may harm our business
reputation, which could lead to customer cancellations or non-renewals.
Our products and product
components need to meet certain industry standards.
Our products and product components need to
meet certain standards for the aerospace, defense, and other industries to which we market our products. In addition, new industry
standards in the aviation and defense industries could cause some or all of our products and services to become obsolete and unmarketable,
which would adversely affect our results of operations. Noncompliance with any of these standards could limit our sales and adversely
affect our business, financial condition, and results of operations.
Our operating margins
may be affected as a result of price increases for our principal raw materials.
In recent years, our suppliers have increased
their prices for most of our principal raw materials. We have faced pressure to raise our prices for our products to compensate for supplier
price increases in order to maintain our operating margins, which we may not be able to achieve due to the competitive market. Furthermore,
our existing suppliers or new suppliers or sources of materials may pass the increase in sourcing costs due to the coronavirus outbreak
to us through price increases, thereby impacting our margins. Material changes in the pricing practices of our suppliers could negatively
impact our profitability. Additional price increases for our principal raw materials may materially affect our operating margins
and future profitability.
We compete with PCB manufacturers
in Asia whose manufacturing costs are lower than ours.
In recent years, many electronics manufacturers
have moved their commercial production to Asia to take advantage of its exceptionally large, relatively low-cost labor pool. The
continued outsourcing of production to Asia is likely to result in additional commercial market share potential for PCB manufacturers
with a strong presence and reputation in such markets. Accordingly, we will need to compete with PCB manufacturers whose costs of production
may be substantially lower than ours. This competition may limit our ability to price our products profitably, which could significantly
harm our financial condition and results of operations. In addition, we distinguish ourselves by focusing on developing cutting edge technologies
for high-end products, in order to serve our sophisticated defense, aerospace and medical customers. This may limit our ability to reach
certain clientele that demand lower-end products in order to reduce their costs.
Our enterprise resource
planning system is no longer being fully supported by its developer and the hardware on which it runs may not be supported in the future. The
failure of such system before we transition to a new system may adversely affect our business and results of operations and the effectiveness
of our internal control over financial reporting.
Our current enterprise resource planning
system (“ERP”) is designed to improve the efficiency of our supply chain and financial transaction processes, accurately maintain
our books and records, and provide information important to the operation of the business to our management team. Our system is no longer
being fully supported by its developer and the hardware on which the ERP runs and the operating system of the hardware are at high risk
of not being supported in the near future. While we intend to replace the system in the future, there is no immediate plan to do so. Any
significant disruption or deficiency in our ERP could have a material adverse effect on our ability to fulfill and invoice customer orders,
apply receipts, place purchase orders with suppliers, and make disbursements, and could negatively impact data processing and electronic
communications among business locations, which may have a material adverse effect on our business, consolidated financial condition or
results of operations.
Regulations
related to conflict minerals may cause us to incur additional expenses and could limit the supply and increase the costs of certain metals
used in the manufacturing of our solutions.
The Dodd-Frank Wall Street
Reform and Consumer Protection Act imposes disclosure requirements regarding the use in components of our products of “conflict
minerals” mined from the Democratic Republic of Congo and adjoining countries, whether the components of our products are manufactured
by us or third parties. These requirements could affect the pricing, sourcing and availability of minerals used in the manufacture of
components we use in our products. Although the U.S. Securities and Exchange Commission, or the SEC, has provided guidance with respect
to a portion of the conflict mineral filing requirements that may somewhat reduce our reporting practices, there are costs associated
with complying with the disclosure requirements and customer requests, such as costs related to our due diligence to determine the source
of any conflict minerals used in our products. Because of the complexity of our supply chain, we may face reputational
challenges if we are unable to sufficiently verify the origins of the subject minerals. Moreover, we are likely to encounter challenges
to satisfy those customers who require that all of the components of our products are certified as “conflict free.” If we
cannot satisfy these customers, they may choose a competitor’s products.
We may fail to maintain
effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, which could have
a material adverse effect on our operating results, investor confidence in our reported financial information, and the market price of
our ordinary shares.
Our efforts to comply with the requirements
of Section 404 of the Sarbanes-Oxley Act of 2002, governing internal control and procedures for financial reporting have resulted in increased
general and administrative expenses and a diversion of management time and attention, and we expect these efforts to require the continued
commitment of significant resources. We may identify material weaknesses or significant deficiencies in our assessments of our internal
control over financial reporting. Failure to maintain effective internal control over financial reporting could result in investigations
or sanctions by regulatory authorities, and could have a material adverse effect on our operating results, investor confidence in our
reported financial information, and the market price of our ordinary shares.
Technological change may
adversely affect the market acceptance of our products.
Technological change in the PCB industry is
rapid and continual. To satisfy customers’ needs for increasingly complex products, PCB manufacturers must continue to develop
improved manufacturing processes, provide innovative solutions and invest in new facilities and equipment. To the extent we determine
that new technologies and equipment are required to remain competitive, the development, acquisition and implementation of such technologies
and equipment are likely to require significant capital investment. We expect that we will need to invest large amounts in the next
few years to replace or refurbish old equipment and to remain competitive in the market. This capital may not be available to us
in the future for such purposes and any new manufacturing processes developed by us may not become or remain commercially viable.
As a result, we may not be able to maintain our current technological position. Furthermore, the PCB industry may in the future
encounter competition from new technologies that may reduce demand for PCBs or may render existing technology less competitive or obsolete.
Our future process development efforts may not be successful or the emergence of new technologies, industry standards or customer requirements
may render our technology, equipment or processes obsolete or uncompetitive.
The measures we take in
order to protect our intellectual property may not be effective or sufficient.
Our success depends in part on our proprietary
techniques and manufacturing expertise, particularly in the area of complex multi-layer and flex-rigid PCBs. We currently rely on
a combination of trade secrets, copyright and trademark law, together with non-disclosure and invention assignment agreements, to establish
and protect the proprietary rights and technology used in our products. Like many companies in the PCB industry, we currently do
not hold any patents. We believe that, because of the rapid pace of technological change in the electronics industry, the legal
protections for our products are less significant factors in our success than the knowledge, ability and experience of our employees,
the frequency of product enhancements and the timeliness and quality of support services that we provide.
We generally enter into confidentiality agreements
with our employees, consultants, customers and potential customers and limit the access to and the distribution of our proprietary information.
Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our technology without authorization,
or to develop similar technology independently. Further, the laws of certain countries in which we sell our products do not protect
our intellectual property rights to the same extent as do the laws of the United States. Substantial unauthorized use of our products
could have a material adverse effect on our business. We cannot make assurances that our means of protecting our proprietary rights
will be adequate or that our competitors will not independently develop similar technology.
Claims that our products
infringe upon the intellectual property of third parties may require us to incur significant costs.
While we do not believe that our products
and proprietary rights infringe upon the proprietary rights of others, third parties may assert infringement claims against us or claims
that we have violated a patent or infringed on a copyright, trademark or other proprietary right belonging to them. Any infringement
claim, even one without merit, could result in the expenditure of significant financial and managerial resources to defend against the
claim. Moreover, a successful claim of product infringement against us or a settlement could require us to pay substantial amounts
or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the
technology. We might not be able to obtain a license from the third party asserting the claim on commercially reasonable terms,
if at all. We also may not be able to obtain a license from another provider of suitable alternative technology to permit us to
continue offering the product. Infringement claims asserted against us could have a material adverse effect on our business, operating
results and financial condition.
During the last several years, a supplier
of one of our software packages requested us to conduct an audit of our operations to verify that we do not breach any intellectual property
rights it allegedly owns. We believe that we have fully, diligently and timely complied with our obligation toward the supplier.
We also believe that the supplier has no right to conduct any audit of our products or services and such audit may cause us to breach
confidentiality obligations to other entities, and therefore replied that there were no grounds for his request. If we are found
to be in violation of such supplier’s intellectual property rights, we could be liable for compensation and costs of an unknown
amount. Such liability could have a material adverse effect on our business, financial condition and results of operations.
We are affected by increasing
global inflation and higher interest rates which may increase our cost of goods and services and borrowing costs.
Global inflation and high interest rates pose
a significant risk factor to our company. The rise in inflation may lead to an increase in the cost of goods and services, reducing consumer
spending power, and affecting our sales and revenue. High interest rates have increased borrowing costs, which may reduce our ability
to finance operations and investments, and potentially impact our financial stability. As a result, we are closely monitoring global economic
trends and proactively taking measures to mitigate the impact of inflation and high interest rates on our business operations and financial
performance.
Risks Related to Our Human Capital
If our workforce will
be represented by a labor union we could incur additional costs or experience work stoppages as a result of the renegotiation of our labor
contracts.
Our employees have previously presented us
with the possibility of establishing an employees’ union committee, which was soon after dissolved. If our employees are represented
by a union in the future, we could incur additional costs, experience work stoppages, either of which could adversely affect our business
operations, including through a loss of revenue and strained relationships with customers. Strikes and work stoppages occur relatively
frequently in Israel. If Israeli trade unions threaten additional strikes or work stoppages and such strikes or work stoppages occur,
these may, if prolonged, have a material adverse effect on the Israeli economy and on our business, including our ability to deliver products
to our customers in a timely manner.
From time
to time, we may be named as a defendant in actions involving the alleged violation of labor laws related to employment
practices, wages and benefits.
From
time to time we are involved in labor related legal proceedings arising from the operation of our business. During the last years
we recruited a new management team and reduced our overall headcount, which actions may expose our company to increased labor related
legal proceedings.
Under
current Israeli law, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from
benefiting from the expertise of some of our former employees.
We
currently have non-competition clauses in the employment agreements of most of our employees. The provisions of such clauses prohibit
our employees, if they cease working for us, from directly competing with us or working for our competitors. Recently, Israeli labor
courts have required employers, seeking to enforce non-compete undertakings against former employees,
to demonstrate that the competitive activities of the former employee will cause harm to one of a limited number of material interests
of the employer recognized by the courts (for example, the confidentiality of certain commercial information or a company’s intellectual
property). In the event that any of our employees chooses to leave and work for one of our competitors, we may be unable to prevent
our competitors from benefiting from the expertise our former employee obtained from us, if we cannot demonstrate to the court that we
would be harmed.
We
depend on key personnel for the success of our business.
Our success depends, to a significant extent,
on the continued active participation of our executive officers and other key personnel. In addition, there is significant
competition for employees with technical expertise in our industry. In order to succeed we would need to be able to:
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retain our executive officers and key technical personnel; |
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attract and retain additional qualified personnel to provide technological depth and support to enhance existing products and develop
new products; and |
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attract and retain highly skilled operations, marketing and financial personnel. |
We cannot make assurances that we will be
successful in attracting, integrating, motivating and retaining key personnel. If we are unable to retain our key personnel and
attract additional qualified personnel as and when needed, our business may be adversely affected.
Our
ability to have access to insurance programs for directors and officers may be curtailed, which may adversely affect our ability to retain
and attract directors and officers.
In recent years we have
experienced difficulties in obtaining directors & officers' insurance on reasonable terms as result of a tightening insurance market.
If we are unable to continue to obtain directors & officers’ insurance or in limits of coverage sufficient to satisfy our indemnification
obligations to our directors and officers, we may be unable to retain such directors and officers and have limited ability to attract
replacements.
We may be required to
make payments to satisfy our indemnification obligations.
We have agreements with our directors and
senior officers which may require us, subject to Israeli law and certain limitations in the agreements, to indemnify our directors and
senior officers for certain liabilities and expenses that may be imposed on them due to acts performed, or failures to act, in their capacity
as office holders as defined in the Israeli Companies Law, 5759-1999, or the Israeli Companies Law. These liabilities may include
financial liabilities imposed by judgments or settlements in favor of third parties, and reasonable litigation expenses imposed by a court
in relation to criminal charges from which the indemnitee was acquitted or criminal proceedings in which the indemnitee was convicted
of an offense that does not require proof of criminal intent. Furthermore, we agreed to exculpate our directors and officers with
respect to a breach of their duty of care towards our company. On October 17, 2017, our shareholders approved an updated indemnification
agreement to be entered to with our directors and officers, and our shareholders approved an amendment thereto on December 5, 2019.
Risks Related to Our Ordinary Shares
Our share price has been
volatile in the past and may continue to be susceptible to significant market price and volume fluctuations in the future.
Our ordinary shares have experienced significant
market price and volume fluctuations in the past and may experience significant market price and volume fluctuations in the future in
response to factors such as the following, some of which are beyond our control:
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quarterly variations in our operating results; |
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operating results that vary from the expectations of securities analysts and investors; |
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changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
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announcements of technological innovations or new products by us or our competitors; |
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announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital
commitments; |
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changes in the status of our intellectual property rights; |
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announcements by third parties of significant claims or proceedings against us; |
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announcements by governmental or regulatory authorities of significant investigations or proceedings against us; |
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additions or departures of key personnel; |
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changes in our cost structure due to factors beyond our control, such as new laws or regulations relating to environmental matters
and employment; |
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future sales of our ordinary shares; |
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our involvement in litigation; |
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general stock market price and volume fluctuations; |
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changes in the prices of our products and services; and |
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devaluation of the dollar against the NIS. |
Domestic and international stock markets often
experience extreme price and volume fluctuations. Market fluctuations, as well as general political and economic conditions, such
as a recession, interest rate or currency rate fluctuations or political events or hostilities in or surrounding Israel, could adversely
affect the market price of our ordinary shares. Low trading volume may also increase the price volatility of our ordinary shares. A thin
trading market could cause the price of our ordinary shares to fluctuate significantly more than the stock market as a whole.
The voting interest of
Mr. Nissan, individually and through Nistec Golan, our controlling shareholder, may conflict with the interests of other shareholders.
Mr. Yitzhak Nissan, our Chairman of the Board
and the controlling shareholder of Nistec Golan, beneficially owns 69.5% of our outstanding ordinary shares. Accordingly,
Mr. Nissan and Nistec Golan have the ability to exercise a significant influence over our business and affairs and generally have the
power to determine all matters submitted to a vote of our shareholders where our shares vote together as a single class, including the
election of directors and approval of significant corporate transactions. Mr. Nissan and
Nistec Golan may make decisions regarding Eltek and our business that are opposed to other shareholders’ interests or with which
other shareholders may disagree. Nistec Golan’s and Mr. Nissan’s voting power could have the effect of deterring or preventing
a change in control of our company that might otherwise be beneficial to our other shareholders.
We may in the future be
classified as a passive foreign investment company, or PFIC, which would subject our U.S. investors to adverse tax rules.
U.S.
holders of our ordinary shares may face income tax risks. There is a risk that we will be treated as a “passive foreign investment
company” (“PFIC”). Our treatment as a PFIC could result in a reduction in the after-tax return to U.S. Holders
(as defined below in “Material U.S. Federal Income Tax Considerations”)
of our ordinary shares and would likely cause a reduction in the value of such shares. A foreign corporation will be treated as a PFIC
for U.S. federal income tax purposes if either (1) at least 75% of its gross income for any taxable year consists of certain types of
“passive income,” or (2) at least 50% of the average value of the corporation’s
gross assets produce, or are held for the production of, such “passive income.” For
purposes of these tests, “passive income” includes dividends, interest, gains from the sale or exchange of investment property
and rents and royalties other than rents and royalties that are received from unrelated parties in connection with the active conduct
of a trade or business. For purposes of these tests, income derived from the performance of services does not constitute “passive
income.” If we are treated as a PFIC, U.S. Holders of ordinary shares would be subject to a special adverse U.S. federal
income tax regime with respect to the income derived by us, the distributions they receive from us, and the gain, if any, they derive
from the sale or other disposition of their ordinary shares. In particular, dividends paid by us, if any, would not be treated as “qualified
dividend income,” eligible for preferential tax rates in the hands of non-corporate U.S. shareholders. We believe that we
were not a PFIC for the 2022 tax year. However, since PFIC status depends upon the composition of our income and the market value of our
assets from time to time, there can be no assurance that we will not become a PFIC in any future taxable year. U.S. Holders should carefully
read “Material U.S. Federal Income Tax Considerations” for a more complete discussion of the U.S. federal income tax risks
related to owning and disposing of our ordinary shares.
We do not expect to distribute
dividends in the foreseeable future.
On
November 2022, our board of directors declared the
Company’s first cash dividend, in the amount of US$0.17 per share (approximately $1 million in the aggregate). The dividend was
paid in US dollars on December 19, 2022 to all of the Company’s shareholders of record as of December 12, 2022. Prior to such distribution,
we have never declared or paid any cash dividends on our ordinary shares.
We currently intend to retain our current and any future earnings to finance operations and expand our business and, therefore, do not
expect to pay any dividends in the foreseeable future. According to the Israeli Companies Law, a company may distribute dividends
out of its profits, provided that there is no reasonable concern that such dividend distribution will prevent the company from paying
all its current and foreseeable obligations, as they become due, or otherwise upon the permission of the court. In the event cash dividends
are declared, such dividends will be paid in NIS, and will be subject to applicable Israeli withholding taxes. The declaration of
dividends is subject to the discretion of our board of directors and would depend on various factors, including our operating results,
financial condition, future prospects and any other factors deemed relevant by our board of directors. You should not rely on an
investment in our company if you require dividend income from your investment.
Risks Related to Our Organization and Location in Israel
Political, economic and
military instability in Israel may disrupt our operations and negatively affect our business condition, harm our results of operations
and adversely affect our share price.
We
are incorporated under the laws of, and our principal executive offices, production, manufacturing and research and development facilities
are located in, the State of Israel. As a result, political, economic and military conditions affecting Israel directly influence
us. Conflicts in North Africa and the Middle
East, including Syria which borders Israel, have resulted in continued political uncertainty
and violence in the region. Efforts to improve Israel’s relationship with the Palestinian Authority have failed to result in a permanent
solution, and there have been numerous periods of hostility in recent years. In addition, relations between Israel and Iran continue to
be seriously strained, especially with regard to Iran’s nuclear program. Such instability
may affect the local and global economy, could negatively affect business conditions and, therefore, could adversely affect our operations.
To date, these matters have not had any material effect on our business and results of operations; however,
the regional security situation and worldwide perceptions of it are outside our control and there can be no assurance that these matters
will not negatively affect us in the future.
Our
commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle
East. Although the Israeli government has in the past covered the reinstatement value of certain damages that were caused by terrorist
attacks or acts of war, we cannot assure you that this government coverage will
be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred
by us could have a material adverse effect on our operations.
Parties with whom we do business have sometimes
declined to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary
in order to meet our business partners face to face. In addition, the political and security situation in Israel may result in parties
with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those
agreements pursuant to force majeure provisions in such agreements. Furthermore, several countries
and companies restrict business with Israel and Israeli companies, and additional countries may impose restrictions on doing business
with Israel and Israeli companies. Restrictive laws or policies directed towards
Israel or Israeli businesses may have an adverse impact on our operations, our financial results or the expansion of our business.
The Israeli government
is currently pursuing extensive changes to Israel’s judicial system. Actual or perceived instability with respect to the current
public dispute over changes to the Israeli legal systems or the impact thereof, may individually or in the aggregate adversely affect
the Israeli economy and our ability to do business, financial condition, results of operations and growth prospects, and share price.
To date, these matters have not had any material
effect on our business and results of operations; however, the internal political situation, the regional security situation and worldwide
perceptions of it are outside our control and there can be no assurance that these matters will not negatively affect us in the future.
Our results of operations
may be negatively affected by the obligation of our personnel to perform military reserve service.
Some of our employees, directors and officers
in Israel are obligated to perform annual reserve duty in the Israeli Defense Forces and may be called for active duty under emergency
circumstances at any time. If a military conflict or war arises, these individuals could be required to serve in the military for
extended periods of time. Our operations could be disrupted by the absence for a significant period of one or more of our executive
officers or key employees or a significant number of other employees due to military service. Any disruption in our operations could
adversely affect our business.
Service and enforcement
of legal process on us and our directors and officers may be difficult to obtain.
Service of process upon our directors and
officers and the Israeli experts named herein, all of whom reside outside the United States, may be difficult to obtain within the United
States. Furthermore, since substantially all of our assets, all of our directors and officers and the Israeli experts named in this
annual report are located outside the United States, any judgment obtained in the United States against us or these individuals or entities
may not be collectible within the United States.
There is doubt as to the enforceability of
civil liabilities under the Securities Act and the Exchange Act in original actions instituted in Israel. However, subject to certain
time limitations and other conditions, Israeli courts may enforce final judgments of United States courts for liquidated amounts in civil
matters, including judgments based upon the civil liability provisions of those and similar acts.
Provisions of Israeli
law may delay, prevent or make difficult an acquisition of us, which could prevent a change of control and therefore impact the price
of our shares.
Provisions
of Israeli corporate and tax laws may have the effect of delaying, preventing or making more difficult a merger with, or other acquisition
of, us or all or a significant portion of our assets. Israeli corporate law regulates acquisitions of shares through tender offers
and mergers, requires special approvals for transactions involving significant shareholders and regulates other matters that may be relevant
to these types of transactions. These provisions of Israeli law could have the effect of delaying or preventing a change in control and
may make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. These provisions
may limit the price that investors may be willing to pay in the future for our ordinary shares. Furthermore, Israeli tax considerations
may make potential transactions undesirable to us or to some of our shareholders.
These
laws may have the effect of delaying or deterring a change in control of our company, thereby limiting the opportunity for shareholders
to receive a premium for their shares and possibly affecting the price that some investors are willing to pay for our company’s
securities. This could cause our ordinary shares to trade at prices below the price for which third parties might be willing to
pay to gain control of us. Third parties who are otherwise willing to pay a premium over prevailing market prices to gain control
of us may be unable or unwilling to do so because of these provisions of Israeli law.
The
rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities
of shareholders under U.S. law.
We
are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our memorandum
of association, articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights
and responsibilities of shareholders in typical U.S. corporations. In particular, each shareholder of an Israeli company has a duty
to act in good faith and in a customary manner in exercising his or her rights and fulfilling his or her obligations toward the company
and other shareholders and to refrain from abusing his or her power in the company, including, among other things, in voting at the general
meeting of shareholders on certain matters. Israeli law provides that these duties are applicable in shareholder votes on, among
other things, amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers
and interested party transactions requiring shareholder approval. In addition, a controlling shareholder of an Israeli company, or a shareholder
who knows that he or she possesses the power to determine the outcome of a shareholder vote or who has the power to appoint or prevent
the appointment of a director or officer in the company, has a duty of fairness toward the company. Currently there is not a clear
definition of the duty of fairness under Israeli law. There is limited case law available to assist us in understanding the nature
of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities
on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.
As
a foreign private issuer whose shares are listed on the NASDAQ Capital Market, we may follow certain home country corporate governance
practices instead of certain NASDAQ requirements. We follow Israeli law and practice instead of NASDAQ rules regarding the composition
of the board of directors, director nomination process and quorum at shareholders’ meetings.
As a foreign private issuer whose shares are
listed on the NASDAQ Capital Market, we are permitted to follow certain home country corporate governance practices instead of certain
requirements of the NASDAQ Stock Market Rules. We follow Israeli law and practice instead of the NASDAQ Stock Market Rules regarding
the composition of the board of directors, director nomination process and quorum at shareholders’ meetings. As a foreign
private issuer listed on the NASDAQ Capital Market, we may also follow home country practice regarding, for example, the requirement to
obtain shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity based compensation
plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving
issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company). A foreign
private issuer that elects to follow a home country practice instead of NASDAQ requirements must submit to NASDAQ in advance a written
statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited
by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the SEC,
or on its website, each such requirement that it does not follow and describe the home country practice followed by the issuer instead
of any such requirement. Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ’s
corporate governance rules.
The termination or reduction
of tax and other incentives that the Israeli government provides to domestic companies may increase the costs involved in operating a
company in Israel.
The Israeli government currently provides
tax and capital investment incentives to domestic companies, as well as grant and loan programs relating to research and development and
marketing and export activities. In recent years, the Israeli government has reduced the benefits available under these programs and the
Israeli governmental authorities have indicated that the government may in the future further reduce or eliminate the benefits of those
programs. We have taken in the past and may take advantage of these benefits and programs again in the future, however, there is no assurance
that such benefits and programs will continue to be available to us in the future. If such benefits and programs were terminated or further
reduced, it could have an adverse effect on our business, operating results and financial condition. The government tax benefits that
we currently are entitled to receive require us to meet several conditions and may be terminated or reduced in the future.
Some of our operations in Israel may entitle
us to certain tax benefits under the Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law, once we are profitable.
If we do not meet the requirements for maintaining these benefits, they may be reduced or canceled and the relevant operations would be
subject to Israeli corporate tax at the standard rate, which is set at 23% in 2018 and thereafter. In addition to being subject to the
standard corporate tax rate, we could be required to refund any tax benefits that we have already received, plus interest and penalties
thereon. Even if we continue to meet the relevant requirements, the tax benefits that our current “Benefited Enterprise” is
entitled to may not be continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the
amount of taxes that we pay would likely increase, as all of our operations would consequently be subject to corporate tax at the standard
rate, which could adversely affect our results of operations. Additionally, if we increase our activities outside of Israel, for example,
by way of acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefits programs.
| ITEM
4. |
INFORMATION ON THE COMPANY |
A.
History and Development of the Company
We were incorporated under the laws of the
State of Israel on January 1, 1970. We are a public limited liability company under the Israeli Companies Law, and operate under
that law and associated legislation. Our registered offices and principal place of business are located at 20 Ben Zion Gelis Street,
Sgoola Industrial Zone, Petach-Tikva 4927920, Israel and our telephone number is +972-3-9395025. Our website is www.nisteceltek.com.
The information on our website is not incorporated by reference into this annual report.
We manufacture and supply technologically
advanced custom made circuitry solutions for use in sophisticated and compact electronic products. We provide specialized services
and are a solution provider in the PCB business, mainly in Israel, Europe, North America and Asia. PCBs are platforms that conduct an
electric current among active and passive microelectronics components, microprocessors, memories, resistors and capacitors and are integral
parts of the products produced by high‑technology industries. Our focus is on short run quick-turnaround, prototype, pre-production
and low to medium volume runs of high-end PCB products for high growth, advanced electronics applications, mainly flex-rigid PCBs.
We design and develop innovative manufacturing
solutions pursuant to complex interconnect requirements of original equipment manufacturers, and provide our customers with a wide range
of custom designed PCBs, including complex rigid, double-sided and multi-layer PCBs as well as flexible circuitry (flex and flex-rigid
boards) made of several types of high-performance base material. To complement our quick-turnaround, prototype, pre-production and
low to medium volume production capability and provide our customers with single source service, we also act as an agent for the importation
of PCBs from South East Asia when customers require high volume production runs, although such activity was not significant in recent
years.
In July 2007, we established Eltek USA Inc.
(“Eltek USA”), a wholly-owned subsidiary incorporated in Delaware, to manage our sales and marketing in the North American
market. In December 2008, we established Eltek Europe GmbH, a wholly-owned subsidiary that is no longer active, to manage our sales
and marketing activities for certain European customers.
In November 2013, Nistec acquired 50.5% of
our issued share capital and gained control of our company. In June 2016, Mr. Nissan, the controlling
shareholder of Nistec, and our Chairman and then CEO, acquired 124,028 ordinary shares of our company in the market, increasing his ownership
interest from 50.5% to 56.6%.
In
December 2018, Nistec Ltd., transferred its ownership interest in our company to Nistec Golan Ltd. Nistec Golan and Nistec Ltd. are privately
held companies indirectly controlled by Mr. Nissan, through Nistec Holdings Ltd.
In
March 2019, we completed a rights offering to our shareholders of 2,351,716 ordinary shares at a price of $1.464 per share, for an aggregate
consideration of $3.4 million. Of such shares, Nistec acquired 1,707,364
shares and Mr. Nissan individually acquired 206,712 of our ordinary shares,
increasing his direct and indirect voting interest from 56.6% to 65.4%.
In
December 2020, we completed a rights offering to our shareholders of 1,460,089 shares at a price of $3.90 per share, for an aggregate
consideration of $5.7 million. Of such shares, Nistec acquired 1,159,813
shares, and Mr. Nissan individually acquired 43,576 of our ordinary shares,
increasing his direct and indirect voting interest from 65.4% to 69.6%.
During
the three years ended December 31, 2022, we invested approximately $5.6
million in new equipment and the expansion of our facilities and infrastructure. Subject to availability
of financial resources, we expect to invest approximately $5.5 million in capital expenditures
in 2023, mainly for manufacturing equipment to expand our manufacturing capacity and to upgrade our technological capabilities.
We intend to finance these expenditures with suppliers’ credit, cash flow from operations, fund raising and bank loans; however,
external financing may not be available, or, if available, may not be on terms favorable to us.
B.
Business Overview
Industry Overview
PCBs are constructed from a variety of base
raw materials. PCBs can be double-sided or multi-layered and made of rigid, flexible, flex-rigid or high-frequency materials.
In essence, they are platforms that conduct electrical signals among active and passive microelectronics components, microprocessors,
memories, resistors and capacitors. Photolithographic type processes transfer the images of the electrical circuit onto the layers,
and chemical processes etch these lines on the boards. There are several broad categories of PCBs:
Rigid
PCBs. Rigid PCBs are the core product of the industry and can be found
in virtually every electronics device. The layer count of these products generally ranges from two to 30 layers,
although some PCBs are composed of 42 layers.
Flexible
and flex‑rigid PCBs. Flexible boards are thin, light-weight
circuits used to interconnect other circuit boards and electronic devices within electronic equipment. Flex-rigid boards are composed
of rigid parts and flexible layers. They generally range from two to 30 layers.
Flex-rigid boards provide solutions for electronic systems that impose space and shape restrictions and for systems in which reliability
of connectivity is crucial. These products are often found in military applications (primarily
avionics), medical and measurement equipment and the automotive industry, among other uses.
Backplanes.
Backplanes are large, high-density circuit boards with design features such as tight tolerance finished hole sizes that require precise
process controls. These products are commonly known as “motherboards” on which connectors are mounted to receive and
interconnect other PCBs and can be found primarily in telecommunications applications.
PCB manufacturers can generally be classified
based on two parameters, product sophistication and service sophistication. Product sophistication is evident in the capability
of a PCB manufacturer to offer products with higher layer counts and more complex construction, as well as in the line width and the spacing
of lines on the circuit boards. The state-of-the-art HDI technology enables manufacturers to produce PCBs with line width and spaces
as narrow as 2-3 mils and hole diameters of 4 to 6 mils.
Industry Trends
We believe that several trends are impacting
the PCB manufacturing industry. These trends include:
Shorter
electronic product life cycles. Continual advances in technology have
shortened the life cycles of complex commercial electronic products, placing greater pressure on manufacturers to quickly bring new products
to market. The accelerated time-to-market and ramp-to-volume needs of manufacturers for high-end commercial equipment create opportunities
for PCB manufacturers that can offer engineering support in the prototype stage and manufacturing scalability throughout the production
life cycle.
Increasing
complexity of electronic products. Manufacturers
continue to design higher performance electronic products which take advantage of advances in semiconductor technology. This in
turn requires technologically complex PCBs that can accommodate higher speeds and component densities, including HDI, flexible and substrate
PCBs. These complex PCBs can require very high layer counts, miniaturized circuit connections, advanced manufacturing processes
and materials, and high-mix production capabilities, which involve processing small lots in a flexible manufacturing environment.
Manufacturers increasingly rely upon larger PCB manufacturers, which possess the financial resources necessary to invest in advanced manufacturing
process technologies and sophisticated engineering staff, often to the exclusion of smaller PCB manufacturers that do not possess such
technologies or resources.
Increasing
concentration of global PCB production in Asia. During the past decade,
many electronics manufacturers have moved their commercial production to Asia to take advantage of its exceptionally large, relatively
low-cost labor pool. In particular, the trend has favored China, which according to industry sources has the largest PCB market
in terms of both revenue and number of suppliers. The overall technical capability of suppliers in China has improved dramatically
in recent years, and China has emerged as a global production center for cellular phones, smartphones, tablet PCs, computers and computer
peripherals, and high-end consumer electronics. However, in recent years, there has been a growing trend of companies shifting their
PCB production back to Western countries. This trend is driven by several factors including increasing labor costs in traditional manufacturing
hubs, concerns over supply chain disruptions and quality control, concerns over IP theft and security issues and a desire to enhance supply
chain resilience. The trend towards reshoring PCB production presents an opportunity for companies in Western countries, such as ours,
to tap into the growing demand for high-quality electronics and capture a share of the global PCB market.
Decreased
reliance on multiple PCB manufacturers. Manufacturers traditionally
have relied on multiple PCB manufacturers to provide different services as an electronic product moves through its life cycle. The
transfer of a product among different PCB manufacturers often results in increased costs and inefficiencies due to incompatible technologies
and manufacturing processes and production delays. In addition, manufacturers generally find it easier and less costly to manage
fewer PCB manufacturers. As a result, manufacturers are reducing the number of PCB manufacturers and backplane assembly service
providers on which they rely, presenting an opportunity for those that can offer one-stop manufacturing capabilities — from prototype
to volume production.
Increased
requirements for aerospace and defense products. The aerospace and
defense markets are characterized by increasingly time-consuming and complex certification processes, long product life cycles, and a
demand for leading-edge technology with extremely high reliability and durability. While the DoD budget faces increasing scrutiny
as part of overall U.S. budget deficit reduction efforts, we anticipate that a continued DoD commitment to new product development and
upgrades — incorporating leading-edge PCB technology in products for intelligence, surveillance and reconnaissance, communications
and weapon systems — combined with Foreign Military Sales programs and a recovering global commercial aerospace industry will support
a significant long-term market for these products. In addition, the current political climate in Europe has led to an increased demand
for defense products. This has resulted in heightened interest from countries looking to upgrade their military capabilities and secure
their borders. The situation has also sparked a renewed focus on national security, with governments investing more resources towards
strengthening their defense systems.
Shortage
of key raw materials. PCB manufacturers obtain
their key raw materials from a select number of suppliers. Any delays in delivery of or shortages in these raw materials could interrupt
and delay manufacturing of PCB products and may result in the cancellation of orders for our products. If
a raw material or component supplier fails to satisfy our product quality standards, including standards relating to “conflict minerals”
it could harm our customer relationships. Furthermore, if we are unable to identify an alternative source of raw
material or component supplier, we may have to modify our products or a large portion of our production process to use a substitute
raw material, which requires customers’ consent of use of such materials and which may cause delays in production and shipments,
increased design and manufacturing costs and increased prices for our products. In addition, price increases for our principal raw materials
may materially affect our operating margins and future profitability.
Uncertainty
in respect of future orders. Due to the costs involved, our customers are
increasingly reluctant to maintain inventory and refrain from placing orders significantly in advance. As a result, there is uncertainty
in respect of future orders.
Introduction
of new disruptive technologies. The traditional PCB production method is
the burning method, in which most of the copper is burned onto the surface on the basis of a defined mold, at the end of which the desired
processor picture is obtained. It recent years a new technology has been introduced, the mSAP/SAP, an additive method, in which the copper
in the photolithographic processes is enlarged on the basis of a predefined mold. The advantage of this production method is the ability
to utilize a limited path area on which are compressed a large number of processors with a conductor space/width of less than 25 microns.
These new semi-additive and fully additive technologies for ultra-dense (1/1 mil line/space) topography are gaining traction and are affecting
the conventional industries including us. If found to be cost effective and reliable it can require us to adopt such production capabilities
in the future.
Manufacturing and Engineering Processes
Continued significant investments in equipment
are necessary in order to maintain technological competitiveness in the PCB industry. During the three years ended December 31,
2022, we invested approximately $5.6 million in machinery and equipment for that purpose.
Manufacturing
Capabilities. We have the capability to manufacture PCBs having up
to 40 layers, flex-rigid boards consists of blind and buried vias and designs using materials as thin as 1 mil. We receive orders
for production with turnaround times of generally between several days to two months. We are able to produce short runs of five to 30
units of simple type PCBs within four to five working days, and a few hundred units within ten working days, and are capable of producing
such number of boards within five working days when production line scheduling permits.
During 2018 we incurred water damage to
two electrical testing systems in our production facility. We were not able to reach an agreement for the damage and the payment from
the insurance company on our insurance claim; therefore we filed a claim with the Israeli court. We cannot be sure that such legal proceedings
in this matter will be successful. During 2022, we invested in machinery and equipment, including a new SEICA (flying probe electrical
test),a direct imaging machine for applying a solder mask, a new Additive Printing machine, a new dryer for solder mask application,
a new PCB vacuum plasma treatment machine and a new laminator.
In the beginning of 2022, we decided to accelerate
our investment program in machines and equipment. The program includes investments in new production lines as well as in infrastructure
in order to enable us to increase our production capabilities as well as our efficiency. The first phase of the program includes investments
of $9 million and is expected to last two years. We expect that this phase will allow us to increase our yearly sales by $5-8 million,
based on the continuity of the increased demand for our products. The total program amounts to $15 million. Due to the complexity of the
investment program, we may encounter e delays in the schedule and the completion of the investments.
Computer
Aided Design/Computer Aided Manufacturing (CAD/CAM). We utilize a
state-of-the-art CAD system developed by Frontline PCB Solutions Ltd., an Israeli-based company, and can receive CAD data by electronic
data transmission. Our CAD workstations perform design rule checks on transmitted designs, incorporate any customer-specific design
modifications and perform manufacturability enhancements that increase PCB quality.
Advanced
Finishing Capabilities for Dense Packaging Designs. We provide a wide
assortment of alternative surface finishes, including hot air solder leveling, E-less nickel (ENIG), E- less nickel & palladium (ENEPIG),
hard& soft electrolytic gold, immersion silver, outsource nickel/palladium/gold and immersion tin, for component soldering .
Other
Advanced Process Capabilities. We provide fabrication of dense multi-layer
PCBs. We use an advanced inner-layer production line, a direct laser imaging system, mechanical and laser drilling equipment and
clean room environments (ISO-7) to produce technologically advanced products.
Quality,
Environmental and Safety Standards. Our quality management system
has been ISO 9001:2008 certified since July 2002. Such certification is based on successful implementation of quality assurance
requirements and includes ongoing monitoring of our business and periodic compliance audits conducted by the Israeli Institute of Standards.
We have obtained United States Department of Defense Qualified Product List approval (MIL-PRF-55110G and MIL-P-50884E) for our products.
Since 1976, our rigid glass epoxy (FR4 and FR5) and flex-rigid boards have been UL 94V-0 certified by Underwriters Laboratories Inc. (a
standards organization that offers product safety testing and certification of product safety). Our environmental management system
has been ISO 14001:2004 certified since 2005 (and prior to such date was ISO 14001 certified from 2003). We are OHSAS 18001:2007
certified for occupation health and safety management systems since December 2007. In November 2009, we became certified to the
AS 9100B quality management standard for the aerospace industry and in August 2012 we were upgraded to AS 9100C.
Sales, Customers and
Marketing
Sales.
In the years ended December 31, 2022, 2021 and 2020, the primary industries for which we produced PCBs were defense and aerospace
equipment (48.7%, 41.2% and 47.6% of production, respectively), medical equipment (8.0%, 8.8%, and 8.3% of production, respectively),
industrial equipment (7.1%, 4.4% and 2.5% of production, respectively), and distributors, contract electronic manufacturers and others
(36.2%, 45.6% and 41.6% of production, respectively).
Customers.
During the year ended December 31, 2022, we provided PCBs to approximately 130 customers in Israel and approximately 81 customers
outside of Israel. Our customers outside of Israel are located primarily in North America, the Netherlands, India, Italy, Romania,
Uruguay, China and South Africa. Sales to non-Israeli customers were $17.5 million 44.2% of revenues) for the year ended December
31, 2022, $14.9 million (43.9% of revenues) for the year ended December 31, 2021 and $16 million (43.6% of revenues) for the year ended
December 31, 2020. In the years ended December 31, 2022, 2021 and 2020, a group of affiliated companies accounted for 18.7%, 21.2% and
18.9% of our total revenues, respectively, and another group of affiliated companies accounted for 9.2%, 7.9% and 11.6% of our total revenue,
respectively.
Marketing.
We market and sell our products primarily through our direct sales personnel, sales representatives and through PCB trading and manufacturing
companies. We currently have eleven persons involved in sales, of which ten persons are located in Israel and two persons are located
in the United States. In North America, we market and sell our products through Eltek USA as well as through independent local sales representatives.
PCB trading and manufacturing companies act as distributors of our products in the Netherlands, Italy, and South Africa. In India,
we market our products through a local sales representative. We maintain technical support services for our customers worldwide.
We also maintain customer service support centers that handle all logistical matters relating to the delivery of our products and receive
and handle complaints relating to delivered products. Our customer service personnel currently consist of five persons.
Our strategy is to focus on the high end of
the PCB market, mainly in flex-rigid PCBs, in which margins are better. We are currently focusing our marketing efforts on the defense
and medical industries. To penetrate the U.S. defense market, we applied for ITAR registration from the U.S. Department of State,
Bureau of Political-Military Affairs, which we received in January 2009. ITAR regulates the manufacture, export and transfer of
defense articles, information and services. ITAR is a set of U.S. government regulations that controls the export and import of
certain defense-related articles and services. The regulations restrict sensitive information and technologies only to be shared
with U.S. persons, unless special approval is acquired. To qualify for ITAR registration, we met strict requirements for corporate
structure, security, record keeping and procedures to allow us to sell our PCBs for use in U.S. defense products. In November 2009,
we became certified to the AS 9100B quality management standard for the avionic industry in order to strengthen our position in the avionic
and aerospace market in North America and Europe. In January 2014, we received accreditation from Nadcap, a global cooperative accreditation
program for aerospace engineering and related industries, for our advanced circuitry solutions, including rigid and flex-rigid printed
circuit boards.
Starting in 2021, we have a dedicated sales
team for commercial activities which cooperate with reliable PCB manufacturers from the Far East.
We have ongoing programs to upgrade our processes
by implementing high-quality standards, employee training and special training activities for clients. Marketing efforts include
recruiting independent sales representatives in various geographic areas, the distribution of promotional materials, seminars for engineers,
and the supply of technical information to business publications.
Materials and Supplies
The materials used in the manufacture of PCBs
are primarily laminates (copper clad, with an isolating core separating them), prepreg composite materials, photo-chemical films, chemicals
and inks. The materials we use are manufactured in Europe, North America and South East Asia. Some of the materials are purchased
directly from the manufacturer, while others are purchased from local distributors.
We,
like most PCB manufacturers, generally obtain our key raw materials from
a select number of suppliers. Any delays in delivery of or shortages in these raw materials could interrupt and delay manufacturing of
PCB products and may result in the cancellation of orders for our products. If a raw material or component
supplier fails to satisfy our product quality standards, including standards relating to “conflict minerals” it could harm
our customer relationships. Furthermore, if we are unable to identify an alternative source of raw
material or component supplier, we may have to modify our products or a large portion of our production process to use a substitute
raw material, which requires customers’ consent of use of such materials and which may cause delays in production and shipments,
increased design and manufacturing costs and increased prices for our products.
Competition
The global PCB industry is highly fragmented
and intensely competitive, trends that we believe will continue. The global PCB industry is characterized by rapidly changing technology,
frequent new product introductions and rapidly changing customer requirements. We compete principally in the market for complex,
flex-rigid multi-layer PCBs. In the Israeli market, we mainly compete with major PCB exporters, mainly from South East Asia, North
America and Europe, and the Israeli firm PCB Technologies Ltd. In the European market we mainly compete with Advanced Circuit Boards NV
(Belgium), Dyconex and Cicor (Switzerland), Graphics, Exception PCB and Invotec (United Kingdom), Cistelaier and Somacis (Italy),
Schoeller-Electronics GmbH (formerly Ruwel Werke GmbH) (Germany) and certain other German companies. In the North American market,
we mainly compete with TTM, Inc. (previously known as DDi Corp and Viasystems), KCA Electronics Inc., Lenthor Engineering, Printed Circuits,
Inc., Teledyne. Many of these competitors have significantly greater financial, technical and marketing resources than us. Although
capital requirements are a significant barrier to entry for manufacturing complex PCBs, the basic interconnect technology is generally
not protected by patents or copyrights. Our current competition in the rigid PCB segment is mainly from PCB manufacturers in the
Far-East (mainly in China), which have substantially lower production costs than us. Continued competitive pressures could cause
us to lose market share and reduce prices.
Backlog
Due
to the costs involved, our customers are increasingly reluctant to maintain inventory and refrain from placing orders significantly in
advance. Accordingly, the backlog outstanding
at any point in time is not necessarily indicative of the level of business to be expected in the ensuing period.
Our backlog at December 31, 2022 was approximately
$16.8 million compared to a backlog of approximately $10 million at December 31, 2021. We include in our backlog all purchase orders
scheduled for delivery within the next 12 months.
Environmental Matters
Our environmental management system has been
ISO 14001 certified since May 2003. This certification was based on successful implementation of environmental management requirements
and includes ongoing monitoring of our processes, raw materials and products. The certification is subject to periodic compliance
audits conducted by the Israeli Institute of Standards.
PCB manufacturing requires the use of metals
and chemicals classified as hazardous substances. Water used in the manufacturing process must be treated to remove metal particles
and other contaminates before it can be discharged into the local sewer systems. We operate and maintain effluent water treatment
systems and use approved testing procedures at our manufacturing facilities. There is no assurance, however, that violations will
not occur in the future. We are also subject to environmental laws and regulations relating to the storage, use and disposal of
chemicals, solid waste and other hazardous materials, as well as air quality regulations. Environmental laws and regulations could
become more stringent over time, and the costs of compliance with more stringent laws could be substantial. Environmental regulations
enacted in Israel in September 2000 provide that a company that is found to have discharged water containing contaminates will be liable
for quadruple the amount normally charged for its water consumption. Over the years, we have undertaken various actions to reduce
the use of water in our manufacturing facilities, and invested in improving our effluent wastewater treatment system to lower the amounts
of inorganic salts and copper concentration in the discharged water.
A shortage of water in Israel may reduce the
allocation of water available to manufacturing plants, including ours, which could affect the concentrations of pollutants in our wastewater,
making it harder to comply with the foregoing regulations, in which event we would be required to invest additional funds to improve our
wastewater treatment systems.
In March 2019, representatives of the Ministry
of Environmental Protection inspected our premises and issued a warning related to an alleged breach of the Clean Air Law and a warning
related to the Hazardous Materials Law (1993). Following a hearing at the Ministry in August 2019, the Ministry conducted two additional
tests after which we were asked to take corrective actions. During May 2020 and July 2020, representatives of the Ministry inspected our
premises again. In September 2020, the Ministry issued a warning related to an alleged breach of the Clean Air Law, the Hazardous Materials
Law (1993), the Water Law and the Business Permit Law. We attended another hearing at the Ministry on November 9, 2020. Following that
hearing, the district manager issued a protocol stating that he will recommend that the Ministry impose fines on our company.
On July 18, 2022, we received a notification
from the Ministry of Environmental Protection about its intention to impose a penalty of approximately
$0.1 million for an alleged breach of the Hazardous Materials Law (1993). We have filed a request to reduce the amount of the penalty.
In January 2023, we received
a notification from the Ministry of Environmental Protection about its intention to impose a penalty of approximately $0.6 million for
an alleged breach of the Clean Air Law during the years 2019-2020. We intend to seek a reduction in the amount of the penalty, in accordance
with provisions of the Clean Air Law.
If we are found to be in violation of environmental
laws in the future, we could be liable for fees, damages, costs of remedial actions and a range of potential penalties, and could also
be subject to revocation of permits necessary to conduct our business or any part thereof. Any such liability or revocation could
have a material adverse effect on our business, financial condition and results of operations.
Intellectual Property Rights
Our success depends in part on our proprietary techniques
and manufacturing expertise, particularly in the area of manufacturing complex multi-layer and flex-rigid PCBs. Like many companies
in the PCB industry, we do not hold any patents and rely principally on trade secret protection of our intellectual property. We
believe that, because of the rapid pace of technological change in the electronics industry, the legal protections for our products are
less significant factors in our success than the knowledge, ability and experience of our employees, the frequency of product enhancements
and the timeliness and quality of support services that we provide.
C.
Organizational Structure
In July 2007, we established Eltek USA Inc., a wholly-owned
subsidiary incorporated in Delaware, to manage our sales and marketing activities in the North American market.
D.
Property, Plants and Equipment
Leased Facilities
Our executive offices, as well as our design,
production, storage and shipping facilities, aggregating approximately 90,000 square feet, are located in an industrial building in the
Sgoola Industrial Zone of Petach-Tikva, Israel. In 2020, we signed an amendment to the lease agreement which extend the lease contract
until February 2027 with a 7% increase in rent, with an option to extend the lease for an additional five years period with an additional
3% increase in rent, which will expire in February 2032. In the year ended December 31, 2022, we incurred $1.3 million of leasing
expenses for these premises.
As part of our accelerated investment program,
we are considering leasing additional office space in a nearby building in order to move our office space from the existing building to
provide additional manufacturing space.
ITEM 4A.
UNRESOLVED STAFF COMMENTS
Not applicable.
| ITEM
5. |
OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
A.
Operating Results
The following discussion
of our results of operations should be read together with our consolidated financial statements and the related notes, which appear elsewhere
in this annual report. The following discussion contains forward-looking statements that reflect our current plans, estimates and
beliefs and involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this annual
report.
Overview
We were incorporated under the laws of the
State of Israel in 1970. We develop, manufacture, market and sell PCBs, including HDI multi-layered and flex-rigid boards for electronic
devices. Our principal customers include manufacturers of medical equipment, defense and aerospace equipment, industrial equipment,
and telecom and networking equipment, as well as contract electronic manufacturers. We have our principal offices and production
facilities in Israel and a marketing subsidiary in the United States.
Our consolidated financial statements appearing
in this annual report are prepared in dollars in accordance with U.S. GAAP. Our functional currency is the NIS. The consolidated
financial statements appearing in this annual report are translated into dollars at the representative rate of exchange under the current
rate method. Under such method, the income statement and cash flows statement items for each year (or period) stated in this report
are translated into dollars using the average exchange rates in effect at each period presented, and assets and liabilities for each year
(or period) are translated using the exchange rate as of the balance sheet date (as published by the Bank of Israel), except for equity
accounts, which are translated using the rates in effect at the date of the transactions. All resulting exchange differences that
do not affect our earnings are reported in the accumulated other comprehensive income as a separate component of shareholders’ equity.
Recent Developments
On
June 14, 2022, a fire broke out in one of the production rooms in our plant in Petach-Tikva. We were able to contain the fire without
any injuries and have completed the repair of the damaged line and our manufacturing capacity has returned to normal levels. We are still
discussing the amount of compensation to be received from our insurance company.
Results of Operations
The following table sets forth, for the periods
indicated, selected financial information expressed as a percentage of our total revenues:
| |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
Cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
20.9 |
|
|
|
20.4 |
|
|
|
21.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
- |
|
|
Selling, general and administrative
expenses
|
|
|
(13.1 |
) |
|
|
(14.4 |
) |
|
|
(12.8 |
) |
|
Operating profit |
|
|
7.6 |
|
|
|
5.8 |
|
|
|
8.3 |
|
|
Financial expenses, net |
|
|
2.2 |
|
|
|
(1.4 |
) |
|
|
(0.9 |
) |
|
Other income (loss), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit before income tax expense
|
|
|
9.8 |
|
|
|
4.5 |
|
|
|
7.3 |
|
|
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit |
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2022 Compared with Year Ended December 31, 2021
Revenues.
Revenues increased by 17% to $39.6 million in the year ended December 31, 2022, from $33.8 million in the year ended December 31, 2021.
The increase in revenues is primarily attributable to the increased demand for the Company's products and the negative impact of a key
raw material shortage during 2021.
Cost
of Revenues. Cost of revenues increased by 16% to $31.4 million for
the year ended December 31, 2022, from $26.9 million for the year ended December 31, 2021. The increase in cost of revenues is primarily
attributable to the increase in revenues.
Gross
Profit. Gross profit increased by 20% to $8.3 million for the year
ended December 31, 2022, from $6.9 million for the year ended December 31, 2021. Gross profit as a percentage of revenues increased
to 20.9% for the year ended December 31, 2022, from 20.4% for the year ended December 31, 2021. The increase in gross profit is
primarily attributable to the increase in revenues.
Selling,
General and Administrative Expenses. Selling, general and administrative
expenses were $5.2 million in the year ended December 31, 2022, compared to $4.9 million in the year ended December 31, 2021. The increase
is primarily attributable to sales incentives paid in regard to the increased sales.
Operating
Profit. We recorded an operating profit of $3.0 million in the year
ended December 31, 2022, compared to an operating profit of $1.9 million in the year ended December 31, 2021. The increase is primarily
attributable to the increase in revenues.
Financial
Expenses, Net. Financial income, net increased to $0.9 million in
the year ended December 31, 2022, from $0.5 million financial expenses in the year ended December 31, 2021. The increase in 2022
is primarily attributable to the devaluation of the NIS against the US Dollar and its impact on our cash and trade receivable balances
during the year.
Income
Tax Expense. Tax expenses were $0.7 million in the year ended December
31, 2022, compared to a tax benefit of $3.5 million in the year ended December 31, 2021. During the year ended December 31, 2021, we released
the tax loss carryforwards valuation allowance recorded in prior years. This release resulted in a tax benefit of $3.5 million in the
year ended December 31, 2021.
Year Ended December 31,
2021 Compared with Year Ended December 31, 2020
Please see Item 5A of
our Form 20-F for the year ended December 31, 2021 filed on March 23, 2022, for this comparison.
Impact of Currency Fluctuations and Inflation
Our revenues and expenses are denominated
in the NIS, dollars and Euros. Due to the different proportions of currencies our revenues and expenses are denominated in, fluctuations
in rates of exchange between NIS and other currencies may affect our operating results and financial condition. For example, the
NIS value of our dollar or Euro denominated revenues are negatively impacted in case of a devaluation of the dollar and the Euro against
the NIS. The average exchange rate for the NIS against the dollar was approximately 4% higher in 2022 than 2021 and the average
exchange rate of the NIS against the Euro was 7.5% lower in 2022 than 2021 and in total, these changes had a positive impact on our operating
results in 2022. The average exchange rate for the NIS against the dollar was approximately 6.2% lower in 2021 than 2020 and the
average exchange rate of the NIS against the Euro was 2.5% lower in 2021 than 2020, and in total, these changes had a negative impact
on our operating results in 2021.
The following table sets forth, for the periods
indicated, devaluation or appreciation of the NIS against the most important currencies for our business, the Dollar and Euro, between
December 31 each year and December 31 of the year before.
| |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
13.15 |
% |
|
|
(3.27 |
%) |
|
|
(6.97 |
%) |
|
|
(7.79 |
%) |
|
|
8.10 |
% |
|
Euro |
|
|
6.62 |
% |
|
|
(10.76 |
%) |
|
|
1.7 |
% |
|
|
(9.63 |
%) |
|
|
3.35 |
% |
From time to time in the past we have used
currency hedging instruments in order to partially protect ourselves from currency fluctuation and may use hedging instruments from time
to time in the future.
Because exchange rates between the NIS and
the dollar and Euro fluctuate continuously, exchange rate fluctuations, particularly larger periodic devaluations, may have an impact
on our profitability and period-to-period comparisons of our results. We cannot assure you that in the future our results of operations
may not be materially adversely affected by currency fluctuations.
Increase in inflation is due to
many factors beyond our control, such as rising production and labor costs, high debts, changes in the Israeli and foreign governmental
policy and regulations, and movements in exchange rates and interest rates. The Israeli national consumer price index, which is an indicator
of the inflation, was 5.3%, 2.8% and (0.7%) in 2022, 2021 and 2020, respectively. Inflation rates may increase in the future.
If inflation rates rise, the costs of our business operations may become significantly higher than anticipated, and we may be
unable to pass on such higher costs to consumers in amounts that are sufficient to cover those increasing operating costs. As a result,
further inflationary pressures in Israel, and worldwide, may have a material adverse effect on our business, financial condition and results
of operations, as well as our liquidity and profitability.
Conditions in Israel
We are incorporated under the laws of, and
our executive offices, principal production facilities and research and development facilities are located in, the State of Israel. See
Item 3D. “Key Information – Risk Factors – Risks Relating to Our Operations in Israel” for a description of governmental,
economic, fiscal, monetary or political polices or factors that have materially affected or could materially affect our operations.
Trade Relations
Israel is a member of the United Nations,
the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation.
Israel is a member of the World Trade Organization and is a signatory to the General Agreement on Tariffs and Trade. In addition,
Israel has been granted preferences under the Generalized System of Preferences from Australia and Canada. These preferences allow
Israel to export the products covered by such programs either duty-free or at reduced tariffs. Israel is also a member of the Organization
for Economic Co-operation and Development, or the OECD, an international organization whose members are governments of mostly developed
economies. The OECD’s main goal is to promote policies that will improve the economic and social well-being of people around
the world.
Israel and the E.U. concluded a Free Trade
Agreement in July 1975 that confers some advantages with respect to Israeli exports to most European countries and obligated Israel to
lower its tariffs with respect to imports from these countries over a number of years. In 1985, Israel and the United States entered
into an agreement to establish a Free Trade Area. The Free Trade Area has eliminated all tariff and some non-tariff barriers on
most trade between the two countries. On January 1, 1993, an agreement between Israel and the European Free Trade Association, known
as the EFTA, established a free-trade zone between Israel and the EFTA nations. In November 1995, Israel entered into a new agreement
with the E.U., which includes a redefinition of rules of origin and other improvements, such as allowing Israel to become a member of
the Research and Technology programs of the E.U. In June 2014, Israel joined the E.U.’s Horizon 2020 Research and Innovation
program. In recent years, Israel has established commercial and trade relations with a number of other nations, including Russia,
China, India, Turkey and most recently, UAE, and other nations in Eastern Europe and Asia.
Effective Corporate Tax Rate
Israeli companies are generally subject to
income tax on their taxable income under the Income Tax Ordinance, 5721-1961. The regular corporate tax rate in Israel has been
23% since 2018. However, our production facility qualifies as a “benefited enterprise” under the Law for the Encouragement
of Capital Investments, 5719-1959, as amended. We may select a “preferred enterprise” status, which will allow us to
be taxed at a rate of 16% on all of our income. For additional information see Item 10E. “Additional Information – Taxation
- Tax Benefits under the Law for the Encouragement of Capital Investments, 5719-1959” and Note 18 to our consolidated financial
statements.
As of December 31, 2022, we had approximately
$14.3 million in tax operating loss carryforwards which can be offset against future income in Israel without time limitation. In addition,
as of December 31, 2022, we had $9.8 million in capital loss carry forwards, which can be offset against future capital gains in Israel
without time limitation. In Israel, we have received final tax assessments through the 1995 tax year. Tax assessments
through the 2017 tax year are considered final due to the statute of limitations. Our inactive European subsidiary, Eltek Europe,
has received final tax assessments through the 2013 tax year. Our U.S. subsidiary has not yet received any final tax assessments
since its incorporation. The subsidiary is no longer subject to federal and state examinations for fiscal years before 2019.
In 2022, we recorded tax expense of $0.7 million,
mainly in respect of our operations in Israel. In 2021, we reversed the valuation allowance recorded in past years due to our conclusion
that it is more likely than not that the Company will realize its deferred tax losses in the future and recorded a tax benefit of $3.5
million. In 2020, we recorded tax expenses of $71,000, mainly in respect of our subsidiary in the United States.
B.
Liquidity and Capital Resources
As of December 31, 2022, we had $7.4 million
in cash and cash equivalents and working capital of $12.9 million compared to $9.3 million in cash and cash equivalents and working capital
of $13.3 million at December 31, 2021. Historically, we have financed our operations through cash generated by operations, shareholder
loans, long-term and short-term bank loans, borrowings under available credit facilities and the proceeds from our initial public offering
in 1997 (approximately $5.8 million). In August 2013, we entered into a definitive investment agreement with Nistec pursuant to which
Nistec purchased 706,531 of our ordinary shares (approximately 34.8% of our issued share capital on a fully diluted basis) in consideration
of $4.2 million.
In June 2017, we received a loan of NIS 5.0
million (approximately $1.4 million) from Nistec and in March 2018, we received additional loans from Nistec in the amount of NIS 4.0
million (approximately $1.2 million). In July 2018, we received a third loan from Nistec of NIS 1.0 million (approximately $290,000).
In December 2018, these loans and the shares of our company that were held by Nistec were transferred within the Nistec group to an affiliated
company, Nistec Golan Ltd. We and Nistec Golan subsequently renegotiated the term and interest provisions of these loans aggregating NIS
10 million (approximately $ 2.9 million) and on December 5, 2019, our shareholders approved the execution of the renegotiated interest
agreement with Nistec Golan (the “Interest Agreement”). Under the terms of the Interest Agreement, the loans carried
interest ranging from Prime + 1% to Prime + 1.75%.
In addition to the above loans, in
January 2019, Nistec Golan provided a NIS 2.0 million (approximately $580,000) guarantee of an existing line of credit to a bank, which
was payable on April 30, 2019. In February 2019, our audit committee approved the exercise of the option that Nistec would repay the debt
owed to the bank and would be converted into a loan to us from Nistec, which was repaid on May 1, 2020.
In
March 2019, we completed a rights offering to our shareholders of 2,351,716 ordinary shares at a price of $1.464 per share, for an aggregate
consideration of $3.4 million. Of such shares, Nistec acquired 1,707,364
shares and Mr. Nissan individually acquired 206,712 of our ordinary shares,
increasing his direct and indirect voting interest from 56.6% to 65.4%. The proceeds of this
rights offering were used to reduce our outstanding debt under our lines of credit by NIS 6.0 million (approximately $1.7 million), as
well as for working capital and other general corporate purposes, including investment in equipment.
In June 2020, we obtained a five-year loan
of NIS 4 million (approximately $1.2 million) from Mizrahi-Tefahot Bank, guaranteed by Nistec Ltd. The loan is for a period of five years
and has preferred terms including a repayment schedule that starts after a 12-month grace period and carried interest of Prime +
1.50%, which was waived for the first year of the loan.
In
December 2020, we completed a rights offering to our shareholders of 1,460,089 shares at a price of $3.90 per share, for an aggregate
consideration of $5.7 million. Of such shares, Nistec acquired 1,159,813
shares, and Mr. Nissan individually acquired 43,576 of our ordinary shares,
increasing his direct and indirect voting interest from 65.4% to 69.6%.
The proceeds of this rights offering were used to reduce our outstanding debt of NIS 10.0 million to Nistec (approximately $3.1 million),
as well as for working capital and other general corporate purposes, including investment in equipment.
In May 2021, we obtained a loan of NIS 10
million (approximately $3.1 million) from Bank Leumi. The loan is for a period of ten years, with preferred terms including a repayment
schedule that starts after a 12-month grace period and carried interest of Prime + 1.50%, which was waived for the first year of the loan.
As of December 31, 2022, we had revolving
lines of credit of approximately $2.5 million with Bank Hapoalim B.M. Our credit lines bear annual interest at Prime + 0.95% and our long-term
NIS bank loans bear annual interest of Prime + interest at range of 1.50% to 1.75%.
The credit lines and loans from the banks
are secured by specific pledge on certain assets, by a first priority charge on the rest of our now-owned or after-acquired assets and
by a fixed pledge on goodwill (intangible assets) and insurance rights (rights to proceeds on insured assets in the event of damage).
In addition, the agreements with the banks prohibit us from selling or otherwise transferring any assets except in the ordinary course
of business or from placing a lien on our assets without the banks’ consent.
Bank Hapoalim and Bank Leumi require us to
maintain a specific set of covenants each fiscal year. We are required to meet all of the following financial covenants: (i) maintaining
adjusted shareholders’ equity equal to the greater of $4.5 million or 17% of our consolidated total assets; and (ii) a debt service
ratio of 1.5. For this purpose, adjusted shareholders’ equity excludes certain intangible and other assets. Debt service
ratio is defined as the ratio of EBITDA to current maturities of long-term debt plus interest expenses. As of December 31, 2022,
2021 and 2020, we were in compliance with the covenants.
These credit facilities may not remain available
to us in the future and under certain circumstances the banks may require us to accelerate or make immediate payment in full of our credit
facilities. All of our assets are pledged as security for our liabilities to our banks, whose consents are required for any future
pledge of such assets.
Our working capital requirements and cash
flow provided by our operating and financing activities are likely to vary greatly from quarter to quarter, depending on the following
factors: (i) the timing of orders and deliveries; (ii) net profit in the period; (iii) the purchase of new equipment; (iv) the build‑up
of inventories; (v) the payment terms offered to our customers; (vi) the payment terms offered by our suppliers; (vii) the repayment of
existing lines of credit and loans; and (viii) approval of the current or additional lines of credit and long-term loans from banks.
The lack of sufficient working capital could
negatively impact our ability to complete our investment plans and to compete effectively in the future. To the extent that we incur operating
losses in the future or are unable to generate free cash flows from our business, we may not have sufficient working capital to fund our
operations and will be required to obtain additional financing.
Cash Flows
The following table summarizes our cash flows
for the periods presented:
|
Year ended December 31,
|
|
|
|
|
|
|
|
|
|
| |
|
($ in thousands) |
|
|
Net
cash provided by operating activities
|
|
|
3,829 |
|
|
|
3,875 |
|
|
|
3,252 |
|
|
Net
cash used in investing activities
|
|
|
(3,029 |
) |
|
|
(1,647 |
) |
|
|
(1,140 |
) |
|
Net cash provided by (used in) financing activities
|
|
|
(1,638 |
) |
|
|
2,124 |
|
|
|
814 |
|
|
Effect
of translation adjustments
|
|
|
(1,079 |
) |
|
|
196 |
|
|
|
181 |
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(1,917 |
) |
|
|
4,548 |
|
|
|
3,107 |
|
|
Cash and cash equivalents at beginning of year
|
|
|
9,283 |
|
|
|
4,735 |
|
|
|
1,628 |
|
|
Cash
and cash equivalents at end of year
|
|
|
7,366 |
|
|
|
9,283 |
|
|
|
4,735 |
|
The changes in assets and liabilities reflected
in the cash flow statement do not correspond exactly to the respective amounts in the balance sheets included with this annual report,
mainly because our functional currency is the NIS and our reporting currency is the dollar.
Net cash provided by operating activities
was $3.8 million in the year ended December 31, 2022. This amount was primarily attributable to our pre-tax income of $3.9 million, depreciation
of fixed assets of $1.5 million and a net increase in working capital items of $1.8 million.
Net cash provided by operating activities
was $3.9 million in the year ended December 31, 2021. This amount was primarily attributable to our pre-tax income of $1.5 million, depreciation
of fixed assets of $1.8 million and a net increase in working capital items of $0.5 million.
Net cash provided by operating activities
was $3.3 million in the year ended December 31, 2020. This amount was primarily attributable to our net profit of $2.6 million, depreciation
of fixed assets of $1.6 million and an increase of $0.5 million in other liabilities and accrued expenses. This amount was partially offset
by an increase in trade receivables of $1.0 million, increase in other accounts receivables and prepaid expenses of $0.6 million and a
decrease in trade payables of $0.5 million.
Net cash used in investing activities was
$3.0 million in the year ended December 31, 2022, compared to $1.6 million in the year ended December 31, 2021, and $1.1 million in the
year ended December 31, 2020. Net cash used in investing activities in each of the three years ended December 31, 2022 was primarily
for the purchase of fixed assets for our production lines and leasehold improvements.
Net cash used in financing activities was
$1.6 million in the year ended December 31, 2022, which was primarily attributable to the $0.7 million of repayment of long-term loans
and dividend distribution of $1.0 million.
Net cash provided by financing activities
was $2.1 million in the year ended December 31, 2021, which was primarily attributable to the $3.1 million of proceeds from long term
loans of $3.1 million. These amounts were partially offset by repayments of short-term credits.
Net cash used in financing activities was
$814,000 in the year ended December 31, 2020, which was primarily attributable to the $5.6 million of proceeds from a rights offering
of our ordinary shares and proceeds from long term loans of $1.1 million. These amounts were partially offset by a decrease of $1.6 million
in short-term credits and the repayment of short-term shareholder loans of $3.7 million
Capital
expenditures on a cash basis for the years ended December 31, 2022, 2021 and 2020 were approximately $3.0
million, $1.5 million and $1.1 million, respectively. Our capital expenditures in such periods mainly related to our investments
in production and manufacturing equipment, and in leasehold improvements.
We expect to finance our 2023 operations from
our cash flow from operations, revolving bank credit lines and long-term bank loans and supplier financing. Although we anticipate that
these capital resources will be adequate to satisfy our liquidity requirements through 2023, our liquidity could be negatively affected
by the continuation of the Coronavirus outbreak, which could have an adverse effect on the global markets and on our operations, shortage
in raw materials, continued operational difficulties in our manufacturing and a decrease in demand for our products, including the impact
of changes in customer buying that may result from the general economic downturn, the stability of the dollar/NIS exchange rate, our results
of operations, our suppliers’ payment terms, our customers’ demand for extending their payment terms and other factors detailed
in Item 3D “Key Information - Risk Factors”. If available liquidity is not sufficient to meet our operating and debt
service obligations as they come due, we would need to pursue alternative financing arrangements or reduce expenditures to meet our cash
requirements through 2023. Such additional financing may not be available to us or, if available, may not be obtained on terms favorable
to us, and there is no assurance that we would be able to reduce discretionary spending to provide the required liquidity.
C. Research
and Development, Patents and Licenses
During January 2021 we received approval for
grants from the Israeli Investment Authority that will fund 15%-20% of our expected $1.5 million investment in Advanced Manufacturing
Equipment compatible with Industry 4.0 standards, which focuses on interconnectivity, automation, machine learning, and real-time data.
In addition, during December 2022, we received final approval from the Israel Innovation Authority (“IIA”) for a 40% participation
in an approximately $800,000 one-year development program, which started in January 2023. The total R&D program may be extended for
a second year, subject to IIA approval. This R&D program is meant to enable Eltek to achieve a significantly faster production rate
in certain stages of its manufacturing process, which will also drastically reduce scrap. There can be no assurance that the R&D
program will succeed in achieving its goals or that all pre-defined benefits will be attained.
D. Trend
Information
We include in our backlog all purchase orders
scheduled for delivery within the next 12 months. Our backlog as of December 31, 2022 was approximately $16.8
million compared to a backlog of approximately $10 million as of December 31, 2021.
E. Critical
Accounting Estimates
The preparation of our consolidated financial
statements and other financial information appearing in this Annual Report requires our management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
We evaluate on an on-going basis these estimates, mainly related to inventory, deferred tax assets and share based compensation expenses.
We base our estimates on our experience and
on various assumptions that we believe are reasonable under the circumstances. The results of our estimates form the basis for our management’s
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
We believe the following critical accounting
policies affect our more significant judgments and estimates used in the preparation of the financial information included in this annual
report:
Inventory
We are required to state our inventories at
the lower of cost or net realizable value. Cost is determined on the weighted average basis for raw materials. For work in
progress and finished goods, the cost is determined based on calculation of accumulated actual direct and indirect costs. Net realizable
value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
transportation.
We periodically evaluate the inventory quantities
on hand relative to historical and projected sales volumes, current and historical selling prices and contractual obligations to maintain
certain levels of parts. Based on these evaluations, inventory write-offs are provided to cover risks arising from slow-moving items,
discontinued products, excess inventories, market prices lower than cost and adjusted revenue forecasts. Any write-off is recognized in
our consolidated statements of income as cost of revenues. In addition, if required, we record a liability for firm non-cancelable and
unconditional purchase commitments with contract manufacturers for quantities in excess of our forecast of future demand consistent with
our valuation of excess and obsolete inventory.
The process for evaluating these write-offs
often requires us to make subjective judgments and estimates concerning future sales potential at which such inventory will be sold in
the normal course of business. Incorrect estimates of future sales potential may cause actual results to differ from the estimates at
the time such inventory is disposed of or sold. Given the significant assumptions required and the possibility that actual conditions
will differ, we consider the valuations to be a critical accounting estimate.
Recently Issued Accounting
Standards
See Note 2v to our 2022 consolidated financial
statements.
| ITEM
6. |
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
A.
Directors and Senior Management
Directors
Set forth below are the name, age, principal
position and a biographical description of each of our directors:
|
Name |
Age |
Position |
|
Yitzhak Nissan (3)
|
73 |
Chairman of the Board of Directors |
|
Mordechai Marmorstein (1)(2)
|
76 |
Director |
|
David Rubner(4) |
83 |
Director |
|
Erez Meltzer(4) |
65 |
Director |
|
Gad Dovev(1)(2)(3)(4)
|
76 |
External Director |
|
Ilana Lurie (1)(2)(3)(4)
|
50 |
External Director |
__________________________
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Banking Committee
(4) Member of the Special Independent Committee for M&A purposes
At our 2022 annual general meeting of shareholders
held on August 31, 2022, our shareholders re-elected Messrs. Yitzhak Nissan, Mordechai Marmorstein,
David Rubner and Erez Meltzer to serve as a directors until our 2023 annual general meeting of shareholders. Mr. Gad Dovev was elected
to serve as an external director for a third three-year term, at our 2020 meeting of shareholders held on October 29, 2020. Ms. Ilana
Lurie was elected to serve as an external director for a second three-year term, at our 2021 meeting of shareholders held on June
3, 2021. Our Audit Committee and Board of Directors determined that Mr. Marmorstein has the accounting and financial expertise
required under the Companies Law in order to serve as an independent director, and therefor he was nominated as an independent director.
In March 2022, the Board of Directors appointed
Ms. Revital Cohen Tzemach, Yitzhak Nissan's daughter and our Special Projects Manager, as an observer to the Board of Directors.
Yitzhak
Nissan has served as our Chairman of the Board of Directors since November
2013, and is a member of our Banking Committee. From October 2014 to July 2018, Mr. Nissan also served as our Chief Executive Officer.
Mr. Nissan is the founder of Nistec Group and has served as its chief executive officer since 1985. Mr. Nissan served as a member
of ILTAM (Israeli Users' Association of Advanced Technologies in Hi-Tech Integrated Systems) Presidential Board between 2008 and 2009,
and as a Presiding Member of the Israeli Association of Electronics and Software Industries since 2012. Mr. Nissan also established
the VPs Operations Forum, which brings thought leadership to 200 VPs of operations from diverse hi-tech companies in Israel. In
2008, Mr. Nissan received the Distinguished Industry Award from the mayor of Petach Tikva Municipality. Mr. Nissan holds a BSc.
degree in Electronic Engineering from the University of Buffalo, New York.
Dr.
Mordechai Marmorstein has served on our Board of Directors since October
2013 and is a member of our audit and compensation committees. From 1992 to 2001, Dr. Marmorstein was the chief financial officer
of Pazchim Co. Ltd. Dr. Marmorstein was also an internal auditor and accountant at Negev Phosphate Works. Dr. Marmorstein
served as the chairman of Teshet (Tourist Enterprises and Aviation Services Co. Ltd.), a subsidiary of El-Al, the Israeli national airline,
from 1999 to 2000. Dr. Marmorstein holds a B.A. degree in Economics, an M.A. degree in Contemporary Jewry Studies and a Ph.D. in
Jewish History Studies, all from Bar-Ilan University.
David
Rubner was elected to serve on our Board of Directors in October 2013. Mr.
Rubner is the Chairman and Chief Executive Officer of Rubner Technology Ventures Ltd., and Chairman of the Board of Novelsat Ltd. Previously,
he was Partner in Hyperion Israel Advisors Ltd., a venture capital firm. During the years 1991 to 2000, he was President and Chief Executive
Officer of ECI Telecom Ltd. (“ECI”). Prior to that, Mr. Rubner held several senior positions within ECI. Before joining ECI,
Mr. Rubner was a senior engineer in the Westinghouse Research Laboratories in Pittsburgh, Pennsylvania. Mr. Rubner served on the boards
of Check Point Software Ltd., Radware Ltd., Telemessage International Ltd., Koor Industries Ltd., Lipman industries Ltd. and a number
of private companies. He also serves on the boards of trustees and executive councils of Shaare Zedek Hospital and Jerusalem College of
Technology. Mr. Rubner holds a B.Sc. (Hons) degree in engineering from Queen Mary College, University of London and an M.S. degree from
Camegie Mellon University. Mr. Rubner was awarded 14 U.S. Patents and was the recipient of the Israeli Industry Prize for 1995.
Erez
Meltzer has served as a director since 2009 including as the Chairman of
our Board of Directors from 2011 to 2013. Mr. Meltzer was the Executive Chairman of Hadassah Medical Center from 2014 until the
end of 2020. He is currently the CEO and BOD member of Nano-x Imaging Ltd. Mr. Meltzer also serves as a director of Ericom
Software Ltd., Hadasit Bio Holding (HBL) Ltd., Mentfield Ltd. Capital Nature Ltd., GEM Pharma Ltd., Atlasense Ltd., Plantis Pharma Ltd.,
Supplant Ltd., Tevel Aerobotics Technologies Ltd. and Rivulis (Plastro) Ltd. From 2008 to 2013, Mr. Meltzer served as the Chief Executive
Officer of Gadot Chemical Tankers & Terminals Ltd. From 2006 to 2007, Mr. Meltzer served as the Chief Executive Officer of Africa
Israel Group. From 2002 to 2006, Mr. Meltzer served as the President and Chief Executive Officer of Netafim Ltd. From 1999
to 2001, Mr. Meltzer served as the President and Chief Executive Officer of CreoScitex. Mr. Meltzer served as a colonel in the Israeli
Defense Forces – Armored Corps (reserve). Mr. Meltzer serves as the Chairman of the Lowenstein Hospital Friends Association
since 1999, and is the honorary chairman of the Israeli Chapter of YPO (the Young Presidents Organization). Mr. Meltzer studied
Economics and Business at the Hebrew University of Jerusalem and Boston University, and is a graduate of the Advanced Management Program
at Harvard Business School.
Gad
Dovev was re-elected to serve as an external director in October 2020
and is a member of our audit, compensation and banking committees. Mr. Dovev retired from the Israeli Ministry of Defense in August
2012. He served as head of the Israeli Ministry of Defense Mission to the United States from August 2008 to August 2011. From
August 2005 to August 2008, Mr. Dovev served as head of the Israeli Ministry of Defense Mission to Germany. Prior to that, from
2001 to 2005, Mr. Dovev acted as Deputy General Manager of the Israeli Ministry of Defense and Head of the Rehabilitation Department.
From 1993 to 2001, Mr. Dovev served as Director of the Finance Department and the Financial Comptroller of the Israeli Ministry of Defense.
Mr. Dovev served as member of the Board of Directors of Bank Otsar Ha-Hayal Ltd., IMI-Israel Military Industries Ltd., Shekem Ltd. and
Gapim Ltd. Mr. Dovev holds a BSc. degree in Financial and Agricultural Administration from the Hebrew University of Jerusalem.
Ms.
Ilana Lurie was elected to serve as an external director in September 2018
and is a member of our audit and compensation committees. Ilana Lurie is a CFO, COO and Director with significant experience in international
finance and operations, within both large technology companies as well as Start-Ups. In a course of last 10 years, Ilana led significant
financing rounds, as well as debt restructuring processes. Ms. Lurie played a critical role in transition from R&D to production in
NovelSat and she is currently leading this activity in IO Tech, in her capacity as CFO & COO and serving as External Director in Wearable
devices (NASDAQ:WLDS). During 2012- 2020, Ms. Lurie has been CFO of NovelSat, Landa Ventures portfolio company. Prior to her tenure at
NovelSat, Ms. Lurie served as Finance Manager for the Enterprise Services business unit (formerly EDS) of Hewlett Packard (NYSE:HPQ).
From 2006 to 2011, Ms. Lurie held several financial management positions at Ness Technologies (NASDAQ/TASE:NSTC), which, at the time,
was a public company. Ms. Lurie earned her B.A. degree and an MBA degree with a specialization in Finance and Marketing from Hebrew University
of Jerusalem.
Executive Officers
Set forth below are the name, age, principal position and a biographical
description of each of our executive officers:
|
Name |
Age |
Position |
|
Eli Yaffe |
68 |
Chief Executive Officer |
|
Ron Freund |
58 |
Chief Financial Officer |
|
Yitzhak Zemach |
47 |
Director of Operations |
|
Oriel Sallary |
60 |
VP Sales and Marketing |
|
Sagi Balter |
42 |
VP Process Engineering |
|
Shlomi Kisluk |
48 |
VP Quality Assurance |
Eli
Yaffe joined us in July 2018 as our Chief Executive
Officer. Prior to joining our company, Mr. Yaffe was the President of Carmel Forge Ltd. (Aerospace) for almost 16 years. Prior thereto
Mr. Yaffe served as the President of Urdan Industries Ltd. (Defense). Previously, Mr. Yaffe served as VP of Business Development &
Strategic Planning, responsible for strategy, M&A, and business development at Ormat Industries Ltd., including 5 years in the USA.
Mr. Yaffe holds a B.Sc. degree (with distinction) from the Technion- Israel Institute of Technology, M.Sc. degree in Mechanical Engineering
from Tel Aviv University and an MBA degree (with distinction) in Finance & Marketing from Bar Ilan University.
Ron
Freund joined us in January 2022 as our Chief Financial
Officer. Mr. Freund served as the CFO of Ophir Tours Ltd. from 2015 to 2021. From 2011 to2014, Mr. Freund served as the CFO of Middle
East Tube Company Ltd., an Israeli public company, traded on the Tel Aviv Stock Exchange (TASE). In previous roles, Mr. Freund served
as Deputy CEO and CFO of Soltam Systems LTD. and as a Senior Partner at Ernst & Young Israel. Mr. Freund holds a B.A. degree in Accounting
and Economics from the Hebrew University, Jerusalem, and is a licensed CPA (Israel).
Yitzhak
Zemach joined us in September 2018 as Director of Operations.
Previously, Mr. Zemach served as the Plant Manager of Kahane Group Ltd. from February 2011 to September 2018 and prior thereto he
served as the VP Operations of Bental Electronics Systems Ltd. Previously, Mr. Zemach served as Plant Manager of Aladdin Knowledge Systems
and prior thereto he served as the Production Manager of the Nistec group. Mr. Zemach holds a B.Sc. degree in Electronic Engineering from
Ariel University and an MBA degree with distinction in IT from Bar Ilan University.
Oriel
Sallary joined
us in May 2020 as Vice President of Worldwide Sales and Marketing. Mr. Sallary has over 25 years of sales experience in the semiconductor
industry. Mr. Sallary served as VP Sales and Marketing at Tritech ltd. a distribution company in Israel from 2010 to April 2020. Previously,
Mr. Salary held various positions including VP Sales and Marketing, senior account executive, sales director at Tritech Ltd. Mr. Sallary
holds a bachelor’s degree in Business Administration from Ruppin Academic Center and Electronic Engineering from ORT Singalovski
College.
Sagi
Balter joined us in December 2015 as our electroplating
process engineer and became our VP Process Engineering in September 2019. Previously, Mr. Balter served as the senior researcher in the
surface physics laboratory of the Weizmann Institute from 2013 to 2015. Prior thereto, he served as a R&D engineer at American
Aviation Ltd from 2009 to 2014. Mr. Balter holds a Ph.D. degree (magna cum laude) in Chemistry from the Bar-Ilan University.
Shlomi
Kisluk joined us in October 2022 as a quality manager.
Prior to joining Eltek, he served as a Quality manager in different startup companies responsible for quality, environment, and safety
management system implementation. Between 2010 and 2020 Mr. Kisluk served as a quality manager at IDE Technologies, which is a world leader
in water-treatment solutions. Mr. Kisluk holds a B.Sc. in Material Engineering from Ben-Gurion University and an MBA from Bar-Ilan University.
There are no family relationships between
any of our directors and executive officers.
B.
Compensation
The following table sets forth all compensation
we paid with respect to all of our directors and executive officers as a group for the year ended December 31, 2022.
| |
Salaries, fees,
|
|
Pension, retirement
|
|
All directors and executive officers as a group (consisting of 12 persons)
|
$1.9
million (1) |
|
$0.4
million (2) |
|
(1) |
During the year ended December 31, 2022, we paid each of our directors an annual fee of approximately $8,600 and an attendance
fee of $275 per meeting. These fees are included in the above amount. |
|
(2) |
The benefits amount includes expenses for automobiles and other benefits that we provide to certain of our executive officers.
|
As
of December 31, 2022, options to purchase 395,171 ordinary
shares granted to our current directors and executive officers were outstanding under our equity incentive plans at a weighted average
exercise price of $5.25 per share.
For as long as we qualify
as a foreign private issuer, we are not required to comply with the proxy rules applicable to U.S. domestic companies, including the requirement
to disclose information concerning the amount and type of compensation paid to the chief executive officer, chief financial officer and
the three other most highly compensated executive officers, rather than on an aggregate basis. Nevertheless, a recent amendment
to the regulations promulgated under the Israeli Companies Law requires us to disclose the annual compensation of our five most highly
compensated officers (or all the named executive officers if there are less than five) on an individual basis, rather than on an aggregate
basis, as was previously permitted for Israeli public companies listed overseas. Under the regulations, this disclosure is required
to be included in the notice of our annual meeting of shareholders each year or in a public document that accompanies such notice, which
we furnish to the SEC under cover of a Report of Foreign Private Issuer on Form 6-K. The Israeli Companies Law regulations permit
us to refer to a report filed pursuant to the laws of the country in which our shares are listed for trading that includes the required
information in lieu of its inclusion in the notice of annual meeting. Because of that disclosure requirement under Israeli law,
we are including such information in this annual report, pursuant to the disclosure requirements of Form 20-F.
The
table below reflects the compensation granted to our five most highly compensated office holders during or with respect to the year ended
December 31, 2022. All amounts reported in the table reflect the cost to the company, as recognized in our financial statements for the
year ended December 31, 2022.
|
Name of Officer |
|
Position of Officer |
|
Compensation for services (USD)(1)
|
|
| |
|
|
|
Base salary |
|
|
Benefits
and
Perquisites
(2) |
|
|
Equity-
Based
(3)
|
|
|
Total compensation |
|
|
Yitzhak Nissan (4)
|
|
Chairman of the Board |
|
|
321,467 |
|
|
|
-
|
|
|
|
- |
|
|
|
321,467 |
|
|
Eli Yaffe |
|
Chief Executive Officer |
|
|
305,202 |
|
|
|
338,383 |
|
|
|
82,964 |
|
|
|
726,549 |
|
|
Ron Freund |
|
Chief Financial Officer |
|
|
167,933 |
|
|
|
125,608 |
|
|
|
8,040 |
|
|
|
301,580 |
|
|
Yitzhak Zemach |
|
VP Operations |
|
|
150,783 |
|
|
|
118,177 |
|
|
|
23,308 |
|
|
|
292,269 |
|
|
Oriel Sallary |
|
Vice President of Worldwide Sales and Marketing |
|
|
133,054 |
|
|
|
76,601 |
|
|
|
2,216 |
|
|
|
211,871 |
|
|
(1) |
Cash compensation amounts denominated in NIS were converted into U.S. dollars at the rate of NIS 3.36 per
$1.00 (the average exchange rate in 2022). |
|
(2) |
Amounts reported in this column include benefits and perquisites, including those mandated by applicable
law. Such benefits and perquisites may include, to the extent applicable, bonuses, car related expenses, managers’ insurance and
pension funds, payments to the National Insurance Institute, advanced education funds, medical insurance, vacation allowance and other
customary benefits. Bonuses represent accrued but not yet paid bonus payments for 2022, based on several criteria, including revenues,
profit, employees’ safety, yield and on time deliveries. |
|
(3) |
Represents the equity-based compensation expenses recorded in the company’s
consolidated financial statements for the year ended December 31, 2022 based on the options’ grant date fair value in accordance
with accounting guidance for equity-based compensation. |
|
(4) |
Paid to Nistec as management fees. |
C.
Board Practices
Introduction
According to the Israeli Companies Law, the
role of the board of directors is to formulate a company’s policy and to supervise the chief executive officer’s exercise
of his roles and operations. According to our articles of association, our chief executive officer has the power to appoint our
other executive officers who, together with our chief executive officer, are responsible for our day-to-day management. The board
of directors may exercise any power of the company which was not assigned to another organ of the company by law or by the articles of
association. The executive officers have individual duties as determined by our chief executive officer and board of directors.
Election of Directors
Our articles of association provide for a
board of directors consisting of no less than three and no more than nine members or such other number as may be determined from time
to time at a general meeting of shareholders. Our board of directors is currently composed of seven directors.
Generally, at each annual meeting of shareholders,
directors are elected by a vote of the holders of a majority of the voting power represented and voting at such meeting. All the
members of our board of directors (except the external directors as detailed below) may be reelected upon completion of their term of
office. Directors (other than external directors) may be removed earlier from office by a resolution passed at a general meeting
of our shareholders. Our board of directors may temporarily fill vacancies in the board or add to their body until the next annual
meeting of shareholders, provided that the total number of directors will not exceed the maximum number permitted under our articles of
association.
The board of directors of an Israeli public
company is required to determine that at least one or more directors will have “accounting and financial expertise,” as defined
by Israeli Companies Law regulations. Our board of directors determined, accordingly, that at least one director must have “accounting
and financial expertise.” Our board of directors has further determined that our external director, Mr. Gad Dovev, has the
requisite “accounting and financial expertise.”
We do not follow the requirements of the NASDAQ
Stock Market Rules with regard to the nomination process of directors, and instead, we follow Israeli law and practice, in accordance
with which our board of directors is authorized to recommend to our shareholders director nominees for election. See Item 16G. “Corporate
Governance.”
Board Diversity
Nasdaq’s
recently adopted Board Diversity Rule
is a disclosure standard designed to encourage a minimum board diversity objective for companies and provide stakeholders with consistent,
comparable disclosures concerning a listed company’s current board composition. Since August 2022, the Board Diversity Rule, requires
a company that is a “foreign private issuer” (as defined in SEC rules) like Eltek to initially (until August 7, 2023) have,
or explain why it does not have, at least one diverse director. Our current board composition is in compliance with these requirements.
Each term used above and in the matrix below has the meaning given to it in Nasdaq Listing Rule 5605(f). The matrix below provides certain
highlights of the composition of our Board members based on self-identification as of December 31, 2022.
Board
Diversity Matrix (As of December 31, 2022)
|
Country of Principal Executive Offices |
Israel |
|
Foreign Private Issuer |
Yes |
|
Disclosure Prohibited under Home Country Law |
No |
|
Total Number of Directors |
6 |
|
Part I: Gender Identity |
Female |
Male |
Non-Binary |
Did Not Disclose
Gender |
|
Directors |
1 |
5 |
0 |
0 |
|
Part II: Demographic Background |
|
|
Underrepresented Individual in Home Country Jurisdiction
|
0 |
|
LGBTQ+ |
0 |
|
Did Not Disclose Demographic Background |
6 |
External and Independent Directors
External
directors. Under the Israeli Companies Law, Israeli companies whose
shares have been offered to the public are required to appoint at least two external directors. A person may not be appointed as
an external director if (i) the person is a relative of a controlling shareholder; (ii) the person, or the person’s relative, partner,
employer or an entity under that person’s control, has or had during the two years preceding the date of appointment any affiliation
with the company, or the controlling shareholder or its relative; (iii) in a company that does not have a controlling shareholder, such
person has an affiliation (as such term is defined in the Israeli Companies Law), at the time of his appointment, to the chairman of the
board of directors, chief executive officer, a shareholder holding at least 5% of the share capital of the company or the chief financial
officer; (iv) such person is an employee of the Israeli Securities Authority or an Israeli stock exchange; and (v) such person’s
relative, partner, employer, supervisor, or an entity he controls, has other than negligible business or professional relations with any
of the persons mentioned in subsection (ii) above, even if such relations are not maintained on a regular basis. The term “relative”
means a spouse, sibling, parent, grandparent, child or child, sibling or parent of spouse or spouse of any of the above. The term
“affiliation” includes an employment relationship, a material business or professional relationship maintained on a regular
and continuous basis, control and service as an office holder excluding service as an external director of a company that is offering
its shares to the public for the first time. In addition, no person may serve as an external director if the person’s position
or other activities create or may create a conflict of interest with the person’s responsibilities as director or may otherwise
interfere with the person’s ability to serve as director. If, at the time an external director is appointed all members of
the board of directors who are not the controlling shareholders or their relatives, are of the same gender, then that external director
must be of the other gender. A director of one company may not be appointed as an external director of another company if a director
of the other company is acting as an external director of the first company at such time.
At least one of the external directors elected
must have “accounting and financial expertise” and any other external director must have “accounting and financial expertise”
or “professional qualification,” as such terms are defined by Israeli Companies Law regulations. We have determined that our
external directors, Mr. Gad Dovev and Ms. Ilana Lurie, have the requisite “accounting and
financial expertise.”
External directors are elected by shareholders.
The shareholders voting in favor of their election must include at least a majority of the shares of the non-controlling shareholders
(and those who do not have a personal interest in the matter as a result of their relationship with the controlling shareholders) of the
company voting on the matter (not including abstaining votes). This majority approval requirement need not be met if the total shareholdings
of those non-controlling shareholders (and those who do not have a personal interest in the matter as a result of their relationship with
the controlling shareholders) voting against their election represent 2% or less of all of the voting rights in the company.
External directors serve for a three-year
term, which may be renewed for two additional three-year periods through one of the following mechanisms:
|
(i) |
the board of directors proposed the nominee and his appointment was approved by the shareholders in the manner required to appoint
external directors for their initial term; |
|
(ii) |
a shareholder holding 1% or more of the voting rights proposed the nominee, and the nominee is approved by a majority of the votes
cast by the shareholders of the company on the matter, excluding the votes of controlling shareholders and those who have a personal interest
in the matter as a result of their relationship with any controlling shareholder and excluding abstentions, provided that the aggregate
votes cast by shareholders who are not controlling shareholders and do not have a personal interest in the matter as a result of their
relationship with the controlling shareholders voted in favor of the reelection of the nominee constitute more than 2% of the voting rights
in the company, and provided further that at the time of such nomination or in the two years preceding such nomination, such external
director or his relative are neither the shareholder who proposed such nomination, or a shareholder holding 5% or more of the company's
issued share capital or voting power, in each case who, or whose controlling shareholder or any entity controlled by them (i) has business
relations with the company, or (ii) is a competitor of the company; or |
|
(iii) |
such external director nominates himself or herself for each such additional term and his or her election
is approved at a shareholders meeting by the same disinterested majority as required for the election of an external director nominated
by a 1% or more shareholder (as described above). |
External directors cannot be dismissed from
office unless: (i) the board of directors determines that the external director no longer meets the statutory requirements for holding
the office, or that the external director has breached the external director’s fiduciary duties and the shareholders vote, by the
same majority required for the appointment, to remove the external director after the external director has been given the opportunity
to present his or her position; (ii) a court determines, upon a request of a director or a shareholder, that the external director no
longer meets the statutory requirements of an external director or that the external director has breached his or her fiduciary duties
to the company; or (iii) a court determines, upon a request of the company or a director, shareholder or creditor of the company, that
the external director is unable to fulfill his or her duty or has been convicted of specified crimes. Each committee that is authorized
to exercise powers that are usually vested in the board of directors must include at least one external director and the audit committee
and compensation committee must each include all of the external directors. An external director is entitled to compensation as
provided pursuant to Israeli Companies Law regulations and is otherwise prohibited from receiving any other compensation, directly or
indirectly, in connection with such service.
At our 2021 meeting of shareholders held on
June 3, 2021, our shareholders re-elected Ms. Ilana Lurie for a second three-year term as an
external director. At the 2020 annual general meeting of shareholders, Mr. Gad Dovev was re-elected, for a third three-year term as an
external director.
Independent
Directors. In general, NASDAQ Stock Market Rules require that the
board of directors of a NASDAQ-listed company have a majority of independent directors and its audit committee must have at least three
members and be comprised only of independent directors, each of whom satisfies the respective “independence” requirements
of NASDAQ and the SEC. As permitted by NASDAQ home country rules, we do not maintain a majority of independent directors on our Board,
but instead we choose to follow Israeli law and practice which requires that we appoint at least two external directors, as discussed
above. Our Audit Committee however is comprised of three directors, all of whom are independent directors under the requirements of the
Israeli Companies Law, the NASDAQ and the SEC rules.
Chairman of the Board
Our
articles of association provide that the chairman of the board is appointed by the members of the board of directors. The chief
executive officer (referred to as a “general manager”
under the Israeli Companies Law) or a relative of the chief executive officer may not serve as the chairman of the board of directors,
and the chairman or a relative of the chairman may not be vested with authorities of the Chief Executive Officer without shareholder approval
consisting of a majority vote of the shares present and voting at a shareholders meeting, provided that either (i) such majority includes
at least two-thirds of the shares held by all shareholders who are not controlling shareholders and do not have a personal interest in
such appointment, present and voting at such meeting; or (ii) the total number of shares of non-controlling shareholders and shareholders
who do not have a personal interest in such appointment voting against such appointment does not exceed two percent of the aggregate voting
rights in the company. Abstaining shareholders shall not be counted as part of the non-controlling shareholders, or shareholders with
no personal interest.
In addition, a person
subordinated, directly or indirectly, to the Chief Executive Officer may not serve as the chairman of the board of directors; the chairman
of the board may not be vested with authorities that are granted to those subordinated to the Chief Executive Officer; and the chairman
of the board may not serve in any other position in the company or a controlled company, but he may serve as a director or chairman of
a subsidiary.
On December 29, 2016,
our shareholders approved that our Chairman of the Board would also serve as our Chief Executive Officer. In July 2018, Mr. Eli
Yaffe was appointed Chief Executive Officer and Mr. Nissan continues to serve as the Chairman of the Board of Directors of our company.
Committees of the Board of Directors
Audit Committee
Under
the Israeli Companies Law, the board of directors of any public company must establish an audit committee. The audit
committee must consist of at least three directors, must include all of the external directors and must have a majority of independent
directors.
The audit committee may not include the chairman
of the board of directors, the controlling shareholder (or any of the controlling shareholder’s relatives), any director employed
by the company or by its controlling shareholder or by an entity controlled by the controlling shareholder, any director who regularly
provides services to the company or to its controlling shareholder or to an entity controlled by the controlling shareholder, and any
director who derives most of his or her income from the controlling shareholder. The chairman of the audit committee must be an
external director. A majority of the members of the audit committee constitutes a quorum, provided that the majority of the members
present at the meeting are independent directors (within the meaning of the Israeli Companies Law) and at least one external director
is present at the meeting.
In addition, the NASDAQ Stock Market Rules
require us to establish an audit committee comprised of at least three members, all of whom must be independent directors, each of whom
is financially literate and satisfies the respective “independence” requirements of the SEC and NASDAQ and one of whom has
accounting or related financial management expertise at senior levels within a company.
Our audit committee meets at least once each
quarter. Under the Israeli Companies Law, the roles of the audit committee are (i) to identify deficiencies in the management
of our business, including in consultation with the internal auditor and our independent auditors, and to suggest appropriate courses
of action to amend such deficiencies; (ii) to define whether certain acts and transactions that involve conflicts of interest are material
or and to define whether transactions that involve interested parties are extraordinary or not, and to approve such transactions (which
may be approved according to certain criteria set out by our audit committee on an annual basis); (iii) to establish procedures to be
followed in respect of related party transactions with a controlling shareholder (where such are not extraordinary transactions), which
may include, where applicable, the establishment of a competitive process for such transaction, under the supervision of the audit committee,
or individual, or other committee or body selected by the audit committee, in accordance with criteria determined by the audit committee;
(iv) to determine whether to approve related party transactions, that are subject to the audit committee's approval according to the Israeli
Companies Law; (v) to determine procedures for approving certain related party transactions with a controlling shareholder, which having
been determined by the audit committee not to be extraordinary transactions, were also determined by the audit committee not to be negligible
transactions; (vi) in companies where the internal auditor's work plan is subject to Board of Directors approval, to examine and propose
revisions to the internal auditor's work plan before it is presented to the Board of Directors; (vii) to examine the performance of our
internal auditor and whether he is provided with the required resources and tools necessary for him to fulfill his role, considering,
among others, the company’s size and special needs, and to review his annual plan and approve it should the company's articles of
association require the approval of the Board for such plan; (viii) to oversee and approve the retention, performance and compensation
of our independent auditors and to establish and oversee the implementation of procedures concerning our systems of internal accounting
and auditing control; and (ix) to set procedures for handling of complaints made by company’s employees in connection with management
deficiencies and the protection to be provided to such employees.
The audit committee may consult from time
to time with our independent auditors and internal auditor with respect to matters involving financial reporting and internal accounting
controls.
In the event the audit committee has discovered
a material deficiency in the company’s business operations, it must hold at least one meeting regarding such deficiency, at which
the internal auditor or the independent accountants must be present and in which office holders who are not members of the audit committee
may not participate, except for the presentation of their position.
Our audit committee consists of three members
of our board of directors who satisfy the respective requirements of the SEC, NASDAQ and Israeli law for the composition of the audit
committee. Our audit committee is currently composed of Messrs. Dovev (Chairman),
Marmorstein and Ms. Lurie.
Compensation Committee
Effective December 2012, Israeli law requires
our Board of Directors to appoint a compensation committee which must be comprised of at least three directors, including all of the external
directors, which shall be a majority of the members of the compensation committee and one of whom must serve as chairman of the committee.
However, subject to certain exceptions, Israeli companies whose securities are traded on stock exchanges such as NASDAQ, and who do not
have a controlling party, do not have to meet this majority requirement; provided, however, that the compensation committee meets other
Israeli Companies Law composition requirements, as well as the requirements of the non-Israeli jurisdiction where the company’s
securities are traded. Other than the external directors, the rest of the members of the compensation committee shall be directors
who will compensation for their role as directors only in accordance with Israeli Companies Law regulations applicable to the compensation
of external directors, or amounts paid pursuant to indemnification and/or exculpation contracts or commitments and insurance coverage.
On August 31, 2022, our shareholders approved
an amended and restated compensation policy for our company. The compensation policy must be approved every three years by our compensation
committee, board of directors and shareholders, voting with a special majority (in that order).
The compensation policy is based on and references certain matters and provisions set forth in the Israeli Companies Law, which include:
(i) promoting our company’s goals, work plan and policy with a long-term view; (ii) creating appropriate incentives for our company’s
office holders, considering, among other things, our company’s risk management policy; (iii) our company’s size and nature
of operations; and (iv) with respect to variable elements of compensation (such as annual cash bonuses), the office holder’s contribution
to achieving company objectives and maximization of our company’s profits, with a long-term view and in accordance with his or her
position.
Our compensation committee is currently composed
of Ms. Lurie and Messrs. Dovev and Marmorstein.
Banking Committee
In March 2014, our Board of Directors established
a banking committee, which was authorized to adopt resolutions on behalf of the Board of Directors in respect of banking activities, including
opening of new accounts and signing credit agreements of up to $9 million. Our banking committee is currently composed of Mr. Nissan and
Mr. Dovev.
Special Independent Committee for M&A
purposes
In November 2017, our Board of Directors established
a Special Independent Committee, separate and independent from our controlling shareholder, Mr. Nissan. The Special Independent Committee
received the Board’s mandate to examine and review any issue that may arise with respect to a possible consummation of an M&A
transaction, at the Special Independent Committee’s sole discretion, including, among other things, the authority to retain and
consult with financial and legal advisors, negotiate such transaction and recommend to our Board of Directors, which retains the authority
on the decision of final execution of such agreement. For the avoidance of any doubt, the Special Independent Committee may determine
that the company will not be party to an M&A Transaction. The Special Independent Committee is currently composed of Mr. Dovev, Ms.
Lurie, Mr. Rubner and Mr. Meltzer.
Internal Audit
The Israeli Companies Law requires the Board
of Directors of a public company to appoint an internal auditor nominated by the audit committee. The internal auditor must meet
certain statutory requirements of independence. The role of the internal auditor is to examine, among other things, the compliance
of the company’s conduct with applicable law and orderly business practice. In March 2016, we appointed Mr. Doron Cohen of Fahn
Kanne as our internal auditor.
Directors’ Service Contracts
There are no arrangements or understandings
between us and any of our subsidiaries, on the one hand, and any of our directors, on the other hand, providing for benefits upon termination
of their employment or service as directors of our company or any of our subsidiaries. We note that the vesting of options granted to
directors, as described below, will stop at termination of their service to the Company.
Exculpation, Indemnification and Insurance
of Directors and Officers
Exculpation of Office Holders
The Israeli Companies Law provides that an
Israeli company cannot exculpate an office holder from liability with respect to a breach of his or her duty of loyalty. If permitted
by its articles of association, a company may exculpate in advance an office holder from his or her liability to the company, in whole
or in part, with respect to a breach of his or her duty of care. However, a company may not exculpate in advance a director from
his or her liability to the company with respect to a breach of his duty of care with respect to distributions.
Our articles of association allow us to exculpate
any office holder from his or her liability to us for breach of duty of care, to the maximum extent permitted by law, before or after
the occurrence giving rise to such liability. We provided an exemption letter, in the form approved by the Company's shareholders
on October 17, 2013 to each of our directors and officers, and agreed to provide the same to our future office holders.
Insurance of Office Holders
The Israeli Companies Law provides that a
company may, if permitted by its articles of association, enter into a contract to insure office holders in respect of liabilities incurred
by the office holder with respect to an act or omission performed in his or her capacity as an office holder, as a result of: (i) a breach
of the office holder’s duty of care to the company or to another person; (ii) a breach of the office holder’s duty of loyalty
to the company, provided that the office holder acted in good faith and had reasonable grounds to assume that his or her act would not
prejudice the company’s interests; and (iii) a monetary liability imposed upon the office holder in favor of another person.
Our articles of association provide that,
subject to any restrictions imposed by applicable law, we may procure, and/or undertake to procure, insurance covering any past or present
or future office holder against any liability which he or she may incur in such capacity, including insurance covering us for indemnifying
such office holder, to the maximum extent permitted by law.
Without derogating from the above, we may
enter into a contract to insure the liability of an office holder for an obligation imposed on such office holder in consequence of an
act or omission done in such office holder’s capacity as an office holder, in the following case: (i) expenses, including reasonable
litigation expenses and legal fees, incurred by the office holder as a result of a proceeding instituted against such office holder in
relation to (A) infringements that may result in imposition of financial sanction pursuant to the provisions of Chapter H'3 under the
Israeli Securities Law, 5728-1968 (as amended), or the “Israeli Securities Law”, or (B) administrative infringements pursuant
to the provisions of Chapter H'4 under the Israeli Securities Law or (C) infringements pursuant to the provisions of Chapter I'1 under
the Israeli Securities Law; and (ii) payments made to the injured parties of such infringement under Section 52ND(a)(1)(a) of the Israeli
Securities Law.
On October 29, 2020, our shareholders approved
the D&O Policy described in Exhibit 99.1 to our Report of Foreign Issuer on Form 6-K filed on September 23, 2020, including the order
of payment, for the benefit of the directors and officers of the Company (excluding its controlling shareholder), currently serving and
as may serve from time to time.
Indemnification of Office Holders
The Israeli Companies Law provides that a
company may, if permitted by its articles of association, indemnify an office holder for liabilities or expenses imposed
on him or her, or incurred by him or her concerning acts or omissions performed by the office holder in such capacity for: (i)
a monetary liability imposed on the office holder in favor of another person by any judgment, including a settlement or an arbitrator’s
award approved by a court; (ii) reasonable litigation expenses, including attorney’s fees, incurred by the office holder as a result
of an investigation or proceeding instituted against him or her by a competent authority, provided that such investigation or proceeding
concluded without the filing of an indictment against the office holder or the imposition of any monetary liability in lieu of criminal
proceedings, or concluded without an indictment against the office holder but with the imposition of a monetary liability on the office
holder in lieu of criminal proceedings with respect to a criminal offense that does not require proof of criminal intent; and (iii) reasonable
litigation expenses, including attorneys’ fees, incurred by the office holder or which were imposed on him or her by a court, in
an action instituted by the company or on the company’s behalf, or by another person, against the office holder, or in a criminal
charge from which the office holder was acquitted, or in a criminal proceeding in which the office holder was convicted of a criminal
offense which does not require proof of criminal intent.
The Israeli Companies Law provides that a
company’s articles of association may permit the company to indemnify an office holder following a determination to this effect
made by the company after the occurrence of the event in respect of which the office holder will be indemnified. It also provides
that a company’s articles of association may permit the company to undertake in advance to indemnify an office holder, except that
with respect to a monetary liability imposed on the office holder by any judgment, settlement or court-approved arbitration award, the
undertaking must be limited to types of events which the company’s board of directors deems foreseeable considering the company’s
actual operations at the time of the undertaking, and to an amount or standard that the board of directors has determined as reasonable
under the circumstances.
Our articles of association provide that we
may indemnify an office holder retroactively for certain obligations or expenses imposed on such office holder in consequence of an act
or omission done in such office holder’s capacity as an officer in our company. These obligations and expenses include:
|
i. |
a monetary obligation imposed on the office holder in favor of another person pursuant to a judgment, including a judgment given
in settlement or an arbitrator's award that has been approved by a court; |
|
ii. |
reasonable litigation expenses, including advocates’ professional fees, incurred by the office holder pursuant to an investigation
or a proceeding commenced against the office holder by a competent authority and that was terminated without an indictment and without
having a monetary charge imposed on the office holder in exchange for a criminal procedure (as such terms are defined in the Israeli Companies
Law), or that was terminated without an indictment but with a monetary charge imposed on the office holder in exchange for a criminal
procedure in a crime that does not require proof of criminal intent or in connection with a financial sanction; |
|
iii. |
reasonable litigation expenses, including advocates’ professional fees, incurred by the office holder or which the office holder
is ordered to pay by a court, in proceedings filed against the office holder by the company or on its behalf or by another person, or
in a criminal indictment in which the office holder is acquitted, or in a criminal indictment in which the office holder is convicted
of an offence that does not require proof of criminal intent; |
|
iv. |
expenses, including reasonable litigation expenses and legal fees, incurred by an office holder as a result of a proceeding instituted
against such office holder in relation to (A) infringements that may result in imposition of financial sanction pursuant to the provisions
of Chapter H'3 under the Israeli Securities Law or (B) administrative infringements pursuant to the provisions of Chapter H'4 under the
Israeli Securities Law or (C) infringements pursuant to the provisions of Chapter I'1 under the Israeli Securities Law; and |
|
v. |
payments to an injured party of infringement under Section 52ND(a)(1)(a) of the Israeli Securities Law. |
Our articles of association also provide that
we may undertake to indemnify in advance an office holder, in accordance with the conditions set under
applicable law, in respect of the obligations or expenses specified in (i)-(v) above, provided that such undertaking is limited to types
of events which in the board of directors’ opinion may be anticipated, in light of our company’s activities, at the time of
granting the indemnity undertaking, and to an amount or criteria which the board of directors determines is reasonable in the circumstances
of the case, both of which are to be specified in the indemnification undertaking.
According to our compensation
policy, the total amount of indemnification that our company undertakes towards all persons whom it has resolved to indemnify, jointly
and in the aggregate, shall not exceed an amount equal (i) 25% of the net equity of our company according to the audited or reviewed financial
statement known at the time the request for indemnification was submitted; or (ii) $3,000,000, whichever is greater.
On December 5, 2019, our shareholders approved
an updated indemnification agreement which was entered into with our directors and officers.
Limitations on Exculpation, Insurance and
Indemnification
The Israeli Companies Law provides that neither
a provision of the articles of association permitting the company to enter into a contract to insure the liability of an office holder,
nor a provision in the articles of association or a resolution of the board of directors permitting the indemnification of an office holder,
nor a provision in the articles of association exempting an office holder from duty to the company shall be valid, where such insurance,
indemnification or exemption relates to any of the following: (i) a breach by the office holder of his duty of loyalty, except with respect
to insurance coverage or indemnification if the office holder acted in good faith and had reasonable grounds to assume that the act would
not prejudice the company; (ii) a breach by the office holder of his duty of care if such breach was committed intentionally or recklessly,
unless the breach was committed only negligently; (iii) any act or omission committed with intent to derive an unlawful personal gain;
and (iv) any fine or forfeiture imposed on the office holder.
Under the Israeli Companies Law, exculpation
of, procurement of insurance coverage for, and an undertaking to indemnify or indemnification of, an office holder (other than the chief
executive officer) must be approved by the company’s compensation committee and board of directors and, if such office holder is
a director, also by the company’s shareholders. Exculpation of, procurement of insurance coverage for, and an undertaking
to indemnify or indemnification of, the chief executive officer must be approved by the company’s compensation committee, board
of directors and by a special majority of the shareholders.
We have agreed to indemnify our office holders
for certain liabilities and expenses that may be imposed on them due to acts performed, or failures to act, in their capacity as office
holders, including financial liabilities imposed by judgments or settlements in favor of third parties, and reasonable litigation expenses
imposed by a court in relation to criminal charges from which the indemnitee was acquitted or criminal proceedings in which the indemnitee
was convicted of an offense that does not require proof of criminal intent, all subject to Israeli law and certain limitations in the
agreements. The aggregate amount we may pay our office holders pursuant to our indemnification undertaking may not exceed, jointly
and in the aggregate, $2 million but in any event not more than 25% of our company’s net equity. We currently maintain directors
and officers liability insurance with a per claim and aggregate coverage limit of $10 million. Under our current directors and officers
liability insurance policy, losses will be paid in accordance with the following order of priority: first, on behalf of officers and directors,
for all loss that they will be obligated to pay as a result of a claim made against them; thereafter, on our behalf, for all loss that
an officer or director will be obligated to pay as a result of a claim made against them, to the extent that we are required or permitted
by law to indemnify our officers and directors; and thereafter, on our behalf, for all loss that we will be obligated to pay as a result
of a securities claim made against us.
D.
Employees
We consider our employees
the most valuable asset of our company. We offer competitive compensation and comprehensive benefits to attract and retain our employees.
We believe that an engaged workforce is key to maintaining our ability to innovate.
We are committed
to providing a safe work environment for our employees in compliance with applicable regulations. We have taken necessary precautions
in response to the recent COVID-19 outbreak, including offering employees flexibility to work from home and mandatory social
distancing requirements in the workplace.
As of December 31, 2022, we employed 294 full-time
employees in Israel, of which 196 were employed in manufacturing services, 36 in process and product engineering, 35 in quality assurance
and control, 11 in sales and marketing and 16 in finance, accounting, information service and administration.
As of December 31, 2021, we employed 260 full-time
employees in Israel, of which 190 were employed in manufacturing services, 21 in process and product engineering, 23 in quality assurance
and control, 10 in sales and marketing and 16 in finance, accounting, information service and administration.
As of December 31, 2020, we employed 285 full-time
employees in Israel, of which 202 were employed in manufacturing services, 38 in process and product engineering, 20 in quality assurance
and control, 11 in sales and marketing and 14 in finance, accounting, information service and administration.
In addition, Eltek USA, a wholly-owned Delaware
subsidiary, employed 2 full-time employees as of December 31, 2022 and 3 full-time employees as of December 31, 2021 and 2020.
Our relationships with our employees in Israel
are governed by Israeli labor law, extension orders of the Israeli Ministry of Economy and Industry and personal employment agreements.
We are subject to various Israeli labor laws, general collective bargaining agreements entered into, from time to time, between the Histadrut
and the Manufacturers Association, as well as specific and local agreements and arrangements. Such laws, agreements, and arrangements
cover the wages and employment conditions of our employees, including length of the workday, minimum daily wages for professional workers,
contribution to pension fund, insurance for work related accidents, procedures for dismissing employees, determination of severance pay,
benefit programs and annual leave. We generally provide our Israeli employees with benefits and working conditions beyond the minimums
required by law.
In the past, our employees have attempted
to establish an employees’ union committee, which was later terminated.
Certain of our officers, key employees and
other employees are party to individual employment agreements. We have entered into a non-disclosure and non-competition agreement
with some of our executive officers. All of our officers and employees are subject to confidential and proprietary information provisions
set forth in our Code of Business Conduct and Ethics.
Pursuant to Israeli law, we are legally required
to pay severance benefits upon certain circumstances, including the retirement or death of an employee or the termination of employment
of an employee without due cause, equivalent to a one-month salary for each year of employment with the company. Most of our employees
are covered by pension plans providing customary benefits including retirement and severance benefits. Some of our employees are
covered by life and pension insurance policies providing similar benefits. We contribute 8.33% of base salaries to the employees’
pension funds or life pension insurance policies to cover our liability for severance pay. Pursuant to Section 14 of the Israeli
Severance Pay Law, 5729-1963, if a company contributes to an employee’s pension fund or severance fund, then the employee is entitled
only to the severance amounts accumulated in such fund(s) upon resignation from the company or termination by the company, and the company
is not obligated to make additional payments to the employee upon termination of employment with the company.
With respect to pension benefits, we contribute
between 6.5% to 7.5% of base salaries to the employees’ pension plans and 7.5% to those employees who have life insurance policies.
The employees who have pension plans contribute between 6% to 7% of base salaries to their pension plans, and the employees who have life
insurance policies contribute 6% of their base salaries to their policies. In addition, we contribute 8.33% for severance pay into
the employees’ life insurance policies, pension plans or similar funds of their choice.
We also contribute between 1% to 7.5% of base
salaries to certain “professional advancement” funds for managers, engineers and certain others and such employees have to
match one third of such contribution, up to 2.5% of their base salaries.
Israeli employers and employees are required
to pay predetermined sums to the National Insurance Institute of Israel, which is similar to the United States Social Security Administration.
Subject to minimum thresholds, the employer contribution to the National Insurance Institute is at the rate of 7.6% of the salary (same
in 2021) and the employee contribution to the National Insurance Institute is at the rate of 12% of the salary (of which 5% relates to
payments for national health insurance), both of which are limited to a maximum monthly salary of NIS 47,500 (approximately $13,500) in
2022, NIS 44,020 (approximately $13,800) in 2021, and NIS 43,370 (approximately $12,600) in 2020. In the year ended December 31,
2022, our aggregate payments as an employer to the National Insurance Institute amounted to approximately 5.3% of the salaries.
E. Share
Ownership
Beneficial Ownership of Executive Officers
and Directors
The following table sets
forth certain information as of March 20, 2023 regarding the beneficial ownership of our ordinary shares by our directors and executive
officers and all of our executive officers and directors as a group:
|
Name |
|
Number of Ordinary Shares Beneficially Owned |
|
|
Percentage of Outstanding Ordinary Shares (2)
|
|
|
Principal Shareholders |
|
|
|
|
|
|
|
Yitzhak Nissan (1)
|
|
|
4,065,912 |
|
|
|
69.5 |
% |
| |
|
|
|
|
|
|
|
|
|
Senior Management and Directors |
|
|
|
|
|
|
|
|
|
Eli Yaffe (1) (3)
|
|
|
139,350 |
|
|
|
2.3 |
% |
|
Ron Freund(4) |
|
|
4,063 |
|
|
|
* |
|
|
Yitzhak Zemach(5)
|
|
|
14,907 |
|
|
|
* |
|
|
Oriel Sallary(6)
|
|
|
3,926 |
|
|
|
* |
|
|
Sagi Balter (7) |
|
|
9,907 |
|
|
|
* |
|
|
Mordechai Marmorstein(8)
|
|
|
7,500 |
|
|
|
* |
|
|
David Rubner (9)
|
|
|
7,500 |
|
|
|
* |
|
|
Erez Meltzer(10)
|
|
|
7,500 |
|
|
|
* |
|
|
Gad Dovev(11) |
|
|
7,500 |
|
|
|
* |
|
|
Ilana Lurie(12) |
|
|
7,500 |
|
|
|
* |
|
|
All executive officers and directors as a group (12 persons)
(13) |
|
|
4,275,564 |
|
|
|
70.6 |
% |
*Less than 1%
(1) Except for Mr. Nissan and Mr. Yaffe, none
of our directors or executive officers holds any of our ordinary shares. Mr. Nissan is the beneficial
owner of 3,891,596 shares held by Nistec Golan, a company controlled by him and holds 174,316 shares as an individual.
The principal business address of Nistec Golan is 43 Hasivim Street, Petach Tikva, Israel.
Mr. Yaffe is the beneficial owner of 4,250 shares held by himself.
(2) The
percentages shown are based on 5,849,678 ordinary shares issued and outstanding as of March 20,
2023.
(3) The
number of ordinary shares beneficially owned includes 135,100 ordinary shares subject to options that are currently exercisable or exercisable
within 60 days of the date of this report.
(4) The
number of ordinary shares beneficially owned includes 4,063 ordinary shares subject to options that are currently exercisable or exercisable
within 60 days of the date of this report.
(5) The
number of ordinary shares beneficially owned includes 14,907 ordinary shares subject to options that are currently exercisable or exercisable
within 60 days of the date of this report.
(6) The
number of ordinary shares beneficially owned includes 3,926 ordinary shares subject to options that are currently exercisable or exercisable
within 60 days of the date of this report.
(7) The
number of ordinary shares beneficially owned includes 9,907 ordinary shares subject to options that are currently exercisable or exercisable
within 60 days of the date of this report.
(8) The
number of ordinary shares beneficially owned includes 7,500 ordinary shares subject to options that are currently exercisable or exercisable
within 60 days of the date of this report.
(9) The
number of ordinary shares beneficially owned includes 7,500 ordinary shares subject to options that are currently exercisable or exercisable
within 60 days of the date of this report.
(10) The
number of ordinary shares beneficially owned includes 7,500 ordinary shares subject to options that are currently exercisable or exercisable
within 60 days of the date of this report.
(11) The
number of ordinary shares beneficially owned includes 7,500 ordinary shares subject to options that are currently exercisable or exercisable
within 60 days of the date of this report.
(12) The
number of ordinary shares beneficially owned includes 7,500 ordinary shares subject to options that are currently exercisable or exercisable
within 60 days of the date of this report.
(13) The
number of ordinary shares beneficially owned includes 205,402 ordinary shares subject to options that are currently exercisable or exercisable
within 60 days of the date of this report.
2018
Share Incentive Plan
Our 2018 share incentive plan authorized the
grant of options to purchase shares and restricted shares unites to officers, employees, directors and consultants of the company and
its subsidiaries. Awards granted under the plan to participants in various jurisdictions may be subject to specific terms and conditions
for such grants as may be approved by our board from time to time.
Each option granted under the plan is exercisable
for a period of ten years from the date of the grant of the option or the expiration dates of the option plan. The options primarily vest
gradually over four years of employment.
During 2020, 16,014 options were granted (including
an adjustment to options previously granted, to reflect the dilutive effect of the rights offering) under the plan and no options were
exercised. During 2021, 270,200 options were granted (including an adjustment to options previously granted, to reflect the dilutive
effect of the rights offering) under the plan and no options were exercised. During 2022, 28,000 options were granted under the
plan. As of December 31, 2022, options to purchase 395,171 ordinary shares were outstanding under the plan, exercisable at an average
exercise price of $5.25 per share.
In December 2020, our Compensation Committee and Board of Directors approved the grant
of options to purchase 100,000 ordinary shares to our CEO. In March 2021 our Compensation Committee and Board of Directors approved the
grant of options to purchase 170,200 ordinary shares to our directors, office holders and employees. The grant to our directors included
a grant of 20,000 options to each of the directors (100,000 in the aggregate), including the external directors but excluding Yitzhak
Nissan. The December 2020 grant to the CEO and March 2021 grant to the directors and to Ms. Revital Cohen Tzemach, the daughter of Mr.
Nissan, who is our special projects manager, was approved by our shareholders at the 2021 General meeting, held on June 3, 2021.
In December 2021, our Compensation Committee
and Board of Directors approved the grant of an additional 13,000 options with an exercise price of $4.18 to our CFO. In December 2022,
our Compensation Committee and Board of Directors approved the grant of an additional 15,000 options with an exercise price of $4.06 to
Mr. Freund.
We have applied to the Israeli tax authorities
for a tax ruling which will enable us according to the 2018 plan, to reduce the exercise price of options granted before the December
19, 2022 dividend distribution. The amount of reduction according to the plan is $0.17 which reflects the dividend payment per share.
| F. |
Disclosure of a Registrant’s Action to Recover Erroneously Awarded Compensation. |
Not applicable.
| ITEM
7. |
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
A.
Major Shareholders
The following table sets forth certain information
as of March 20, 2023 regarding the beneficial ownership by all shareholders known to us to own beneficially 5% or more of our ordinary
shares:
|
Name |
|
Number of Ordinary Shares
Beneficially Owned (1)
|
|
|
Percentage
of Ownership (2)
|
|
|
Nistec Golan Ltd. (3)
|
|
|
3,891,596 |
|
|
|
66.53 |
% |
|
Yitzhak Nissan (3)
|
|
|
174,316 |
|
|
|
2.98 |
% |
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
___________
|
(1) |
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with
respect to securities. Ordinary shares relating to options or convertible notes currently exercisable or exercisable within 60 days
of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed
outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property
laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as
beneficially owned by them. |
|
(2) |
The percentages shown are based on 5,849,678 ordinary shares issued and outstanding as of March
20, 2023. |
|
(3) |
Based on a Schedule 13D/A filed on February 16, 2021. Nistec Golan is an Israeli private company
controlled by Yitzhak Nissan. Accordingly, Mr. Nissan may be deemed to be the beneficial owner of the ordinary shares held directly
by Nistec Golan. |
Significant Changes in the Ownership of Major
Shareholders
In our March 2019 rights offering to our shareholders,
Nistec acquired 1,707,364 additional ordinary shares of our company and Mr. Nissan acquired 206,712
additional ordinary shares of our company.
In
our December 2020 rights offering to our shareholders,
Nistec acquired 1,159,813 shares and Mr. Nissan individually acquired 43,576 of our ordinary
shares, increasing his direct and indirect voting interest from 65.4%
to 69.6%.
Mr. Michael McGauley
reported a 5.21% ownership in the company effective as of November 25, 2019 in a Schedule 13D filing dated December 6, 2019. Mr. Michael
McGauley reported a 4.99% ownership interest effective as of November 30, 2020 in a Schedule 13D filing dated December 2, 2020.
Major Shareholders Voting Rights
Our principal shareholders do not have different
voting rights attached to their ordinary shares.
Record Holders
Based on the information provided to us by
our transfer agent, as of March 20, 2023, there were 8 holders of record of our ordinary shares, of which 6 record holders holding approximately
33.5% of our ordinary shares had registered addresses in the United States. These numbers are not representative of the number of
beneficial holders of our shares nor are they representative of where such beneficial holders reside, since many of our ordinary shares
were held of record by brokers or other nominees (including one U.S. nominee company, CEDE & Co., which held approximately 33.4% of
our outstanding ordinary shares as of such date).
B. Related
Party Transactions
On December 5, 2019 our shareholders approved
the renewal and amendment of a management agreement with Nistec Ltd. On June 3, 2021, the Shareholders approved an additional renewal
and amendment of a management agreement with Nistec Ltd. effective January 1, 2022, for a period of 3 years. Under the terms of the amended
management agreement, Mr. Nissan serves as the Chairman of our Board of Directors. In that role, Mr. Nissan provides us with various
enumerated services, as follows: (a) coordination of the activities of our Board of Directors with respect to the development of
the long term strategy for Eltek; (b) guidance to our Board of Directors with respect to the implementation by management of its strategy,
work plans and budget, as shall be determined from time to time by our Board of Directors; (c) coordination of the activities of our Board
of Directors with respect to the regulation and implementation of proper corporate governance practices; (d) coordination of the activities
of our Board of Directors for the purpose of the approval of quarterly and annual financial statements and reports; (e) development
and retention of relations with current and future strategic investors; (f) general guidance and management of the activities of our Board
of Directors; (g) advancement of the our company’s efforts with respect to the realization of its business development strategy,
including the pursuit of mergers and acquisition opportunities; (h) coordination of the activities of our Board of Directors with respect
to the definition of strategic financial targets and in attaining such targets (i) provision of assistance to our company in cooperation
with our CEO, regarding our company’s dealings, communications and negotiations with the banks and non-banking financing institutions,
including but not limited to, assistance with respect to obtaining financing for our company’s business activities, and (j) business
development services, including assistance, in cooperation with our CEO, in the development and preservation of relationships with our
company’s existing and potential customers. Mr. Nissan will dedicate the appropriate attention, time and effort to our company in
connection with the provision of the enumerated services. The time dedicated by Mr. Nissan for the provision of such services will be
as required by our company from time to time, and in accordance with its needs.
In consideration for performing the above
services, we pay Nistec Ltd. a monthly fixed fee of NIS 90,000, plus applicable VAT. In addition, Mr. Nissan is entitled to the
following compensation:
|
• |
Mr. Nissan will receive reimbursement of travel expenses (other than food and beverage expenses) while traveling
internationally on behalf of our company, provided that such reimbursement shall not exceed an aggregate amount of NIS 10,000 per calendar
quarter. |
|
• |
Mr. Nissan will receive reimbursement of food and beverage expenses while traveling internationally on behalf of our company, against
receipts, in accordance with the Israeli Income Tax Regulations (Deduction of Certain Expenses) 5732-1972. |
Our Compensation Committee,
Board of Directors and shareholders at an Annual General Meeting resolved to approve the extension and amendment of the management agreement.
In September 2018, our
shareholders approved:
|
i. |
The extension of the Amended PCB Purchase Procedure with Nistec Ltd.; |
Nistec purchases PCBs from our company solely
to provide assembled boards to its customers. Our sales to Nistec are based on our standard pricing, which may be subject to a discount
of up to ten percent (10%). Should the order be for imported PCBs, the quote reflects the actual price of such PCBs, plus a mark-up of
at least twenty percent (20%). Should the order be for PCBs that are being sold from excess inventory of an original order, the quote
will reflect the standard price of such PCBs, with a discount of up to fifty percent (50%) of the price actually paid for such PCBs in
the original order (the “Excess Inventory Discount”). The Excess Inventory Discount will apply only to orders from excess
inventory of the first original order of a specific PCB (i.e., should a second order of a specific PCBs generate any excess inventory
and Nistec would like to purchase such excess, the Excess Inventory Discount will not be applied to such purchase).
|
ii. |
The extension of the amended general engagement terms, processes and restrictions of the Soldering and
Assembly Services Procedure with Nistec Ltd.; |
We may acquire soldering services and/or purchasing
services from Nistec. Nistec’s pricing for its soldering services will be its standard pricing less a five percent (5%) discount.
Nistec may charge for purchasing services in accordance with the actual costs of the orders, plus a fourteen and a quarter (14.25%) commission,
which reflects a five percent (5%) discount, as compared to the commission charged to third parties by Nistec for similar services. Prices
of services not subject to Nistec’s standard pricing will be negotiated by the parties in good faith (without participation
of Mr. Nissan or any of his relatives). Nistec standard procedures govern manufacturer warranties and restrictions regarding defective
assembled products. In addition to requesting Nistec to provide us with a quote for soldering and assembly services, in the
event that we require design and/or design services for production of PCBs, we may ask Nistec to provide a quote for such services. Nistec
may charge for design and/or design services in accordance with its standard pricing for such services, less a five percent (5%) discount.
Out purchases of services under the Soldering, Assembly and Design Services Procedure may not exceed NIS 300,000 (approximately $93,000)
per annum.
|
iii. |
The extension of the procedure under which we and Nistec Ltd. may jointly acquire certain services
related to employees social activities, marketing services and insurance. |
We may share with Nistec costs of insurance
consulting and insurance premiums in the event we determine that a joint insurance policy with Nistec will reduce our costs as compared
to purchasing insurance separately. Insurance expenditures will be divided between the our companies as follows: (i) insurance consulting
services costs will be divided in proportion to the insurance premiums paid by our two companies in the preceding year; (ii) the joint
insurance premiums will be divided in the proportions indicated by the insurer for each of our two companies had they purchased the insurance
separately. We will solicit updated insurance proposals at least bi-annually. The decision to enter into such a joint insurance policy
with Nistec will be subject to the approval of our Audit Committee and our Board of Directors.
We may purchase social activities for the
benefit of our employees together with Nistec. The cost of such activities will be divided between us in accordance with the ratio of
the number of our employees and Nistec employees to whom the applicable activity was directed, regardless of actual participation.
We may purchase services together with Nistec.
Marketing costs will be divided between us as follows: (i) to the extent the portion of the marketing material applicable to our company
can be quantified, costs will be divided accordingly; (ii) in the event that such costs cannot be quantified, we and Nistec will each
bear 50% of the marketing costs.
In August 2022, the exculpation
letter and the indemnification letter granted to Mr. Yitzhak Nissan were further extended for an additional three (3) year period ending
on December 31, 2025.
On October 29, 2020, our shareholders approved,
effective as of August 1, 2020: (i) an increase in the gross monthly salary of Ms. Cohen-Tzemach, the daughter of Mr. Nissan, from NIS
18,000 to NIS 20,000; and (ii) that Ms. Cohen-Tzemach will be entitled to three (3) additional vacation days per year, such that she will
be entitled to 23 vacation days per year. Other than as described above, the terms of Ms. Cohen-Tzemach’s
employment will remain the same, including that Ms. Cohen-Tzemach shall be entitled to the use of a 7-seat company car, valued
up to NIS 180,000, including all associated operation and maintenance expenses. Ms. Cohen-Tzemach’s new position will be a special
project manager and it was approved that our bonus plan will also apply to her. The term of her employment agreement was extended until
August 31, 2022 and she was granted options to purchase 3,000 of our shares, at an exercise price of US$ 6.38. The options vest over a
period of four (4) years, such that at the first anniversary of grant, 25% of the options will vest, and then in equal amounts, quarterly
thereafter. On October 29, 2020, the shareholders approved a grant of a bonus of up to NIS 50,000 to
Ms. Cohen-Tzemach, to cover her tuition, in accordance with our Amended and Restated Compensation Policy. On June 3, 2020, the
shareholders approved a grant of options to purchase 10,000 of the Company’s Ordinary Shares to
Ms. Revital Cohen-Tzemach, at an exercise price of US$ 5.52. The options vest over a period
of four (4) years, such that at the first anniversary of grant, 25% of the options will vest, and then in equal amounts, quarterly thereafter,
and the application of the of our Bonus Plans during the period 2022 to 2024 with respect to her.
In June 2017, we received
a loan of NIS 5.0 million (approximately $1.4 million) from Nistec. In March 2018, we received additional loans from Nistec, of NIS 4.0
million (approximately $1.2 million), and in July 2018, we received a third loan from Nistec, of NIS 1.0 million (approximately $290,000)
(together, the “Loans”). In December 2018, the Loans and Nistec’s shares were transferred internally within the Nistec
group to an affiliated company, Nistec Golan Ltd. On December 5, 2019, our shareholders approved the execution of an amended interest
agreement with Nistec Golan (the “Interest Agreement”). Under the terms of the Interest Agreement (any accrued interest
prior to the date of the Interest Agreement was waived by Nistec Golan), the Loans, which were repaid from the proceeds of our December
2020 rights offering, carried interest, as follows: A loan in the amount of NIS 5 million carried interest of Prime + 1%, from September
26, 2019 until January 7, 2020. A second loan amount of NIS 5 million carried interest of Prime + 1.75%, from January 1, 2019 until December
2020.
On October 29, 2020,
our shareholders approved an amendment to the Interest Agreement (the Amended Interest Agreement), such that
in the event that the guarantees that Nistec provided to a bank and a NBFI will be exercised,
Nistec would repay such loans to the lenders and we would pay Nistec interest on such amounts, equal to the interest rate agreed between
us and the non-banking financial institution, plus 0.5% annually.
In addition to the above loans, in January
2019, Nistec Golan provided a NIS 2.0 million (approximately $580,000) guarantee of an existing line of credit to a bank, which was payable
on April 30, 2019. In February 2019, our audit committee approved the exercise of the option that Nistec would repay the debt owed to
the bank and would be converted into a loan to us, which was repaid on May 1, 2020.
In June 2020, we obtained a loan of NIS 4
million (approximately $1.2 million) from Mizrahi-Tefahot Bank, guaranteed by Nistec Ltd.
As of December 31, 2022 we do not have any
outstanding loans from Nistec or Nistec Golan.
C.
Interests of Experts and Counsel
Not applicable.
| ITEM
8. |
FINANCIAL INFORMATION |
A.
Consolidated Statements and Other Financial Information
See the consolidated financial statements,
including the notes thereto, and the exhibits listed in Item 18 hereof.
Legal Proceedings
From time to time we are involved in legal
proceedings arising from the operation of our business. Based on the advice of our legal counsel, management believes that except
for the proceedings discussed below, such current proceedings, if any, will not have a material adverse effect on our financial position
or results of operations.
Employee Related Matters
Three of our employees
filed lawsuits between May 2008 and November 2019, alleging that they had suffered personal injuries during their employment and they
are seeking aggregate financial compensation of approximately $121,000 for past damages and additional amounts for future lost income,
pain and suffering as the court may determine. Five other employees notified us between January 2011 and December 2019, that they allegedly
suffered personal injuries during their employment with the company, but have not filed a lawsuit. Of these five employees, two are seeking
compensation of approximately $1.7 million and the others did not state their claim amount. We submitted all of these claims to our insurance
company, which informed us that it is reviewing the statements of claim without prejudicing its rights to deny coverage.
During the period February 2019 through
October 2020, two former employees filed lawsuits seeking additional payments in connection with their employment and subsequent termination.
The aggregate amount claimed for the above mention matters is approximately $345,000. We recorded a provision according to our legal advisor's
opinion.
In March 2022, a lawsuit was filed by a former
employee of the Company seeking additional payments in connection with his employment termination. The amount claimed is $125,000.
Software License
A supplier of one of our software packages
asked to conduct an audit of our operation to verify that we are not in breach of any intellectual property rights he allegedly owns.
We believe that we have fully, diligently and timely complied with our obligation toward the supplier. We also believe that the
supplier has no right to conduct any audit of our products or services and such audit may cause us to breach confidentiality obligations
to other entities. If a claim is made and we are found to be in violation of such supplier’s intellectual property rights,
we could be liable for compensation and costs of an unknown amount. Such liability could have a material adverse effect on our business,
financial condition and results of operations.
Dividend Distribution Policy
On November 2022, our board of directors declared
the Company’s first cash dividend, in the amount of US$0.17 per share and approximately $1 million in the aggregate.of. The dividend
was paid in US dollars on December 19, 2022, to all of the Company’s shareholders of record as of December 12, 2022.
Prior to such distribution, we had never declared
or paid any cash dividends to our shareholders. We currently intend to retain future earnings for use in our business and do not
anticipate paying cash dividends on our ordinary shares in the foreseeable future. Any future dividend policy will be determined
by our board of directors and will be based upon conditions then existing, including our results of operations, financial condition, current
and anticipated cash needs, contractual restrictions and other conditions.
According to the Israeli Companies Law, a
company may distribute dividends out of its profits provided that there is no reasonable concern that such dividend distribution will
prevent the company from paying all its current and foreseeable obligations, as they become due. Notwithstanding the foregoing,
dividends may be paid even if not out of profits, with the approval of a court, provided that there is no reasonable concern that such
dividend distribution will prevent the company from satisfying its current and foreseeable obligations, as they become due. Profits,
for purposes of the Israeli Companies Law, means the greater of retained earnings or earnings accumulated during the preceding two years,
after deducting previous distributions that were not deducted from the surpluses. In the event cash dividends are declared, such
dividends will be paid in NIS, and will be subject to applicable Israeli withholding taxes.
B.
Significant Changes
None.
| ITEM
9. |
THE OFFER AND LISTING |
A.
Offer and Listing Details
Our ordinary shares are traded on the NASDAQ
Capital Market under the ticker symbol “ELTK.”
B.
Plan of Distribution
Not applicable.
C.
Markets
Our ordinary shares have been listed on the
NASDAQ Stock Market since our initial public offering on January 22, 1997.
D.
Selling Shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expense of the Issue
Not applicable.
| ITEM
10. |
ADDITIONAL INFORMATION |
A. Share
Capital
Not applicable.
B.
Memorandum and Articles of Association
Set out below is a description
of certain provisions of our memorandum of association and articles of association and of the Israeli Companies Law related to such provisions.
This description is only a summary and does not purport to be complete and is qualified by reference to the full text of the memorandum
of association and articles of association, which are incorporated by reference as exhibits to this Annual Report, and to Israeli law.
Purposes and Objects of the Company
We are registered with the Israeli Registrar
of Companies and have been assigned company number 52-004295-3. Section 2 of our memorandum of association provides that we were
established for the purpose of engaging in the business of developing, manufacturing, producing, vending, importing, exporting, supplying,
distributing and dealing in printed, multi-layer, flexible, thick film, hybrid and integrated circuits, components or portions thereof,
processes for making the same and related products. In addition, the purpose of our company is to perform various corporate activities
permissible under Israeli law.
The Powers of the Directors
Under the provisions of the Israeli Companies
Law and our articles of association, a director cannot vote on a proposal, arrangement or contract in which he or she is has personal
interest in, nor be present in the discussion relating to such transaction is considered. In addition, our directors’ compensation
is approved through special procedures prescribed in the Israeli Companies Law. In general, with respect to a director’s compensation,
approval is required by the (i) compensation committee; (ii) board of directors; and (iii) company’s shareholders with a regular
majority (in that order).
The authority of our directors to enter into
borrowing arrangements on our behalf is not limited, except in the same manner as any other transaction by us.
Under our articles of association, the service
of directors in office is not subject to any age limitation and our directors are not required to own shares in our company in order to
qualify to serve as directors.
Annual and Extraordinary Meetings of Shareholders
The board of directors must convene an annual
general meeting of shareholders at least once every calendar year, within 15 months of the last annual meeting. Depending on the
matter to be voted upon, notice of at least 21 days or 35 days prior to the date of the meeting is required. In addition, the board
of directors must convene a special general meeting of the shareholders upon the demand of any of: (1) two of the directors; (ii) 25%
of the nominated directors; (iii) one or more shareholders holding at least 5% of our company’s issued and outstanding share capital
and at least 1% of the voting power in the company; or (iv) one or more shareholders holding at least 5% of the voting power in our company.
The quorum required for a shareholders meeting
consists of at least two shareholders present in person or represented by proxy who hold or represent, in the aggregate, at least one
third of the voting rights of the issued share capital. A meeting adjourned for lack of a quorum is adjourned by seven business
days, at the same time and place, or any later time and place as the board of directors designate in a notice to the shareholders.
The requisite quorum at an adjourned general meeting will be: (i) if the original meeting was convened upon requisition by shareholders
pursuant to the Israeli Companies Law - the number of shareholders holding the minimum number of voting shares necessary to make such
requisition, present in person or by proxy; and (ii) in any other event - one or more shareholders, present in person or by proxy, holding
at least one share. We do not follow the requirements of the NASDAQ Stock Market Rules regarding the quorum at shareholder meetings.
See Item 16G. “Corporate Governance.”
Please refer to Exhibit 2.2 for Items 10.B.3,
B.4, B.6, B.7, B.8, B.9 and B.10.
C.
Material Contracts
None.
D.
Exchange Controls
Israeli law and regulations do not impose any material foreign
exchange restrictions on non-Israeli holders of our ordinary shares. Non-residents of Israel who purchase our ordinary shares will
be able to convert dividends, if any, thereon, and any amounts payable upon our dissolution, liquidation or winding up, as well as the
proceeds of any sale in Israel of our ordinary shares to an Israeli resident, into freely repatriable dollars, at the exchange rate prevailing
at the time of conversion, provided that the Israeli income tax has been withheld (or paid) with respect to such amounts or an exemption
has been obtained.
E.
Taxation
The following is a discussion of Israeli and
United States tax consequences material to our shareholders. To the extent that the discussion is based on tax legislation which
has not been subject to judicial or administrative interpretation, the views expressed in the discussion might not be accepted by the
tax authorities in question or by court. The discussion is not intended, and should not be construed, as legal or professional tax
advice and does not exhaust all possible tax considerations.
Holders of our ordinary
shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and
disposition of ordinary shares, including, in particular, the effect of any foreign, state or local taxes.
Israeli
Tax Considerations
General Corporate Tax Structure
Israeli companies are generally subject to
income tax on their taxable income. The regular corporate tax rate in Israel has been 23% since 2018. However, the effective rate
of tax payable by a company which is qualified under Israeli law as an “Industrial Company” and/or which derives income from
an “approved enterprise,” “benefited enterprise,” “preferred enterprise” or “preferred technological
enterprise” (as further discussed below) may be lower. See this Item 10E. “Additional Information – Taxation -
Tax Benefits Under the Law for the Encouragement of Capital Investments, 5719-1959.”
Tax Benefits under the Law for the Encouragement
of Industry (Taxes), 5729-1969
Pursuant to the Law for the Encouragement
of Industry (Taxes), 5729-1969, or the Industry Encouragement Law, a company qualifies as an “Industrial Company” if it is
a resident of Israel, was incorporated in Israel and at least 90% of its income in any tax year (exclusive of income raising from certain
governmental security loans) is derived from an “Industrial Enterprise” it owns, which is located in Israel. An “Industrial
Enterprise” is defined for purposes of the Industry Law as an enterprise whose principal activity in a given tax year is production.
We believe that we are currently an Industrial
Company. An Industrial Company is entitled to certain tax benefits, including a deduction of the purchase price of patents or the
right to use a patent or know-how used for the development or promotion of the Industrial Enterprise at the rate of 12.5% per annum, commencing
the year in which such rights were first exercised.
The tax laws and regulations dealing with
the adjustment of taxable income for local inflation provided that Industrial Enterprises, such as us, were eligible for special rates
of depreciation deductions. These rates vary in the case of plant and equipment. With respect to equipment, the applicable
rates of depreciation are determined according to the number of shifts in which the equipment is being operated and generally range from
20% to 40% on a straight-line basis, a 30% to 50% on a declining balance basis for equipment first put into operation on or after June 1,
1989 (instead of the regular rates which are applied on a straight-line basis). The applicable regulations are valid for equipment
whose date of first operation was not later than December 31, 2016.
Moreover, companies which own Industrial Enterprises
that are approved enterprises or benefited enterprises (see below) can choose, with respect to income deriving from such enterprises,
between (a) the special depreciation rates referred to above or (b) accelerated regular rates of depreciation applied on a straight-line
basis in respect of property and equipment, generally ranging from 200% (for equipment) to 400% (for buildings) of the ordinary depreciation
rates during the first five years of service of these assets, provided that the depreciation on a building may not exceed 20% per annum,
multiplied by the applicable adjustment rate.
Eligibility for benefits under the Industry
Encouragement Law is not contingent upon the prior approval of any Government agency. There can be no assurance that we will continue
to so qualify, or will be able to avail ourselves of any benefits under the Industry Law in the future.
Tax Benefits under the Law for the Encouragement
of Capital Investments, 5719-1959
General
Our production facility qualifies as a “benefited
enterprise” under the Law for the Encouragement of Capital Investments, 5719-1959, as amended in 2005, or the Investment Encouragement
Law, which provides certain tax benefits to investment programs of an “approved enterprise” or “benefited enterprise.”
Our benefited enterprise was converted from a previously approved enterprise program pursuant to the approval of the Israel Tax Authority
that we received in September 2006. As of yet, it was not necessary for us to utilize these
tax benefits.
The Investment Encouragement Law stipulates
certain criteria which need be met with respect to investment programs carried out by an enterprise, in order for such an enterprise to
be classified as a “benefited enterprise.” Israeli resident companies which own benefited enterprise are generally classified
as Benefited Companies. Benefited Companies may claim tax benefits (as further discussed below) granted by the Investment Encouragement
Law in its tax returns (and there is no need to obtain prior approval to qualify for such benefits). There is no requirement to
file reports with the Investment Center. Audits are the responsibility of the Israeli Income Tax Authority as part of their tax
audits. Companies may also approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the
Investment Encouragement Law.
A company that owns an approved enterprise
is eligible for governmental grants, but may elect to receive an alternative package comprised of tax benefits, referred to as the “previous
alternative benefits track”. The tax benefits of an approved enterprise include lower tax rates or no tax depending on the
area and the track chosen, lower tax rates on dividends and accelerated depreciation. In order to receive benefits in the grant
track or the alternative benefit track, the industrial enterprise must contribute to the economic independence of the Israeli economy,
be competitive and contribute to the gross local product in one of the manners stipulated in the Investment Encouragement Law. Tax
benefits would be available, subject to certain conditions (described below), to production facilities that generally derive more than
25% of their annual revenue from export, or that do not derive 75% or more of their annual revenue in a single market.
Amendments
to Investment Encouragement Law
In December 2010, the Israeli Parliament passed
the Law for Economic Policy for the Years 2011 and 2012 (Amended Legislation), 5771-2011, which prescribes, among other things, amendments
to the Investment Encouragement Law, effective as of January 1, 2011 (the “2011 Amendment”). The 2011 Amendment introduced
new benefits for income generated by a “Preferred Company” through its Preferred Enterprise (as such terms are defined in
the Investment Encouragement Law), if certain criteria are met. The new tax benefits (described below) would be available, subject
to certain conditions, to production facilities that generally derive more than 25% of their annual revenue from export, or that do not
derive 75% or more of their annual revenue in a single market, or, to competitive facilities in the field of renewable energy. A
“Preferred Company” is defined in the amendment as either (i) a company incorporated in Israel and not wholly-owned by governmental
entities; or (ii) a partnership (a) that was registered under the Israeli Partnerships Ordinance; and (b) all of its partners are companies
incorporated in Israel, which are in general not transparent for Israeli tax purposes and that not all of them are fully owned by governmental
entities and such companies or partnerships own, among other conditions, Preferred Enterprises and are controlled and managed from Israel.
In accordance with the 2011 Amendment and
further amendments, a Preferred Company is entitled to reduced corporate tax with respect to income derived by it Preferred Enterprise
(and subject to certain conditions) at the rate of 16%, unless it is located in a certain development zone, in which case the rate will
be 7.5%.
Under the amendments, dividends distributed
out of income which is generally attributed to a Preferred Enterprise are subject to withholding tax at the rate of 20% (or lower, under
an applicable tax treaty). However, upon distribution of a dividend attributed to income generated in Israel, to an Israeli company,
no withholding tax will apply.
The 2011 Amendment applies to income generated
as of January 1, 2011. Under the transitional provisions of the 2011 Amendment, we may elect to irrevocably implement the 2011 Amendment
to the Investment Encouragement Law while waiving benefits provided under the Investment Encouragement Law as in effect prior to the 2011
Amendment or to remain subject to the Investment Encouragement Law as in effect prior to the 2011 Amendment. We may elect to implement
the 2011 Amendment by May 31 of any year, and such an election shall apply as of the tax year following the year on which the company's
tax return (and the election) was filed. Electing to implement the 2011 Amendment is irreversible.
We qualify for the status of a “Preferred
Company” pursuant to the 2011 Amendment. We are contemplating the implementation of the 2011 Amendment in future tax years.
In 2021, we have reversed the valuation allowance recorded
in past years due to our forecast that it is more likely than not that the Company will realize its deferred tax losses in the future.
The termination or substantial reduction of
any of the benefits available under the Investment Encouragement Law could have a material adverse effect on our future investments in
Israel, and could adversely affect our results of operations and financial condition.
Taxation of Gains Upon Disposition of, and
Dividends Paid on, our Ordinary Shares
Taxation of Israeli Resident Shareholders
Israeli law imposes a capital gains tax on
the sale of capital assets. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is
a portion of the total capital gain that is equivalent to the increase of the relevant asset’s purchase price which is attributable
to the increase in the CPI between the date of purchase and the date of sale. Foreign residents who purchased an asset in foreign
currency may request that the inflationary surplus will be computed on the basis of the devaluation of the NIS against such foreign currency.
The real gain is the excess of the total capital gain over the inflationary surplus. The inflationary surplus accumulated from and
after December 31, 1993, is exempt from any capital gains tax in Israel while the real gain is taxed at the applicable rate discussed
below.
Dealers in securities in Israel are taxed
at regular tax rates applicable to business income.
Subject to certain provisions relating to
the linear calculation method applicable to the determination of the capital gain tax pertaining to capital gains derived from the sale
of assets, purchased prior to January 1, 2003, or prior to January 1, 2012 (with respect to sale of assets or securities not listed in
a stock exchange prior to 1.1.2012), the tax rate on capital gains, including capital gain from the sale of securities listed on a stock
exchange and on dividends, is generally 25% for individuals and 30% for substantial individual shareholders (that are, generally, holders
of 10% or more of the shares of the company on the date of the sale of the shares or at any date during
the 12 months period preceding such sale). The tax rate for capital gains generated by corporations is 23% (since 2018).
Dividends paid to an Israeli company by another Israeli company are not subject to tax, unless received out of income derived from a benefited
enterprise, or an approved enterprise, or stems from income derived or accrued outside of Israel. In
any event the applicable paying company and/or bank withholds at source income tax at the rate of 25% or 30% in the case of a substantial
individual shareholders.
If
the shares were sold by Israeli residents, then (i) for the period ending December 31, 2002 their sale would generally be tax exempt so
long as (1) the shares were listed on a stock exchange, such as, in our case, the NASDAQ Capital Market, which is recognized by the Israeli
Ministry of Finance on December 31, 2002, and (2) we qualified as an Industrial Company or Industrial Holding Company under the law for
Industry Encouragement Law, at the relevant
times as provided by the Income Tax Ordinance [New Version], 5721-1961, which we believe we so qualified and (ii) for the period commencing
January 1, 2003, the sale of the shares would be, generally, subject to a 25% tax if sold by non-substantial individual shareholders and
30% tax if sold by a substantial individual shareholders. The tax rate for corporate shareholders for the sale of the shares is
23% (since 2018).We cannot provide any assurance that the Israeli tax authorities will agree with the determination that we qualified
as an Industrial Company at the relevant times.
Taxation of Non-Israeli Resident Shareholders
Under
the convention between the United States and Israel concerning taxes on income, Israeli capital gains tax will generally not apply to
the sale, exchange or disposition of ordinary shares by a person who qualifies as a resident of the United States. However,
this exemption will not apply, among other cases, if the gain is attributable to a permanent establishment of such person in Israel, or
if the qualified U.S. resident holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the
12-month period preceding the sale, exchange or disposition, subject to specified conditions. In this case, the sale, exchange or
disposition would be subject to Israeli tax, to the extent applicable under Israeli domestic law. However, under the U.S.-Israel
tax treaty, a U.S. resident generally would be permitted to claim a credit for the Israeli tax against the U.S. federal income tax imposed
on the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel
tax treaty does not relate to U.S. state or local taxes.
For residents of other countries, the purchaser
of the shares may be required to withhold capital gains tax on all amounts paid by it for the purchase of shares for the sale of our ordinary
shares, for so long as the capital gain from such a sale is not exempt from Israeli capital gains tax.
Notwithstanding the above, the capital gain
from the sale of our shares by non-Israeli residents would be tax exempt as long as our shares are listed on the NASDAQ Capital Market
or any other stock exchange recognized by the Israeli Ministry of Finance, and provided that certain other conditions are met. The most
relevant conditions are as follows: (i) the capital gain is not attributed to the foreign resident’s permanent establishment in
Israel, and (ii) the shares were acquired by the foreign resident after the company’s shares had been listed for trading on the
foreign Exchange.
On the distribution of dividends other than
bonus shares (stock dividends) to individual Israeli residents shareholders or to non-Israeli shareholders, income tax applies at the
rate of 25% or 30%, as described above, or the lower rate payable with respect to dividends received out of income derived from a preferred
or benefited enterprise (see the Investment Encouragement Law), unless a double taxation treaty is in effect between Israel and the shareholder's
country of residence which provides for a lower tax rate in Israel on dividends. The Convention between the State of Israel and
the Government of the United States relating to relief from double taxation provides for a maximum tax of 25% on dividends paid to a resident
of the United States. As set forth above, dividends paid to an Israeli company by another Israeli company are not subject to corporate
tax, unless received out of income derived from a benefited enterprise, or an approved enterprise or unless the dividend stems from income
produced or accrued abroad.
Non-residents of Israel are subject to income
tax on income accrued or derived from sources in Israel. Such sources of income include passive income such as dividends, royalties
and interest, as well as non-passive income from services rendered in Israel. Distributions of dividends other than bonus shares
or stock dividends, are subject to income tax at the rate of 25% or 30% (for individuals), or 23% (for corporations in 2018 and 2019)
pursuant to Israeli domestic law as described above. However, under the Investment Encouragement Law, dividends generated by an
approved enterprise or by our benefited enterprise are, generally, taxed at the rate of 15%.
Pursuant to the Convention between the State
of Israel and the Government of the United States relating to relief from double taxation, the maximum tax rate on dividends paid to a
holder of ordinary shares who is a Treaty U.S. Resident will be 25%. However, dividends which are not generated by an approved enterprise will
generally be subject to Israeli tax at a rate of 12.5% if paid to a U.S. corporation which holds 10% of our voting power for a designated
period and provided that not more than 25% of our gross income for such period consists of certain types of dividends and interest. Notwithstanding
the foregoing, dividends distributed from income attributed to an approved enterprise are generally subject to a withholding tax rate
of 15% for such a U.S. corporation shareholder (which meets both conditions set forth above).
Subject to certain conditions, non-Israeli
residents will be tax exempt on capital gain derived from investments in Israeli companies without derogating from any other capital gain
tax exemption applying to non-Israeli resident under Israeli law or under any applicable double tax treaty.
In
any event the applicable paying company and/or bank withholds at source income tax at the rate of 25% or 30% in the case of a substantial
individual shareholders.
United States Federal Income Taxation
The following is a general discussion of the
material U.S. federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares. This description addresses
only the U.S. federal income tax considerations that may be relevant to U.S. Holders (as defined below) who hold our ordinary shares as
capital assets. This summary is based on the U.S. Internal Revenue Code of 1986, as amended, (the "Code") Treasury regulations promulgated
thereunder, judicial and administrative interpretations thereof and the U.S.-Israel Tax Treaty (the “Treaty”), all as in effect
on the date hereof and all of which are subject to change either prospectively or retroactively or to differing interpretations. There
can be no assurance that the U.S. Internal Revenue Service (“IRS”) will not take a different position concerning the tax consequences
of the acquisition, ownership or disposition of our ordinary shares or that such a position would not be sustained. This discussion does
not address all tax considerations that may be relevant to a U.S. Holder of ordinary shares. In addition, this description does not account
for the specific circumstances of any particular investor, such as:
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financial institutions or financial services entities; |
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certain insurance companies; |
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investors liable for alternative minimum tax; |
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regulated
investment companies, real estate investment trusts, or grantor trusts;
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dealers or traders in securities, commodities or
currencies; |
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tax-exempt organizations; |
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certain former citizens or long-term residents of the United States; |
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non-resident aliens of the United States or taxpayers whose functional currency is not the U.S. dollar;
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persons who hold ordinary shares through partnerships or other pass-through entities;
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persons who acquire their ordinary shares through the exercise or cancellation of employee stock options or otherwise as compensation
for services;
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direct, indirect
or constructive owners of investors that actually or constructively own
at least 10% of the total combined voting power of our shares or at least 10% of our shares by value; or |
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investors holding ordinary shares as part of a straddle, appreciated financial position, a hedging transaction or conversion transaction.
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If a partnership or an entity treated
as a partnership for U.S. federal income tax purposes owns our ordinary shares, the U.S. federal income tax treatment of a partner in
such a partnership will generally depend upon the status of the partner and the activities of the partnership. A partnership that owns
our ordinary shares and the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences
of holding and disposing of ordinary shares.
This summary does not address the effect
of any U.S. federal taxation (such as estate and gift tax) other than U.S. federal income taxation. In addition, this summary does not
include any discussion of state, local or non-U.S. taxation.
For purposes of this summary the
term “U.S. Holder” means a person that is eligible for the benefits of the Treaty and is a beneficial owner of ordinary shares
who is, for U.S. federal income tax purposes:
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an individual who is a citizen or a resident of the United States; |
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a corporation or other entity taxable as a corporation for United States federal income tax purposes, created or organized in or
under the laws of the United States or any political subdivision thereof; |
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an estate the income of which is subject to U.S. federal income taxation regardless of its source; or |
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a trust if the trust has validly elected to be treated as a U.S. person for U.S. federal income tax purposes or if (1) a court within
the United States is able to exercise primary supervision over the trust’s administration and (2) one or more U.S. persons have
the authority to control all of the substantial decisions of the trust. |
Unless otherwise indicated, it is assumed
for the purposes of this discussion that the Company is not, and will not become, a “passive foreign investment company” (“PFIC”)
for U.S. federal income tax purposes. See “—Passive Foreign Investment Companies”
below.
Taxation of Distributions
Subject to the discussion below under the
heading “—Passive Foreign Investment Companies,” the gross amount of any distributions
received with respect to our ordinary shares, including the amount of any Israeli taxes withheld therefrom, will constitute dividends
for U.S. federal income tax purposes when such distribution is actually or constructively received, to the extent such distribution is
paid out of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. Because we do
not expect to maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that the entire
amount of any distribution will generally be reported as dividend income to you. Dividends are included in gross income at ordinary income
rates, unless such dividends constitute "qualified dividend income," as set forth in more detail below. Distributions in excess of our
current and accumulated earnings and profits would be treated as a non-taxable return of capital to the extent of your adjusted tax basis
in our ordinary shares and any amount in excess of your tax basis would be treated as gain from the sale of ordinary shares. See “—Sale,
Exchange or Other Disposition of Ordinary Shares” below for a discussion of the taxation of capital gains. Our dividends
would not qualify for the dividends-received deduction generally available to corporations under section 243 of the Code.
Dividends that we pay in NIS, including the
amount of any Israeli taxes withheld therefrom, will be included in your income in a U.S. dollar amount calculated by reference to the
exchange rate in effect on the day such dividends are received, regardless of whether the payment is in fact converted into U.S. dollars.
A U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at an exchange rate other than the rate in effect on such
day may have a foreign currency exchange gain or loss that would generally be treated as U.S.-source ordinary income or loss. U.S. Holders
should consult their own tax advisors concerning the U.S. tax consequences of acquiring, holding and disposing of NIS.
Subject to complex limitations, some of which
vary depending upon the U.S. Holder’s circumstances, any Israeli withholding tax imposed on dividends paid with respect to our ordinary
shares, may be a foreign income tax eligible for credit against a U.S. Holder’s U.S. federal income tax liability (or, alternatively,
for deduction against income in determining such tax liability). Israeli taxes withheld in excess of the applicable rate allowed by the
Treaty (if any) will not be eligible for credit against a U.S. Holder’s federal income tax liability. The limitation on foreign
income taxes eligible for credit is calculated separately with respect to specific classes of income. Dividends paid with respect
to our ordinary shares generally will be treated as foreign-source passive category income or, in the case of certain U.S. Holders, general
category income for U.S. foreign tax credit purposes. Further, there are special rules for computing the foreign tax credit limitation
of a taxpayer who receives dividends subject to a reduced tax rate. A U.S. Holder may be denied a foreign tax credit with respect to Israeli
income tax withheld from dividends received on our ordinary shares if such U.S. Holder fails to satisfy certain minimum holding period
requirements or to the extent such U.S. Holder’s position in ordinary shares is hedged. An election to deduct foreign taxes instead
of claiming a foreign tax credit applies to all foreign taxes paid or accrued in the taxable year. The rules relating to the determination
of the foreign tax credit are complex. You should consult with your own tax advisors to determine whether and to what extent you
would be entitled to this credit.
Subject to certain limitations (possibly including
the PFIC rules discussed below), “qualified dividend income” received by a non-corporate U.S. Holder may be subject to tax
at the lower long-term capital gain rates (currently, a maximum rate of 20%). Distributions taxable as dividends paid on our ordinary
shares should qualify for a reduced rate if we are a “qualified foreign corporation,” as defined in Code section 1(h)(11)(C).
We will be a qualified foreign corporation if either: (i) we are entitled to benefits under the Treaty or (ii) our ordinary shares are
readily tradable on an established securities market in the United States and certain other requirements are met. We believe that
we are entitled to benefits under the Treaty and that our ordinary shares currently are readily tradable on an established securities
market in the United States. However, no assurance can be given that our ordinary shares will remain readily tradable. The rate reduction
does not apply unless certain holding period requirements are satisfied, nor does it apply to dividends received from a PFIC (see discussion
below), in respect of certain risk-reduction transactions, or in certain other situations. U.S. Holders of our ordinary shares should
consult their own tax advisors regarding the effect of these rules in their particular circumstances.
Sale, Exchange or Other
Disposition of Ordinary Shares
Subject
to the discussion of the PFIC rules below, if you sell or otherwise dispose
of our ordinary shares (other than with respect to certain non-recognition transactions), you will generally recognize gain or loss for
U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other disposition and
your adjusted tax basis in our ordinary shares, in each case determined in U.S. dollars. Such gain or loss will generally be capital gain
or loss and will be long-term capital gain or loss if you have held the ordinary shares for more than one year at the time of the sale
or other disposition. Long-term capital gain realized by a non-corporate U.S. Holder is generally eligible for a preferential tax rate
(currently at a maximum of 20%). In general, any gain that you recognize on the sale or other disposition of ordinary shares will be U.S.-source
for purposes of the foreign tax credit limitation; losses will generally be allocated against U.S. source income. Deduction of capital
losses is subject to certain limitations under the Code.
In the case of a cash basis U.S. Holder who
receives NIS in connection with the sale or disposition of our ordinary shares, the amount realized will be based on the U.S. dollar value
of the NIS received with respect to the ordinary shares as determined on the settlement date of such exchange. A cash basis U.S. Holder
who receives payment in NIS and converts NIS into U.S. dollars at a conversion rate other than the rate in effect on the settlement date
may have a foreign currency exchange gain or loss, based on any appreciation or depreciation in the value of NIS against the U.S. dollar,
which would be treated as ordinary income or loss.
An accrual basis U.S. Holder may elect the
same treatment of currency exchange gain or loss required of cash basis taxpayers with respect to a sale or disposition of our ordinary
shares that are traded on an established securities market, provided that the election is applied consistently from year to year. Such
election may not be changed without the consent of the IRS. In the event that an accrual basis U.S. Holder does not elect to be treated
as a cash basis taxpayer (pursuant to the Treasury regulations applicable to foreign currency transactions), such U.S. Holder is required
to calculate the value of the proceeds as of the "trade date" and may have a foreign currency gain or loss for U.S. federal income tax
purposes in the event of any difference between the U.S. dollar value of NIS prevailing on the trade date and on the settlement date.
Any such currency gain or loss generally would be treated as U.S.- source ordinary income or loss and would be subject to tax in addition
to the gain or loss, if any, recognized by such U.S. Holder on the sale or disposition of such ordinary shares.
Passive
Foreign Investment Companies
We believe that we were not a PFIC for
U.S. federal income tax purposes for the 2019 taxable year. However, since PFIC status depends upon the composition of our income and
assets and the market value of our assets from time to time, there can be no assurance that we will not be considered a PFIC for any future
taxable year. If we were a PFIC for any taxable year during which a U.S. Holder owned ordinary shares, certain adverse consequences could
apply to the U.S. Holder. Specifically, unless a U.S. Holder makes one of the elections mentioned below, gain recognized by the U.S. Holder
on a sale or other disposition of ordinary shares would be allocated ratably over the U.S. Holder’s holding period for the ordinary
shares. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed
as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals
or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the resulting tax liability. Further,
any distribution in excess of 125% of the average of the annual distributions received by the U.S. Holder on our ordinary shares during
the preceding three years or the U.S. Holder’s holding period, whichever is shorter, would be subject to taxation as described immediately
above. Certain elections (such as a mark-to-market election or a QEF election) may be available to U.S. Holders and may result in alternative
tax treatment. U.S. Holders should consult their tax advisors as to the availability and consequences of a mark-to-market election or
a QEF election with respect to their ordinary shares.
In addition, if we were
a PFIC for a taxable year in which we pay a dividend or the prior taxable year, the favorable dividend rates discussed above with respect
to dividends paid to certain non-corporate U.S. Holders would not apply. If we were a PFIC for any taxable year in which a U.S. Holder
owned our shares, the U.S. Holder would generally be required to file annual returns with the IRS on IRS Form 8621.
Additional
Tax on Investment Income
In
addition to the income taxes described above, U.S. Holders that are individuals,
estates or trusts and whose income exceeds certain thresholds may be subject to a 3.8% Medicare contribution tax on net investment income,
which includes dividends and capital gains from the sale or exchange of our ordinary shares.
Backup Withholding and
Information Reporting
Payments in respect of our ordinary shares
may be subject to information reporting to the IRS and to U.S. backup withholding tax at the rate (currently) of 24%. Backup withholding
will not apply, however, if you (i) fall within certain exempt categories and demonstrate the fact when required or (ii) furnish a correct
taxpayer identification number and make any other required certification.
Backup withholding is not an additional tax.
Amounts withheld under the backup withholding rules may be credited against a U.S. Holder’s U.S. tax liability. A U.S. Holder may
obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the
IRS.
U.S. citizens and individuals taxable as resident
aliens of the United States that (i) own “specified foreign financial assets” (as defined in Section 6038D of the Code and
the regulations thereunder) with an aggregate value in a taxable year in excess of certain thresholds (as determined under rules in Treasury
regulations) and (ii) are required to file U.S. federal income tax returns generally will be required to file an information report with
respect to those assets with their tax returns. IRS Form 8938 has been issued for that purpose. “Specified foreign financial assets”
include any financial accounts maintained by foreign financial institutions, foreign stocks held directly, and interests in foreign estates,
foreign pension plans or foreign deferred compensation plans. Under those rules, our ordinary shares, whether owned directly or through
a financial institution, estate or pension or deferred compensation plan, would be “specified foreign financial assets.” Under
Treasury regulations, the reporting obligation applies to certain U.S. entities that hold, directly or indirectly, specified foreign financial
assets. Penalties can apply if there is a failure to satisfy this reporting obligation. In addition, in the event a U.S. Holder that is
required to file IRS Form 8938 does not file such form, the statute of limitations on the assessment and collection of U.S. federal income
taxes of such U.S. Holder for the related tax year may not close until three years after the date that the required information is filed.
A U.S. Holder is urged to consult the U.S. Holder’s tax advisor regarding the reporting obligation.
Any U.S. Holder who acquires more than $100,000
of our ordinary shares or holds 10% or more of our ordinary shares by vote or value may be subject to certain additional U.S. information
reporting requirements.
The above description is not intended to constitute
a complete analysis of all tax consequences relating to acquisition, ownership and disposition of our ordinary shares. You should consult
your tax advisor concerning the tax consequences of your particular situation.
F.
Dividends and Paying Agents
Not applicable.
G.
Statement by Experts
Not applicable.
H.
Documents on Display
We are subject to certain of the reporting
requirements of the Exchange Act as applicable to “foreign private issuers” as defined in Rule 3b-4 under the Exchange Act.
As a foreign private issuer, we are exempt from certain provisions of the Exchange Act. Accordingly, our proxy solicitations are
not subject to the disclosure and procedural requirements of Regulation 14A under the Exchange Act, and transactions in our equity securities
by our officers and directors are exempt from reporting and the “short-swing” profit recovery provisions contained in Section
16 of the Exchange Act. In addition, we are not required under the Exchange Act to file quarterly reports and financial statements.
However, we file with the SEC an annual report on Form 20-F containing financial statements audited by an independent accounting firm.
We also submit to the SEC reports on Form 6-K containing (among other things) press releases and unaudited financial information.
We post our annual report on Form 20-F on our website promptly following the filing of our annual report with the SEC. The information
on our website is not incorporated by reference into this annual report.
The SEC maintains an Internet website that
contains reports and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov.
We make our reports available on our internet website, free of charge, as soon as reasonably practicable after such material is electronically
filed with the SEC.
The documents concerning our company that
are referred to in this annual report may also be inspected at our offices located at 20 Ben Zion Gelis Street, Sgoola Industrial Zone,
Petach Tikva 4910101, Israel.
I.
Subsidiary Information
Not applicable.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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We are exposed to a variety of market risks,
including foreign currency fluctuations and changes in interest rates affecting primarily the interest on short-term credit lines and
long-term loans.
Foreign Currency Exchange Risk
Our reporting currency is the dollar.
Our revenues are primarily denominated in the dollar, NIS and Euros, while our expenses are primarily denominated in NIS, dollars and
Euros. As a result, the NIS value of our dollar and Euro denominated revenues are negatively impacted by the depreciation of the
dollar and the Euro against the NIS. In addition, fluctuations in rates of exchange between NIS and other currencies may affect
our operating results and financial condition. The average exchange rate for the NIS against the dollar was approximately 4% higher
in 2022 than 2021 and the average exchange rate of the NIS against the Euro was 7.5% lower in 2022 than 2021, and in total, these changes
had a positive impact on our operating results in 2022. The average exchange rate for the NIS against the dollar was approximately
6.2% lower in 2021 than 2020 and the average exchange rate of the NIS against the Euro was 2.5% lower in 2021 than 2020, and in total,
these changes had a negative impact on our operating results in 2021. As of December 31, 2022, we estimate that a devaluation of
1% of the dollar against the NIS would result in a decrease of approximately $260,000 in our
operating income and devaluation of 1% of the Euro against the NIS would not have a material impact on our operating and financial results.
If we were to determine that it is in our
best interests to enter into hedging transactions in the future in order to protect ourselves in part from currency fluctuations, we may
not be able to do so, or such transactions, if entered into, may not materially reduce the effect of fluctuations in foreign currency
exchange rates on our results of operations and may result in additional expenses.
Commodity Price Risk
Cost of raw materials is a significant component
of our cost of revenues. In 2022, the cost of raw materials used in production was $10.7 million compared to $8.5 million in 2021.
A 1% increase or decrease in the cost of raw materials used in production would increase or decrease our cost of raw materials by approximately
$107,000.
Interest Rate Risk
Our exposure to market risk for changes in
interest rates relates primarily to our short-term credit lines, short-term loans and long-term loans.
For information on the interest rates of our short-term credit lines, short-term loans and long-term loans,
see Item 5B. “Operating and Financial Review and Prospects - Liquidity and Capital Resources.” For purposes of specific
risk analysis, we use sensitivity analysis to determine the impact that market risk exposure may have on the financial expenses derived
from our short-term credit lines and long-term loans. Based on our loans balance at December 31, 2022, a hypothetical increase of
1% in the interest rates would result in an increase of approximately $35,000 in our financial
expenses. A hypothetical increase of 1% in the CPI would not have a material impact on our financial and operational expenses.
Credit Risk
We may be subject to significant concentrations
of credit risk consisting principally of cash and cash equivalents and trade accounts receivable. Cash and cash equivalents are
deposited with major financial institutions in Israel, Europe and the United States.
The risk of collection associated with trade
receivables is reduced by the geographical dispersion of our customer base. However, our business involves selling products to customers
for whose credit we do not have insurance coverage, and we are exposed to risk with respect to our receivables from them.
| ITEM
12. |
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not applicable.